Highlights From Smith & Wesson's (SWHC) Q4 Conference Call: Delivered Record Quarterly Revenues, Guides In-line for Q1

June 23, 2009 3:26 PM EDT

Last night, Smith & Wesson (Nasdaq: SWHC) reported Q4 EPS of $0.14, 2 cents better than the analyst estimate of $0.12. Revenue for the quarter was $99.5 million, versus the consensus of $97.83 million. Today's trading is typical 'buy on the rumor, sell on the news'....as share fall 7% today after strong earnings and guidance.

Highlights From SWHC's Q4 Conference Call:

• (CEO) Capitalizing on the recent strong demand for our pistols and tactical rifles this quarter, we delivered record quarterly revenue, record net income, record earnings per share and record levels in both our cash balances and our firearms backlog.
  
• Overall handgun sales increased 13% on a year-over-year basis, while tactical rifle sales increased 195% year-over-year reflecting strong demand in the sporting goods market and the law enforcement sales channel.
  
• In law enforcement the M&P continues to win at a rate of over 80% in agencies where we compete. Our M&P pistols have now been selected or approved for carry by 537 law enforcement agencies.
  
• Among Q4 conversions from law enforcement was the Detroit Police Department, which ordered 5000 of our M&P pistols and 350 of our M&P tactical rifles.
  
• The reported number of background checks remained strong through the fourth quarter and April's data showed 30% growth year-over-year. The May figures have now been issued as well and they reflect 15% year-over-year growth.
  
• Smith & Wesson branded pistols were up 33% in the quarter, led by sales of M&P pistols, which were up 27%, Sigma pistols, which were up 89%, Walther oistols grew nearly 29%. Tactical rifles grew over 195%. Revolvers however declined by 3%.
  
• In total, our firearms backlog continued to increase dramatically during the quarter and reached its peak at $268 million by the end of April. That level is $218 million higher than the same quarter a year ago.
  
• Our backlog always represents product that has been ordered but not yet shipped. Therefore, it is possible that portions of this backlog could be canceled if demand should suddenly drop.
  
• Our sales of Smith & Wesson branded products internationally were down 12% in the quarter.
  
• Now let's turn to an update on Hunting. Historically, this portion of our business has consisted primarily of high-end, highly discretionary consumer products namely black powder rifles. As a result, it has suffered in the current economic environment.
  
• A large percentage of our planned production for the fall of 2009 hunting season is already sold and retailers including Cabela's, Gander Mountain, Bass Pro Shops, The Sports Authority and our independent dealers all will be listing this new rifle.
  
• The acquisition of USR will provide us with an entry into the rapidly growing facilities security market, a move aligned with our growth and diversification strategy, and one that expands our revenue base into commercial, non-firearm categories.
  
• (CFO) Total company sales for Q4 were $99.5 million, a 16.4 million or approximately 20% increase over the comparable quarter last year. Within that, sales of all firearms totaled $93.9 million, an increase of 17.2 million or 22% over last year.
  
• The balance of revenue totaled $5.7 million and declined by $782,000 or 12% and most of this was
  due to a reduction in the specialty services we provided to other companies.
  
• Handgun sales totaled $65.4 million, an increase of 13% over the year ago quarter, tactical rifle sales of $74.4 million were 195% higher year-over-year, while hunting firearm revenue totaled $8.1 million and decreased by 22% on a year-on-year basis.
  
• Total debt outstanding at the end of the fourth quarter was $86 million compared to $127.7 million in the same quarter a year ago.
  
• Our fiscal '09 net sales of approximately $335 million represented an increase of 13% over fiscal '08 levels.
  
• Accounts receivable decreased to $48 million versus 54 million at year-end fiscal '08. This occurred
  despite increased revenue.
  
• Our Q1 ends on July 31st, about six weeks from now. Looking first at revenue, demand for our products remained strong and we continue to sustain a backlog well in excess of 200 million.
  
• We currently see first quarter revenue, between $92 and $94 million. (Consensus is 91.80M)
  
• We anticipate that total company backlog will begin to decrease in the first quarter of fiscal 2010.
  
• (Q&A) Can you give us - give a little more clarity on the great improvement in the tactical rifle revenues in the quarter. You had 2x whatever has been in the past couple of quarters. What were you able to do there to ramp that up thinking that - you kind of thought before or whether that was at fairly close to capacity? (A) Well, the - you're right. I mean tactical rifles were up almost 200% versus the same period the year before. We have increased our capacity on that rifle, but remember, we said we're going to selectively look at increasing capacity where there are opportunities and we felt that there was some security on the back-end with law enforcement contracts for, quite honestly, US military contracts or international military or law enforcement contracts. So it's a reflection of the - our increased capacity and we are bringing some parts in-house that we're outsourcing, which supplements our capacity on that also.
  
• And then just following that general capacity, your comments or I guess your build on Q1, talking about, your lot of finished goods inventory that you had with - kind of have been used up and you are replenishing at this point, and so, you will see some sequential drop in sales which is understandable. What are the company's goals over the coming months and quarters to increase capacity overall, kind of across all product lines were possible and kind of what could it get to over the next, say, 12 months? (A) We are looking at selectively adding capacity and we're also implementing projects that just make us a little bit more efficient with the equipment we're running. If you look forward at new product opportunities, which are our required incremental capacity and the efforts we have underway selectively really with M&P pistol, and as Michael just mentioned, in M&P15 or the tactical rifle. Over the coming quarters, and I can't say how quickly this in full will dial in. But we would be adding somewhere in the range of $10 million more per quarter or a $40 million increment. And this would be over the next three
  or four quarters....$40 million more capacity into the business.
  
• Then, switching gears a little bit, just looking particularly back to tactical, which you talked about in the last question. I'm just curious from your standpoint, what of that growth do you feel like is being driven by a lot of the new stuff you've introduced either as an attachment to that product, an accessory, or just new permutation to that model in the last year or so, in the last six months - what of that - what of new product is driving what we see in the fourth quarter? (A) In tactical rifles, you're right, over the last - I'm going to say nine months or so, we have expanded our line from really three SKUs to 12 models that we sell out there, and there are some differences on all the different models. Certainly, we're giving consumers more of a choice depending on the specific requirements that they're looking for. So, I think that's having an effect on it, it's just a broader line more than just one or two or three SKUs of Smith & Wesson M&Ps that they can choose.

Smith & Wesson Holding Corporation, through its subsidiary, Smith & Wesson Corp., manufactures firearms primarily in the United States.

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