UNITED STATES SECURITIES AND
Washington, D.C. 20549
|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|For the fiscal year ended April 30, 2009|
Commission file number 1-31552
SMITH & WESSON HOLDING CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction
Incorporation or Organization)
| (I.R.S. Employer |
2100 Roosevelt Avenue
Springfield, Massachusetts 01104
(Address including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.001 per Share
| Nasdaq Global Select Market |
Nasdaq Global Select Market
|(Title of Class)||(Name of Each Exchange on Which Registered)|
Securities registered pursuant to Section 12(g) of the
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
|Accelerated filer ☑|| Non-accelerated
filer o |
(Do not check if a smaller reporting company)
|Smaller reporting company o|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ☑
The aggregate market value of Common Stock held by nonaffiliates of the registrant (43,837,965 shares) based on the last reported sale price of the registrant's Common Stock on the Nasdaq Global Select Market on October 31, 2008, which was the last business day of the registrant's most recently completed second fiscal quarter, was $100,827,320. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.
As of June 29, 2009, there were outstanding 53,895,263 shares of the registrant's Common Stock, par value $.001 per share.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
WESSON HOLDING CORPORATION
REPORT ON FORM 10-K
For the Fiscal Year Ended April 30, 2009
TABLE OF CONTENTS
|UNRESOLVED STAFF COMMENTS||27|
|SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS||27|
|MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES||28|
|SELECTED FINANCIAL DATA||30|
|MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS||31|
|QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||46|
|FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA||46|
|CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE||47|
|CONTROLS AND PROCEDURES||47|
|DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE||49|
|SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS||49|
|CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE||49|
|PRINCIPAL ACCOUNTANT FEES AND SERVICES||49|
|EXHIBITS AND FINANCIAL STATEMENT SCHEDULES||49|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Statement Regarding Forward-Looking Information
The statements contained in this report on Form 10-K that are not purely historical are forward-looking statements within the meaning of applicable securities laws. Forward-looking statements include statements regarding our "expectations," "anticipation," "intentions," "beliefs," or "strategies" regarding the future. Forward-looking statements also include statements regarding revenue, margins, expenses, and earnings for fiscal 2010 and thereafter; future products or product development; our product development strategies; beliefs regarding the features and performance of our products; the success of particular product or marketing programs; and liquidity and anticipated cash needs and availability. All forward-looking statements included in this report are based on information available to us as of the filing date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from the forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed under Item 1A, "Risk Factors."
We are one of the world's leading manufacturers of firearms. We manufacture a wide array of pistols, revolvers, tactical rifles, hunting rifles, black powder firearms, handcuffs, and firearm-related products and accessories for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, protection focused individuals, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We are the largest manufacturer of handguns and handcuffs in the United States, the largest U.S. exporter of handguns, and a growing participant in the tactical and hunting rifle markets that we recently entered. We manufacture these products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Rochester, New Hampshire. We are also a supplier of OEM firearm components. In addition, we pursue opportunities to license our name and trademarks to third parties for use in association with their products and services. We plan to substantially increase our product offerings to leverage the 150-plus year old "Smith & Wesson" brand and capitalize on the goodwill developed through our historic American tradition by expanding consumer awareness of products we produce or license in the safety, security, protection, and sport markets.
Our objective is to be a global leader in the business of safety, security, protection, and sport. Key elements of our strategy to achieve this objective are as follows:
|•||enhancing existing and introducing innovative new products;|
|•||entering new markets and expanding our presence in existing markets;|
|•||enhancing our manufacturing productivity and capacity;|
|•||capitalizing on our widely known brand name;|
|•||emphasizing customer satisfaction and loyalty; and|
|•||pursuing strategic relationships and acquisitions.|
We estimate that the domestic non-military firearm market is approximately $175 million for revolvers and $791 million for pistols, with our market share being approximately 46% and 14%, respectively, and approximately $554 million for hunting rifles, $313 million for shotguns, $277 million for tactical rifles, and $60 million for black powder rifles, with our market share being approximately 9% in the tactical rifle market and approximately 37% in the black powder rifle market. We entered the hunting firearm market with our acquisition of Thompson/Center Arms in January 2007. According to 2007 reports by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives ("ATF"), the U.S. firearms manufacturing industry has grown at a compound annual growth rate in units of 2.8% from 2002 through 2007.
Our wholly owned subsidiary, Smith & Wesson Corp., was founded in 1852 by Horace Smith and Daniel B. Wesson. Mr. Wesson purchased Mr. Smith's interest in 1873. The Wesson family sold Smith & Wesson Corp. to Bangor Punta Corp. in 1965. Lear Siegler Corporation purchased Bangor Punta in 1984, thereby gaining ownership of Smith & Wesson Corp. Forstmann Little & Co. purchased Lear Siegler in 1986 and sold Smith & Wesson Corp. shortly thereafter to Tomkins Corporation, an affiliate of UK-based Tomkins PLC. We purchased Smith & Wesson Corp. from Tomkins in May 2001 and changed our name to Smith & Wesson Holding Corporation in February 2002. We strive to build upon Smith & Wesson's legacy as an authentic American brand known for innovation and new product designs and embodying our customers' sense of heritage and independence.
On January 3, 2007, we completed the acquisition of all of the outstanding capital stock of Bear Lake Acquisition Corp., now known as Thompson Center Holding Corporation, and its subsidiaries, including Thompson/Center Arms Company, Inc. Thompson/Center Arms is a brand recognized by hunting enthusiasts with a leading position in the black powder segment of the long gun market. In addition to a leadership position in the long gun market, Thompson/Center Arms also brings expertise in long gun barrel manufacturing, which will
assist us in our plans to expand further into the long gun market. Thompson/Center Arms recently entered the bolt-action rifle market.
We maintain our principal executive offices at 2100 Roosevelt Avenue, Springfield, Massachusetts 01104. Our telephone number is (800) 331-0852. Our website is located at www.smith-wesson.com. Through our website, we make available free of charge our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to any of them filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These documents are available as soon as reasonably practicable after we electronically file those documents with the Securities and Exchange Commission, or the SEC. We also post on our website the charters of our Audit, Compensation, and Nominations and Corporate Governance Committees; our Corporate Governance Guidelines, our Code of Conduct and Ethics, our Code of Ethics for the CEO and Senior Financial Officers, and any amendments or waivers thereto; and any other corporate governance materials contemplated by the regulations of the SEC and the exchange on which our common stock is listed. The documents are also available in print by contacting our corporate secretary at our executive offices.
Products and Services
Our firearm products combine our legacy of more than 150 years of American know-how with modern technological advances. We strive to utilize our tradition of reliability and innovation in materials, performance, and engineering to produce feature-rich, durable, reliable, accurate, safe, and high-performing firearms that satisfy the needs of our broad range of customers.
Our introduction of new firearm products is designed to enhance our competitive position and broaden our participation in the overall firearm market. We offer more handgun models, in more calibers, for more applications than any other handgun manufacturer. We introduced 13 new revolver models, 11 new pistol models, and one new Walther pistol model in fiscal 2009 and nine new revolver models, five new pistol models, and two new Walther pistol models in fiscal 2008. We currently offer 117 different standard models of handguns with a wide variety of calibers, finishes, sizes, compositions, ammunition capacities, barrel lengths, grips, sights, actions, and other features. As little as five years ago, we were known primarily for our revolvers, with revolvers accounting for approximately 40% of our fiscal 2004 revenue. Starting in fiscal 2005, our management team determined to increase our business by solidifying our position in the revolver market and significantly increasing our business in other categories of the overall firearm business. The introduction of our 460 XVR revolver and our Model 500 revolver enhanced our position in the revolver market. The introduction of our M&P Series of pistols in January 2006 resulted in us becoming a leader in the pistol market with sales of pistols in fiscal 2009 showing a 246% increase over fiscal 2004 levels. Our January 2006 launch of our M&P15 Series of tactical rifles has enabled us to capture what we estimate to be approximately 9% of the tactical rifle market. Our January 2007 acquisition of Thompson/Center Arms added black powder firearms, interchangeable firearm systems, and the ICON bolt-action rifle to our product portfolio. As a result, we are now participating in three categories of the long gun market as well as both categories of the handgun market.
The sale of firearms accounted for approximately $313.0 million in net sales, or approximately 93.4% of our net sales, for the fiscal year ended April 30, 2009 and approximately $274.1 million in net sales, or approximately 92.6% of our net sales, for the fiscal year ended April 30, 2008. With the exception of Walther firearms, all of our firearms are sold under our Smith & Wesson and Thompson/Center Arms brands, several with associated sub-brands.
We currently manufacture 43 different models of pistols. The suggested retail prices of our pistols range between $308 and $1,439. A pistol is a handgun in which the ammunition chamber is an integral part of the barrel and which is fed ammunition from a magazine contained in the grip. The firing cycle ejects the spent casings and loads a new round into the chamber.
The following sets forth information regarding some of our most popular pistols:
|Polymer frame pistols designed for law enforcement and military professionals, available in full-sized and compact versions in 9mm, .40 caliber, .357 Sig, and .45 caliber. These pistols have been selected or approved for carry by over 500 law enforcement agencies.|
|Polymer frame pistols available in 9mm and .40 caliber. The 9mm version is used by the Afghanistan National Police and Border Patrol.|
|A .40 caliber premium pistol designed for law enforcement, which is the standard duty firearm for the California Highway Patrol.|
|A .45 ACP competition-ready pistol based on the 1911 pistol, which was the standard issue for the U.S. military for decades and which is available in a variety of materials and features.|
Our M&P Series of pistols, which was engineered with input from more than a dozen law enforcement agencies, is designed to offer performance, safety, and durability features that meet the standards of global law enforcement and military personnel as well as consumers desiring personal protection. The M&P comes in 9mm, .45, .40, and .357 Sig calibers and is available in both compact and full-sized models and with an optional frame-mounted ambidextrous thumb safety.
We believe that our M&P Series of pistols is the most feature rich, innovative polymer pistol on the market today. The M&P Series of pistols is made with a polymer frame with a rigid stainless steel chassis and a through-hardened black melonite stainless steel barrel and slide for durability. The M&P Series features easily changed palmswell grips in three sizes, allowing the user to customize grips in a matter of seconds; a passive trigger safety to prevent the pistol from firing if dropped; an enlarged trigger guard to accommodate gloved hands; a sear lever release that eliminates the need to press the trigger in order to disassemble the firearm; a loaded chamber indicator located on the top of the slide; an ambidextrous slide stop and reversible magazine release to accommodate right and left handed shooters; an optional internal locking system and magazine safety; and a universal equipment rail to allow the addition of accessories, including lights and lasers.
Our Sigma Series consists of double-action pistols constructed with a durable polymer frame and a through-hardened stainless steel slide and barrel. The Sigma Series features an ergonomic design and simple operating procedures. The Sigma Series comes in 9mm and .40 caliber models. Sigma model pistols have been purchased by the U.S. Army Security Assistance Command for use by the Afghanistan National Police and Border Patrol as a result of performance features required in wartime and extreme environmental conditions.
Our Smith & Wesson pistol sales accounted for approximately $93.1 million in net sales, or approximately 27.8% of our net sales, for the fiscal year ended April 30, 2009 and approximately $69.6 million in net sales, or approximately 23.5% of our net sales, for the fiscal year ended April 30, 2008.
We are the exclusive U.S. importer and North American marketer of Walther firearms and hold the production rights for the popular Walther PPK pistol in the United States, which we manufacture at our Houlton, Maine facility. The Walther PPK was made famous by the movie character James Bond. The Walther P22 has become one of the top selling .22 caliber pistols in the United States. Walther sales accounted for approximately $34.3 million in net sales, or approximately 10.2% of our net sales, for the fiscal year ended April 30, 2009 and approximately $27.1 million in net sales, or approximately 9.2% of our net sales, for the fiscal year ended April 30, 2008.
We currently manufacture 74 different models of revolvers. The suggested retail prices of our revolvers range between $600 and $1,446. A revolver is a handgun with a cylinder that holds the ammunition in a series of chambers that are successively aligned with the barrel of the gun during each firing cycle. There are two general types of revolvers: single-action and double-action. To fire a single-action revolver, the hammer is pulled back to cock the gun and align the cylinder before the trigger is pulled. To fire a double-action revolver, a single trigger pull advances the cylinder as it cocks and releases the hammer.
The following table sets forth information regarding some of our most popular revolvers:
|Lightweight .38 caliber revolver, which is the original aluminum frame revolver.|
|Lightweight .38 caliber revolver, which is very popular as a back-up firearm for law enforcement personnel and which features an enclosed hammer with no snag and easy carry.|
|Stainless steel variation of the .44 magnum revolver made famous in the Dirty Harry films.|
|World's most powerful production revolver, which is used for big-game hunting.|
|World's highest velocity production revolver, also used for big-game hunting.|
|Lightweight, scandium frame .357 magnum revolver, designed as a back-up weapon for law enforcement personnel.|
We offer our revolvers in a variety of frame sizes. In 2004, we introduced extra large frame revolvers. Our initial offering was the Model 500, a .500 caliber S&W magnum revolver, which is the world's most powerful revolver in production. In 2005, we introduced the Model 460 XVR (X-treme Velocity Revolver), an extra large frame .460 caliber S&W magnum revolver, which has the highest muzzle velocity of any production revolver in the world. The extra large frame revolvers are designed to address the handgun hunting and sport shooting markets.
We have long been known for our small frame revolvers, which have been carried by law enforcement personnel and personal defense-minded citizens for decades. These "J Frames" come in a variety of models, many of which are available in lightweight alloys. We hold a patent on firearm applications that incorporate scandium, a material that possesses many of the same attributes as titanium but at a more reasonable cost. Scandium is featured on our M&P line of small frame revolvers as well as many of our other revolvers and pistols.
We also manufacture many mid- and large-sized revolvers in a variety of models and calibers, including .38 caliber, .357 magnum, and the powerful .44 magnum. These mid- and large-sized revolvers have applications in virtually all professional and personal markets. The revolvers include the Model 10, which has been in continuous production since 1899. Other models include the Model 686 .357 magnum and the Model 629 .44 magnum, which also are available in several barrel lengths.
The sale of revolvers accounted for approximately $77.1 million in net sales, or approximately 23.0% of our net sales, for the fiscal year ended April 30, 2009 and approximately $70.2 million in net sales, or approximately 23.7% of our net sales, for the fiscal year ended April 30, 2008.
Our M&P15, M&P15A, and M&P15T are tactical rifles, commonly known as "black rifles," specifically designed to satisfy the functionality and reliability needs of global military and law enforcement personnel. These rifles are also popular as sporting target rifles and are sold through sporting good distributors, retailers, and dealers. The M&P15, M&P15A, and M&P15T are rugged, lightweight, semi-automatic rifles with 16-inch barrels that are designed to perform under a diverse range of conditions and fire 5.56mm and .223 caliber ammunition. The rifles feature a single-stage trigger with a seven pound trigger pull. These rifles are gas operated and include a chrome-lined gas tray, bolt carrier, and barrel with a six-position adjustable stock to accommodate a variety of shooting positions. In fiscal 2009, we introduced a fully automatic version for military and law enforcement agencies.
The M&P15, introduced in January 2006, incorporates a traditional AR-15 design, featuring a removable carry-handle and adjustable rear and front post sights, allowing for quick target acquisition and convenient handling. The M&P15A has a folding rear sight and does not have a carry handle. The upper and lower receivers on the rifles are constructed with tough 707/T6 aluminum and are furnished with A2 military flash suppressors. The M&P15T, with its high-end accessory package, features folding front and rear battle sights and a four-sided equipment rail system that allows the addition of accessories, such as lights, laser-aiming devices, and vertical grips. The tactical rifle line has been expanded to included 12 models, with various features and multiple calibers.
The sale of tactical rifles accounted for approximately $39.8 million in net sales, or approximately 11.9% of our net sales, for the fiscal year ended April 30, 2009 and approximately $16.6 million in net sales, or approximately 5.6% of our net sales, for the fiscal year ended April 30, 2008. Tactical rifles remain the fastest growing segment of the long gun market.
Our ICON ® bolt-action, center fire rifle is a premium hunting rifle designed to be a new breed of bolt-action rifle in terms of ruggedness, reliability, and accuracy. The ICON features a 24-inch polished blue metal barrel with several features designed to enhance accuracy, including a flat bottom receiver with an interlock bedding system, 5R rifling, a match grade crown, and an integrated scope base. The ICON rifle also features a Sims recoil pad, a detachable box magazine, a specially designed and located bolt release, and a two-position safety. Each rifle is fired prior to leaving the factory, and the rifle is certified to shoot one inch groups at 100 yards. A target reflecting the actual test shots from the factory is included in the box.
The ICON adds innovations to the inherent reliability and accuracy advantages of bolt-action rifles, which are rifles in which the opening and closing of the breach is controlled manually by a bolt, resulting from their relatively few moving parts compared with other rifles.
Our T/C ® Venture tm is a bolt action rifle that features a match grade barrel and 5R rifling and carries a one inch accuracy guarantee and Thompson/Center Arms quality at an economic price. The launch of the T/C Venture positions Thompson/Center Arms in a higher volume price segment. T/C Venture is positioned as the most finely crafted and most accurate bolt-action rifle retailing for less than $500.
Our Omega tm , Black Diamond tm , Fire Storm tm , Hawken tm , and Triumph ® models are leading fixed-barrel black powder, or "muzzle loader," firearms. Black powder firearms are firearms in which the ammunition is loaded through the muzzle rather than the breech as is the case of conventional firearms. Our black powder firearms are highly accurate, dependable rifles configured with muzzle loading barrels for hunting. Black powder firearms are purchased by hunting enthusiasts primarily for use during exclusive black powder hunting seasons for hunting big game, such as deer and elk. They are also used by participants in Civil War re-enactments and gun collectors.
Our interchangeable firearm systems include the Encore ® , Pro Hunter ® , Contender ® , and Endeavor ® product lines. These products offer over 360 different gun, barrel, caliber configurations, and finishes and can be configured as a center fire rifle, rim fire rifle, shotgun, black powder firearm, or single-shot handgun for use across the entire range of big- and small-game hunting. As a result, a firearm owner can easily change barrels, stocks, and forends, resulting in "one gun for all seasons" that can be continuously modified to suit the needs and tasks of the owner for various forms of sport shooting and hunting.
The sale of hunting firearms accounted for approximately $38.5 million in net sales, or approximately 11.5% of our net sales, for the fiscal year ended April 30, 2009 and approximately $57.6 million in net sales, or approximately 19.5% of our net sales, for the fiscal year ended April 30, 2008.
Premium and Limited Edition Handguns and Classics
Our Smith & Wesson Performance Center ® personnel have been providing specialized products and services for the most demanding firearm enthusiasts since 1990. To meet the requirements of law enforcement professionals, competitive shooters, collectors, and discriminating sport enthusiasts who demand superior firearm products, Performance Center personnel conceptualize, engineer, and craft firearm products from the ground up. Our craftsmen, many of whom are actively involved in competitive shooting, are highly skilled and experienced gunsmiths. While Performance Center products are typically made in limited production quantities, we offer 22 catalog Performance Center model variations in order to enhance product availability.
Our "Classics" department makes it possible for customers to own historic firearms that are manufactured today but modeled after original favorites, such as the Model 29, which is the gun made famous by the movie character Dirty Harry. These firearms are newly crafted with designs that take advantage of some of the most
famous and collectible guns that we have ever made. Our Classics department also makes commemorative firearms and employs master engravers who craft one-of-a-kind custom firearms. These custom-made applications reflect the skill and vision of the master engraver and the artistic expression of the owner.
Our premium and limited edition handguns and classics and engraving services generated approximately $16.2 million in net sales, or approximately 4.8% of our net sales, for the fiscal year ended April 30, 2009 and approximately $16.1 million in net sales, or approximately 5.5% of our net sales, for the fiscal year ended April 30, 2008.
Parts and Black Powder Accessories
We sell parts and accessories, including black powder accessories for black powder rifles. The sale of these products accounted for approximately $13.9 million in net sales, or approximately 4.2% of our net sales, for the fiscal year ended April 30, 2009 and approximately $16.8 million in net sales, or approximately 5.7% of our net sales, for the fiscal year ended April 30, 2008.
We are the largest manufacturer of handcuffs and restraints in the United States. We fabricate these products from the highest grade carbon or stainless steel. Double heat-treated internal locks help prevent tampering and smooth ratchets allow for swift cuffing and an extra measure of safety. We can customize handcuffs to fit customer specifications. The sale of handcuffs accounted for approximately $7.1 million in net sales, or approximately 2.1% of our net sales, for the fiscal year ended April 30, 2009 and approximately $6.2 million in net sales, or approximately 2.1% of our net sales, for the fiscal year ended April 30, 2008. In 2008, we launched our innovative new Lever Lock tm handcuff, which eliminates the need to use the cuff key to initiate the double-lock feature.
Smith & Wesson Academy
Established in 1969, the Smith & Wesson Academy is the nation's oldest private law enforcement training facility. The Smith & Wesson Academy has trained law enforcement personnel from all 50 states and more than 50 foreign countries. Classes are conducted at a modern facility in Springfield, Massachusetts or on location around the world. Through the Smith & Wesson Academy, we offer state-of-the art instruction designed to meet the training needs of law enforcement and security customers worldwide.
We utilize our substantial capabilities in metal processing and finishing to provide services to third-party customers. Our services include forging, heat treating, finishing, and plating. The acquisition of Thompson/Center Arms included a foundry operation, which expanded our specialty services offerings to include castings. Specialty services accounted for approximately $6.8 million in net sales, or approximately 2.0% of our net sales, for the fiscal year ended April 30, 2009 and approximately $7.6 million in net sales, or approximately 2.6% of our net sales, for the fiscal year ended April 30, 2008.
Our objective is to be a global leader in the businesses of safety, security, protection, and sport. Key elements of our strategy to achieve this objective include the following:
Enhance Existing Products and Introduce New Products
We continually seek to enhance our existing products and to introduce new products to expand our market share or enter into new market segments. During the last two fiscal years, we have introduced 22 new revolver models and 19 new pistol models. Our January 2007 acquisition of Thompson/Center Arms added black powder firearms, interchangeable firearm systems, and the ICON bolt-action rifle to our product portfolio. We plan to
continue to introduce new products in fiscal 2010 in both the handgun and long gun markets. Some of these new products may be intended for markets and customers that we currently do not serve.
Enter New Markets and Enhance Presence in Existing Markets
We plan to continue to enter new markets and expand our penetration in the markets we serve. Historically, the largest portion of our business resulted from the sale of revolvers in the domestic sporting good market. With the introduction of the M&P Series of pistols and the growth of our Sigma Series and a full line of Model 1911 style pistols, we have significantly expanded the breadth and quality of our pistol offerings. As a result of the expansion of the M&P pistol line with additional calibers and versions and customer demand for these products, pistols now account for more of our revenue than revolvers. We plan to position the M&P Series of pistols to help increase our share in the military and law enforcement markets both within the United States and internationally.
The introduction of our M&P15 Series of tactical rifles and the addition of black powder firearms, interchangeable firearm systems, and our ICON bolt-action rifle resulting from our acquisition of Thompson/Center Arms have enabled us to become an increasingly important factor in multiple segments of the long gun market. We are also evaluating other product and service opportunities, such as law enforcement and criminal investigation, security systems, less lethal products, and homeland defense products and services. Other products and services being considered may be intended for other aspects of the safety, security, protection, and sport markets.
Enhance Manufacturing Productivity and Capacity
We are continuing our efforts to enhance our manufacturing productivity in terms of increased daily production quantities, increased operational availability of equipment, reduced machinery down time, extended machinery useful life, reduced overtime, increased efficiency, and enhanced product quality. The recent introduction of new production methods and additional machinery has resulted in significant improvements in our production. For example, we have been able to increase our average daily handgun production by 193% from December 2004 to May 2009 while improving product quality, reducing waste, and reducing overtime. Any significant growth of our business, however, will require us to increase our manufacturing capacity. Over the past several years, we have improved our utilization of the floor space in our Springfield facility and now have available space into which we can grow. For example, recently, we have not always been able to satisfy on a timely basis the consumer demand for some of our most popular new products, including our M&P15 tactical rifles. We plan to continue to seek gains in manufacturing efficiency and capacity so as to assure we can meet consumer demand for our most popular new products.
Capitalize on Brand Name
We plan to capitalize on our well-known Smith & Wesson brand name, which we believe is one of the world's most recognized brand names with 87% brand recognition across all demographic lines. We believe our brand name will enable us to offer new products and services that we do not currently offer and to achieve license revenue from third parties that believe our brand name will facilitate the sale of their products or services. Customer feedback has shown that the Thompson/Center Arms brand name has a high recognition value among hunters. We are evaluating how we can best capitalize on this brand recognition in our strategy.
Emphasize Customer Satisfaction and Loyalty
We plan to continue to emphasize customer satisfaction and loyalty by offering high-quality products on a timely and cost-effective basis and by offering customer training and support. We offer loyal customers the opportunity to join Club 1852. Membership in Club 1852 is available with any Smith & Wesson firearm purchase and provides customers the opportunity to be introduced to new products, to be invited to exclusive Club 1852 events, and to receive special product offers.
Pursue Strategic Relationships and Acquisitions
We intend to develop and expand strategic relationships and pursue strategic acquisitions to enhance our ability to offer new products and penetrate new markets. Our January 2007 acquisition of Thompson/Center Arms enabled us to enter the hunting rifle and black powder firearm markets.
Marketing, Sales, and Distribution
We currently employ 48 direct sales people who service distributors, retailers, dealers, and law enforcement agencies. As of April 30, 2009, we had 52 commercial distributors, 74 law enforcement distributors, and nine federal and military distributors. Our top five commercial distributors accounted for a total of approximately 32.1% of our net product sales for the fiscal year ended April 30, 2009. Historically, commercial and law enforcement distributors have been primarily responsible for the distribution of our firearms and restraints.
We market our products primarily through creative distributor, dealer, and consumer promotions as well as specialized retail merchandising that utilizes many in-store sales tools. We are also an industry leader in vertical print media as gauged by our regular tracking of editorial coverage in more than 274 outdoor magazines, including such leaders as Guns & Ammo , American Rifleman , Shooting Times , American Handgunner , Outdoor Life , and Field & Stream . We also sponsor numerous outdoor television and radio programs, which generate significant editorial exposure. Through these print, television, and radio media, we achieved more than 2.3 billion consumer impressions (inclusive of Smith & Wesson and Thompson/Center Arms) in fiscal 2009. We sponsor a significant number of firearm safety, shooting, and hunting events and organizations. We print various product catalogs that are distributed to our dealers and mailed directly, on a limited basis, to consumers. We also attend various trade shows, such as the SHOT Show, NRA Show, International Association of Chiefs of Police Show, IWA Show in Europe, and various distributor, buying group, and consumer shows. In the fiscal year ended April 30, 2009, advertising and promotion expenses amounted to approximately $13.8 million, excluding the cost of rebates and promotions reflected in gross margin.
We also sell a significant amount of firearms directly to law enforcement agencies. Our overseas sales are primarily made through distributors, which in turn sell to retail stores and government agencies.
We utilize our www.smith-wesson.com and www.tcarms.com websites to market our products and services and provide information regarding our company to customers, consumers, dealers, distributors, and government and law enforcement agencies worldwide. We are exploring ways to enhance our ability to utilize e-marketing to provide additional products and services to our customers.
We operate a retail store, including a commercial shooting range, in Springfield, Massachusetts. The Smith & Wesson Shooting Sports Center sells Smith & Wesson, Walther, and Thompson/Center Arms firearms, accessories, branded products, apparel, ammunition, and related shooting supplies. We also operate a retail store in Rochester, New Hampshire, known as Fox Ridge Outfitters. The Fox Ridge store offers firearms as well as hunting, shooting, camping, fishing, and sporting gear and accessories at the retail location and online. We also offer Thompson/Center Custom Shop products through the Fox Ridge retail outlet.
Service and Support
We operate a toll free customer service number from 8:00 a.m. to 8:00 p.m. Eastern Time to answer questions and resolve issues regarding our products. In addition, we offer a limited lifetime warranty program under which we repair defects in material or workmanship in our firearm products without charge for as long as the original purchaser owns the handgun. We also maintain a number of authorized warranty centers throughout the world and provide both warranty and charge repair services at our facilities.
Several of our registered trademarks, including the "S&W ® " logo and script "Smith & Wesson ® ," are well known throughout the world and have a reputation for quality, value, and trustworthiness. As a result, licensing our trademarks to third parties for use in connection with their products and services provides us with an opportunity that is not available to many other companies in our industry. Our future plans include the expansion of our licensing program to capitalize on the awareness of the 150-plus year old Smith & Wesson name and capitalize on the goodwill developed through our historic American tradition by expanding consumer awareness of Smith & Wesson branded products.
We expect this further extension may provide added retail and distribution channels, products, and markets for our licensed goods and branded products. We believe that the use and capitalization of our brand through an increased licensing program can leverage our historic reputation and increase revenue with minimal risk exposure.
Our licensed products are distributed throughout the world. As of April 30, 2009, we licensed our Smith & Wesson trademarks to 26 different companies that market products complementing our products. In fiscal 2009, we signed agreements with three new licensees and ended our relationship with eight licensees.
In fiscal 2009, we entered into a licensing agreement with BBC Imagewear to provide tee shirts, jackets, and shirts utilizing the Smith & Wesson trademarks. We also entered into a licensing agreement with Kudzu/The Game to provide hats and caps with the Smith & Wesson logo and hats, tee shirts, jackets, gun pads, license plates, decals, pins, patches, key chains, glassware, and mugs with the Thompson/Center Arms logo. We signed an agreement with TruckVault to provide lockable steel handgun safes for homes, vehicles, and public safety agencies, including police, government agencies, fire departments, and the military.
In fiscal 2008, we entered into an exclusive license agreement with NationWide Digital Monitoring Co., a provider of security system products and services. Under the agreement, NationWide Digital Monitoring Co., the wholesale monitoring division of New York Merchants Protective Co., Inc., has developed an authorized Smith & Wesson Security Services program, which it has begun to market to select security dealers in North America beginning in 2009. The program provides security dealers access to both wireless and hardwired professional grade electronic security products, branded with the Smith & Wesson name and logo, along with dedicated monitoring services. Each system is available in multiple price and feature packages, allowing for applications in both residential and commercial environments.
We have three manufacturing facilities: a 530,323 square-foot facility located in Springfield, Massachusetts; a 38,115 square-foot facility located in Houlton, Maine; and a 160,000 square-foot facility located in Rochester, New Hampshire. We conduct our handgun and tactical rifle manufacturing and most of our specialty services activities at our Springfield, Massachusetts facility; we conduct our black powder, interchangeable firearm system, and hunting rifle manufacturing at our Rochester, New Hampshire facility; and we utilize our Houlton, Maine facility for the production of .22 caliber pistols, 1911 pistols, Walther PPK pistols, handcuffs, and other restraint devices. Our Springfield and Houlton facilities are ISO 9001 certified. We perform most assembly, inspection, and testing of the firearms manufactured at our manufacturing facilities. Each firearm is test fired before shipment. Our major firearm components are cut by computer-assisted machines, and we deploy sophisticated automated testing equipment to assist our skilled employees to ensure the proper functioning of our firearms.
Our Springfield facility is currently operating on a four shift, 168 hour per week schedule while our Houlton and Rochester facilities are operating on a two shift, 80 hour per week schedule. We seek to minimize inventory costs through an integrated planning and production system.
We believe we have a strong track record of manufacturing very high-quality products. From time to time, we have experienced some manufacturing issues with respect to some of our handguns and have initiated product recalls. Our most recent recall occurred in May 2009 with respect to our Model 22A handguns manufactured at our Houlton, Maine facility. In February 2009, we also issued a recall with respect to our Walther PPK/S handguns manufactured at our Houlton, Maine facility. In November 2008, we issued a recall of our i-Bolt bolt-action rifle bolts manufactured in our Springfield, Massachusetts facility. The aggregate cost of these recalls was approximately $2.5 million.
Although we manufacture many of the components for our firearms, we obtain certain parts and components, including ammunition, magazines, polymer pistol frames, bolt carriers, accessory parts, and rifle stocks, from third parties. Most of our major suppliers are U.S.-based and include Carpenter Steel for raw steel, Pioneer Tool for cutting tools, Tri-Town Precision Plastics for polymer components, and Advanced Forming Technology and Parmatech for metal-injected-molded components. The costs of these materials are at competitive rates and could be obtained from other suppliers if necessary.
Research and Development; New Product Introductions
Through our advanced products engineering department, we enhance existing and develop new firearm products. In fiscal 2009, our gross spending on research activities relating to the development of new products was approximately $2.9 million. In fiscal 2008, our gross spending on such research activities amounted to approximately $1.9 million. As of April 30, 2009, we had 34 employees engaged in research and development as part of their responsibilities.
Patents and Trademarks
We own numerous patents related to our firearms and related products. We apply for patents and trademarks whenever we develop new products or processes deemed commercially viable. Historically, we have primarily focused on applying for utility patents, but we are now also focusing on applying for design patents when we believe that a particular firearm design has merit worth protecting. We have 59 active patents. We do not believe our patents are critical to our business.
Trademarks and copyrights also are important to our firearm business and licensing activities. We have an active global program of trademark registration and enforcement. We believe that our SMITH & WESSON trademark and our S&W monogram, registered in 1913-1914, and the derivatives thereof, are known and recognized by the public worldwide and are very valuable assets. With the return of our company to American ownership, we have renewed our emphasis on strengthening our product branding and realize that the reputation developed by the use of our name for over 150 years is helpful to leverage our image among the general public. Many of the products we sell derive higher margins as a result of our brand name.
In addition to our name and derivations thereof, we have numerous other trademarks, service marks, and logos registered both in the United States and abroad. Many of our products are introduced to the market with a particular brand name associated with them. Some of our better known trademarks and service marks include the following:
|•||"MILITARY & POLICE tm ," "AIRLITE ® ," "THE SIGMA SERIES ® ," "ALLIED FORCES tm ," "CHIEFS SPECIAL ® ," "LADY SMITH ® ," "MOUNTAIN GUN ® ," "MOUNTAIN LITE ® ," and "BODYGUARD ® " (all firearms or series of firearms);|
|•||"MAGNUM ® " (used not only for revolvers but a whole line of branded products);|
|•||"SMITH & WESSON PERFORMANCE CENTER ® " (our high-performance gun/custom gunsmith service center and used in connection with products);|
|•||"SMITH & WESSON ACADEMY ® " (refers to our law enforcement/military training center);|
|•||"CLUB 1852 ® " (a consumer affinity organization made available to Smith & Wesson firearm owners);|
|•||"OMEGA tm ," "CONTENDER ® ," "ENCORE ® ," "TRIUMPH ® ," "ENDEAVOR tm ," "T/C ® VENTURE tm ," "PRECISION HUNTER tm ," and "ICON ® " (all guns or series of guns);|
|•||"SWING HAMMER ® ," "SPEED BREECH ® ," "FLEX TECH ® ," and "WEATHER SHIELD ® " (all features); and|
|•||"AMERICA'S MASTER GUNMAKER ® ."|
We intend to vigorously pursue and challenge any violations of our trademarks, copyrights, or service marks, as we believe the goodwill associated with them is a cornerstone of our branding and licensing strategy.
The firearm industry is dominated by a small number of well-known companies. We encounter competition from both domestic and foreign manufacturers. Some competitors manufacture a wide variety of firearms as we do while the majority manufacture only certain types of firearms. We are the largest manufacturer of handguns and handcuffs in the United States, the largest U.S. exporter of handguns, and a growing participant in the tactical and hunting rifle markets that we recently entered.
Our primary competitors are Ruger and Taurus in the revolver market and Beretta, Glock, Heckler & Koch, Ruger, Sig Sauer, and Springfield Armory in the pistol market. We compete primarily with Bushmaster, Rock River, Stag, and DPMS in the tactical rifle market; with Browning, Marlin, Remington, Ruger, Savage, Weatherby, and Winchester in the hunting rifle market; and with CVA and Traditions in the black powder firearm market. We compete primarily based upon innovation, product quality, reliability, price, performance, consumer awareness, and service. Our customer service organization is proactive in offering timely responses to customer inquiries.
Peerless Handcuff Company is the only major handcuff manufacturer with significant market share in the United States that directly competes with us. As a result of competitive foreign pricing, we sell nearly 80% of our handcuffs and restraints in the United States.
We sell our products and services through a variety of distribution channels. Depending upon the product or service, our customers include distributors, state and municipal law enforcement agencies and officers, government and military agencies, retailers, and consumers.
The ultimate users of our products include gun enthusiasts, collectors, sportsmen, competitive shooters, hunters, protection-focused individuals, law enforcement and military personnel and agencies, and other governmental organizations. During fiscal 2009, approximately 8.6% of our sales were to state and local law enforcement agencies and the federal government; approximately 7.4% were international; and the remaining approximately 84.0% were through the highly regulated distribution channel to domestic consumers. Our domestic sales are primarily made to distributors that sell to licensed dealers that in turn sell to the end user. In some cases, we sell directly to large retailers and dealers.
We are regulated by ATF, which licenses the manufacture and sale of firearms. ATF conducts periodic audits of our facilities. The U.S. Department of State oversees the export of firearms, and we must obtain an export permit for all international shipments.
There are also various state and local regulations relating to firearm design and distribution. In Massachusetts, for example, there are regulations related to the strength of the trigger pull, barrel length, and the makeup of the material of the gun. California has similar regulations but also requires that each new model be sampled by an independent lab before being approved for sale within the state. Warning labels related to the operation of firearms are contained in all boxes in which the firearms are shipped. With respect to state and local regulations, the local gun dealer is required to comply with those laws, and we seek to manufacture weapons complying with those specifications.
We are subject to numerous federal, state, and local laws that regulate or otherwise relate to the protection of the environment, including those governing pollutant discharges into the air and water, managing and disposing of hazardous substances, and cleaning up contaminated sites. Some of our operations require permits and environmental controls to prevent or reduce air and water pollution. These permits are subject to modification, renewal, and revocation by the issuing authorities.
Environmental laws and regulations generally have become stricter in recent years, and the cost to comply with new laws may be higher in the future. Several of the more significant federal laws applicable to our operations
include the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, or RCRA. CERCLA, RCRA, and related state laws can impose liability for the entire cost of cleaning up contaminated sites upon any of the current and former site owners, operators, or parties that sent waste to these sites, regardless of location, fault, or the lawfulness of the original disposal activity.
In our efforts to satisfy our environmental responsibilities and to comply with environmental laws and regulations, we have established, and periodically update, policies relating to the environmental standards of performance for our operations. We maintain programs that monitor compliance with various environmental regulations. However, in the normal course of our manufacturing operations, we may be subject to governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges from our operations into the environment. We regularly incur substantial capital and operating costs to comply with environmental laws, including remediation of known environmental conditions at our main plant in Springfield, Massachusetts. We spent approximately $915,000 in the fiscal year ended April 30, 2009 on environmental compliance, consisting of approximately $435,000 for disposal fees and containers, $97,000 for remediation, $258,000 for DEP analysis and fees, and $125,000 for air filtration maintenance. Although we have potential liability with respect to the future remediation of certain pre-existing sites, we believe that we are in substantial compliance with applicable material environmental laws, regulations, and permits.
We may become involved in various proceedings relating to environmental matters, and we are engaged in an environmental investigation and remediation at one site. Our manufacturing facilities are located on properties with a long history of industrial use, including the use of hazardous substances. We have identified soil and groundwater contamination at our Springfield, Massachusetts, plant that we are investigating, monitoring, or remediating.
We have provided reserves for potential environmental obligations that we consider probable and for which reasonable estimates of such obligations can be made. As of April 30, 2009, we had a reserve of approximately $754,000 for environmental matters that is recorded on an undiscounted basis. Environmental liabilities are considered probable based upon specific facts and circumstances, including currently available environmental studies, existing technology, enacted laws and regulations, experience in remediation efforts, direction or approval from regulatory agencies, our status as a potentially responsible party, or PRP, and the ability of other PRPs, if any, or contractually liable parties to pay the allocated portion of any environmental obligations. We believe that we have adequately provided for the reasonable estimable costs of known environmental obligations. However, the reserves will be periodically reviewed and increases or decreases to these reserves may occur due to the specific facts and circumstances previously noted.
We do not expect that the liability with respect to such investigation and remediation activities will have a material adverse effect on our liquidity or financial condition. However, we cannot be sure that we have identified all existing environmental issues related to our properties or that our operations will not cause environmental conditions in the future. As a result, we could incur additional material costs to address cleanup of the environmental conditions.
Pursuant to the merger agreement signed December 15, 2006, effective January 3, 2007, we completed the acquisition of Bear Lake Acquisition Corp. and its subsidiaries, including Thompson/Center Arms. Under the agreement, the former stockholders of Bear Lake Acquisition Corp. have indemnified us for losses arising from, among other things, environmental conditions related to its manufacturing activities. Of the purchase price, $8.0 million was placed in an escrow account, a portion of which will be applied to environmental remediation at the manufacturing site in Rochester, New Hampshire. In November 2008, $2.5 million of the escrow account was released to the sellers. We are currently working on a remediation action plan with the sellers in order to remediate the environmental contamination found at the site. It is not presently possible to estimate the ultimate amount of all remediation costs and potential uses of the escrow. As of April 30, 2009, approximately $1.2 million of the escrow has been spent on safety and environmental testing and remediation activities. We believe the likelihood of environmental remediation costs exceeding the amount available in escrow to be remote.
As of May 31, 2009, we had 1,362 full-time employees. Of our employees, 1,135 are engaged in manufacturing, 111 in sales and marketing, 31 in finance and accounting, 34 in research and development, 20 in information services, and 31 in various executive or other administrative functions. None of our employees are represented by a union in collective bargaining with us. Approximately 33% of our employees have 10 or more years of service with our company, and approximately 23% have greater than 25 years of service. We believe that our employee relations are good and that the high quality of our employee base is instrumental to our success.
As of April 30, 2009, we had a backlog of orders of approximately $267.9 million. The backlog of orders as of April 30, 2008 was approximately $49.9 million. Our backlog consists of orders for which purchase orders have been received and which are generally scheduled for shipment within six months. The high order backlog at April 30, 2009 is directly related to the increase in consumer demand that we experienced beginning in our third and fourth fiscal quarters in 2009. We have limited data by which to determine how long this increase in consumer demand will last. Orders received that have not yet shipped could be cancelled if demand were to suddenly decrease. Therefore, the backlog may not be indicative of future sales.
The following table sets forth certain information regarding our executive officers:
Michael F. Golden
|55||President and Chief Executive Officer|
William F. Spengler
|54||Executive Vice President, Chief Financial Officer, and Treasurer|
Leland A. Nichols
|47||Senior Vice President of Sales and Marketing|
Kenneth W. Chandler
|48||Vice President - Operations|
Ann B. Makkiya
|39||Vice President, Secretary, and Corporate Counsel|
Michael F. Golden has served as the President and Chief Executive Officer and a director of our company since December 2004. Mr. Golden was employed in various executive positions with the Kohler Company from February 2002 until joining our company, with his most recent position being the President of its Cabinetry Division. Mr. Golden was the President of Sales for the Industrial/Construction Group of the Stanley Works Company from 1999 until 2002; Vice President of Sales for Kohler's North American Plumbing Group from 1996 until 1998; and Vice President - Sales and Marketing for a division of The Black & Decker Corporation where he was employed from 1981 until 1996.
William F. Spengler has served as Executive Vice President, Chief Financial Officer, and Treasurer of our company since July 2008. Mr. Spengler was Executive Vice President and Chief Financial Officer of MGI PHARMA, Inc. from August 2006 until January 2008 and Senior Vice President and Chief Financial Officer from April 2006 to August 2006. Mr. Spengler was Senior Vice President, International & Corporate Development of MGI PHARMA from October 2005 to April 2006. From July 2004 to October 2005, Mr. Spengler was Executive Vice President and Chief Financial Officer of Guilford Pharmaceuticals Inc. prior to its acquisition by MGI PHARMA in October 2005. From May 2002 to June 2004, Mr. Spengler was President, Chief Operating Officer, and a director of Osteoimplant Technology, Inc.
Leland A. Nichols has served as Senior Vice President of Sales and Marketing of our company since September 2008. Mr. Nichols served as Vice President - Sales of our company from January 2005 until September 2008. Mr. Nichols also has served as the President and Chief Operating Officer of our subsidiary, Smith & Wesson Corp., from April 2006 until September 2008. Mr. Nichols was Executive Vice President of the Cabinetry Division of the Kohler Company from July 2002 until joining our company. Mr. Nichols held various executive positions with the Stanley Works from April 1998 until June 2002, including President of its Hardware Division. Mr. Nichols spent the previous 14 years with The Black & Decker Corporation, including positions in sales, marketing, product management, and general management in the United States and Asia.
Kenneth W. Chandler has served as Vice President - Operations of our company since November 2004. Mr. Chandler was Vice President - Operations - Automotive Division of Torrington Bearing Company, formerly a subsidiary of Ingersoll Rand and now a subsidiary of the Timkin Company, from 2001 until joining our company.
Ann B. Makkiya has served as Vice President of our company since April 2009 and Secretary and Corporate Counsel of our company since February 2004. Ms. Makkiya served as Corporate Counsel of our wholly owned subsidiary, Smith & Wesson Corp., from December 2001 until February 2004. Ms. Makkiya was associated with the law firm of Bulkley, Richardson and Gelinas, LLP from 1998 to 2001.
|Item 1A.||Risk Factors|
Our performance is being influenced by a variety of general economic and political factors.
The domestic consumer firearm market experienced a decline in demand beginning during our second fiscal quarter ended October 31, 2007. This period was marked by an escalation of the subprime loan crisis, a tightening in the credit markets, the continued worsening of the housing market, increasing fuel prices, less than robust employment growth, and generally weak economic conditions. These factors contributed to a general slowdown of consumer spending across a wide variety of industry and product lines, and against this environment, unseasonably warm weather throughout most of the United States adversely affected the retail traffic in the sporting goods channel. At the same time, significant distribution channel purchases in anticipation of a strong hunting season resulted in excess inventory levels, which limited the ability of the distribution channel to purchase additional products. We cannot predict when or if economic conditions will improve.
Despite the continuing weakness of the overall economy, we began to experience strong consumer demand for our handguns and tactical rifle products beginning in our third fiscal quarter ended January 31, 2009 with net product sales increasing 25.9% for the quarter and order backlog increasing by more than $95 million over the comparable quarter in the previous year and $102 million over the prior sequential quarter. For the period ended April 30, 2009, our backlog grew an additional $145 million to $268 million. This period was marked by a new administration taking office in Washington, D.C., speculation surrounding increased gun control, and heightened fears of terrorism and crime. We are unable to assess whether or for how long the recent and significant increase in consumer demand will last or whether the orders constituting our backlog will be cancelled if consumer demand decreases. Changes in the factors that are contributing to the very strong consumer demand for our handgun and tactical rifle products, particularly in an overall weak economic environment, may adversely affect our operating results.
The weakness of demand for our hunting products is adversely affecting our overall results.
We have been experiencing a significant decline for our hunting products, including bolt-action hunting rifles, interchangeable system rifles and fixed-barrel black powder firearms, and related parts and accessories. Hunting firearm sales declined by more than 33% for the fiscal year ended April 30, 2009, and we recorded an impairment charge relating to our hunting business of $98.2 million, less related deferred tax liabilities of $21.8 million, resulting in a $76.5 million adverse impact to after-tax profits. Among other things, we attribute the weakness in our hunting products to the severe weakness in the economy, unseasonably warm weather, excess levels of hunting product inventory in the sporting goods distribution channel, and the premium nature of the hunting products we offer. We have taken a number of actions to address the weak demand for our hunting products and to reduce the losses we have been incurring, including the introduction of lower price-point products in an effort to reach a larger segment of the market, moving from a direct sales force to a manufacturers' representative model, and instituting cost-cutting initiatives and workforce reductions.
We cannot predict whether the measures we have taken will increase the demand for our hunting products or reduce or eliminate the losses being incurred in this portion of our business. We may be required to consider the disposal of all or portions of our hunting business if we are unable to return it to profitability.
We remain dependent on the sale of our firearm products in the sporting goods distribution channel.
We manufacture a wide array of pistols, revolvers, tactical rifles, hunting rifles, black powder firearms, handcuffs, and firearm-related products and accessories for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, protection focused individuals, law enforcement agencies and officers, and military agencies in the United States and throughout the world. We have made substantial efforts during the last several years to increase our sales to law enforcement and military agencies in the United States and throughout the world. Our efforts to increase sales to law enforcement agencies have been successful to date with over 500 agencies in the United States and almost 50 agencies abroad selecting or approving for carry our M&P pistols. We have not, however, yet secured any major contracts to supply any large domestic military agencies. Although we believe that we now are able to offer a broad array of competitive products to the military, we cannot predict whether or when we will be able to secure any major military supply contracts. As a result, approximately 84% of our net sales remain in the sporting goods distribution channel.
Our objective of becoming a global leader in the business of safety, security, protection, and sport may not be successful.
Our objective of becoming a global leader in the business of safety, security, protection, and sport may not be successful. This objective was designed to enable us to diversify our business and to reduce our traditional dependence on handguns in general, and revolvers in particular, in the sporting goods distribution market. While we have been successful in substantially expanding our pistol business in multiple markets and in entering the long gun market with tactical rifles and hunting rifles, we have not yet achieved our broader objectives. Pursuing our strategy to achieve our objective beyond firearms may require us to hire additional managerial, manufacturing, marketing, and sales employees; to introduce new products and services; to purchase additional machinery and equipment; to expand our distribution channels; to expand our customer base to include a leadership position in sales to law enforcement agencies and the military; and to engage in strategic alliances and acquisitions. We may not be able to attract and retain the additional employees we require, to introduce new products that attain significant market share, to increase our law enforcement and military business, to complete successful acquisitions or strategic alliances, or to penetrate successfully other safety, security, protection, and sport markets.
From time to time, we have been capacity constrained.
From time to time, we have been capacity constrained and have been unable to satisfy on a timely basis the demand for our products. Capacity constraints remain despite our achieving significant improvements in our production as a result of the introduction of enhanced production methods and the purchase of additional machinery. During the last several years, we have enhanced our manufacturing productivity in terms of added capacity, increased daily production quantities, increased operational availability of equipment, reduced machinery down time, extended machinery useful life, and increased manufacturing efficiency. The continuation of the recent very strong consumer demand for our products or increased business from law enforcement or military agencies will require us to expand further our manufacturing capacity, particularly through the purchase of additional manufacturing equipment. We may not be able to increase our capacity in time to satisfy increases in demand that may occur from time to time and may not have adequate financial resources to increase capacity to meet demand. We may suffer excess capacity and increased overhead if we increase our capacity to meet demand and that demand decreases.
We may be unsuccessful in achieving our goals to increase revenue, increase gross margins, or reduce operating expense ratios.
We may be unsuccessful in achieving our goals to increase revenue, increase gross margins, or reduce operating expense ratios. Our ability to achieve these goals could result from a variety of factors, including our inability to introduce new products with significant customer appeal, pressures on the selling prices of our products, increases in required capital expenditures, and increases in the costs of labor and materials.
The sale of our licensed products depends on the goodwill associated with our name and our brand and the success of our licensees.
Our licensed products and non-firearm products displayed in our catalogs and sold by us or our licensees compete based on the goodwill associated with our name and brand and the success of our licensees. A decline in the perceived quality of our firearm products, a failure to design our products to meet consumer preferences, or other circumstances adversely affecting our reputation could significantly damage our ability to sell or license those products. Our licensed products compete with numerous other licensed and non-licensed products outside the firearm market.
Our ability to compete successfully depends on a number of factors, both within and outside our control.
Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:
|•||our success in designing and introducing new products;|
|•||our ability to predict the evolving requirements and desires of our customers;|
|•||the quality of our customer services;|
|•||product introductions by our competitors; and|
|•||foreign labor costs and currency fluctuations, which may cause a foreign competitor's products to be priced significantly lower than our products.|
Potential strategic alliances may not achieve their objectives, and the failure to do so could impede our growth.
We anticipate that we will enter into strategic alliances. We continually explore strategic alliances designed to expand our product offerings, enter new markets, and improve our distribution channels. Any strategic alliances may not achieve their intended objectives, and parties to our strategic alliances may not perform as contemplated. The failure of these alliances may impede our ability to introduce new products and enter new markets.
The successful execution of our strategy will depend in part on our ability to make successful acquisitions.
As part of our business strategy, we plan to expand our operations through strategic acquisitions in order to enhance existing products and offer new products, enter new markets and businesses, and enhance our current markets and business Our acquisition of Thompson/Center Arms in January 2007 is the only acquisition that we have completed to date. Our acquisition strategy involves significant risks. We cannot accurately predict the timing, size, and success of our acquisition efforts. We may be unable to identify suitable acquisition candidates or to complete the acquisitions of candidates that we identify. Increased competition for acquisition candidates or increased asking prices by acquisition candidates may increase purchase prices for acquisitions to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria. Acquisitions also may become more difficult in the future as we or others acquire the most attractive candidates. Unforeseen expenses, difficulties, and delays frequently encountered in connection with rapid expansion through acquisitions could inhibit our growth and negatively impact our operating results.
Our ability to grow through acquisitions will depend upon various factors, including the following:
|•||the availability of suitable acquisition candidates at attractive purchase prices;|
|•||the ability to compete effectively for available acquisition opportunities;|
|•||the availability of cash resources, borrowing capacity, or stock at favorable price levels to provide required purchase prices in acquisitions;|
|•||diversion of management's attention to acquisition efforts; and|
|•||the ability to obtain any requisite governmental or other approvals.|
As a part of our acquisition strategy, we frequently engage in discussions with various companies regarding their potential acquisition by us. In connection with these discussions, we and each potential acquisition candidate exchange confidential operational and financial information, conduct due diligence inquiries, and consider the structure, terms, and conditions of the potential acquisition. In certain cases, the prospective acquisition candidate agrees not to discuss a potential acquisition with any other party for a specific period of time and agrees to take other actions designed to enhance the possibility of the acquisition, such as preparing audited financial information. Potential acquisition discussions frequently take place over a long period of time and involve difficult business integration and other issues. As a result of these and other factors, a number of potential acquisitions that from time to time appear likely to occur do not result in binding legal agreements and are not consummated.
Unforeseen expenses, difficulties, and delays frequently encountered in connection with rapid expansion through acquisitions could inhibit our growth and negatively impact our profitability. In addition, the size, timing, and success of any future acquisitions may cause substantial fluctuations in our operating results from quarter to quarter. Consequently, our operating results for any quarter may not be indicative of the results that may be achieved for any subsequent quarter or for a full fiscal year. These fluctuations could adversely affect the market price of our common stock.
Any acquisitions that we undertake in the future could be difficult to integrate, disrupt our business, dilute stockholder value, and harm our operating results.
In order to pursue a successful acquisition strategy, we may need to integrate the operations of acquired businesses into our operations, including centralizing certain functions to achieve cost savings and pursuing programs and processes that leverage our revenue and growth opportunities. The integration of the management, operations, and facilities of acquired businesses with our own could involve difficulties, which could adversely affect our growth rate and operating results.
Our experience in acquiring other businesses is limited. We may be unable to complete effectively an integration of the management, operations, facilities, and accounting and information systems of acquired businesses with our own; to manage efficiently the combined operations of the acquired businesses with our operations; to achieve our operating, growth, and performance goals for acquired businesses; to achieve additional revenue as a result of our expanded operations; or to achieve operating efficiencies or otherwise realize cost savings as a result of anticipated acquisition synergies. The integration of acquired businesses involves numerous risks, including the following:
|•||the potential disruption of our core businesses;|
|•||risks associated with entering markets and businesses in which we have little or no prior experience;|
|•||diversion of management's attention from our core businesses;|
|•||adverse effects on existing business relationships with suppliers and customers;|
|•||failure to retain key customers, suppliers, or personnel of acquired businesses;|
|•||the potential strain on our financial and managerial controls and reporting systems and procedures;|
|•||greater than anticipated costs and expenses related to the integration of the acquired business with our business;|
|•||potential unknown liabilities associated with the acquired company;|
|•||meeting the challenges inherent in effectively managing an increased number of employees in diverse locations;|
|•||failure of acquired businesses to achieve expected results; and|
|•||creating uniform standards, controls, procedures, policies, and information systems.|
We may not be successful in overcoming problems encountered in connection with any acquisitions, and our inability to do so could disrupt our operations and reduce our profitability.
Our growth strategy may require significant additional funds, the amount of which will depend upon the size, timing, and structure of future acquisitions and our working capital and general corporate needs.
Any borrowings made to finance future acquisitions or for operations could make us more vulnerable to a downturn in our operating results, a downturn in economic conditions, or increases in interest rates on borrowings. If our cash flow from operations is insufficient to meet our debt service requirements, we could be required to sell additional equity securities, refinance our obligations, or dispose of assets in order to meet our debt service requirements. Adequate financing may not be available if and when we need it or may not be available on terms acceptable to us. The failure to obtain sufficient financing on favorable terms and conditions could have a material adverse effect on our growth prospects and our business, financial condition, and operating results.
If we finance any future acquisitions in whole or in part through the issuance of common stock or securities convertible into or exercisable for common stock, existing stockholders will experience dilution in the voting power of their common stock and earnings per share could be negatively impacted. The extent to which we will be able or willing to use our common stock for acquisitions will depend on the market price of our common stock from time to time and the willingness of potential sellers to accept our common stock as full or partial consideration for the sale of their businesses. Our inability to use our common stock as consideration, to generate cash from operations, or to obtain additional funding through debt or equity financings in order to pursue our acquisition program could materially limit our growth.
The failure to manage our growth could adversely affect our operations.
To remain competitive, we must make significant investments in systems, equipment, and facilities. In addition, we may commit significant funds to enhance our sales, marketing, and licensing efforts in order to expand our business. As a result of the increase in fixed costs and operating expenses, our failure to increase sufficiently our net sales to offset these increased costs would adversely affect our operating results.
The failure to manage our growth effectively could adversely affect our operations. We have substantially increased the number of our manufacturing and design programs and plan to expand further the number and diversity of our programs in the future. Our ability to manage our planned growth effectively will require us to
|•||enhance our operational, financial, and management systems;|
|•||enhance our facilities and expand our equipment; and|
|•||successfully hire, train, and motivate additional employees, including additional personnel for our sales, marketing, and licensing efforts.|
The expansion and diversification of our products and customer base may result in increases in our overhead and selling expenses. We also may be required to increase staffing and other expenses as well as our expenditures on capital equipment and leasehold improvements in order to meet the demand for our products. Any increase in expenditures in anticipation of future sales that do not materialize would adversely affect our profitability.
From time to time, we may seek additional equity or debt financing to provide funds for the expansion of our business. We cannot predict the timing or amount of any such financing requirements at this time. If such financing is not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired and our operating results may suffer. Debt financing increases expenses and must be repaid regardless of operating results. Equity financing could result in additional dilution to existing stockholders.
Our inability to protect our intellectual property or obtain the right to use intellectual property from third parties could impair our competitive advantage, reduce our revenue, and increase our costs.
Our success and ability to compete depend in part on our ability to protect our intellectual property. We rely on a combination of patents, copyrights, trade secrets, trademarks, confidentiality agreements, and other contractual provisions to protect our intellectual property, but these measures may provide only limited protection. Our failure to enforce and protect our intellectual property rights or obtain the right to use necessary intellectual property from third parties could reduce our sales and increase our costs. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States.
Patents may not be issued for the patent applications that we have filed or may file in the future. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. We have registered certain of our trademarks in the United States and other countries. We may be unable to enforce existing or obtain new registrations of principle or other trademarks in key markets. Failure to obtain or enforce such registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenges from third parties to our use of our trademarks and brands.
In the past, we did not consistently require our employees and consultants to enter into confidentiality agreements, employment agreements, or proprietary information and invention agreements; however, such agreements are now required. Therefore, our former employees and consultants may try to claim some ownership interest in our intellectual property and may use our intellectual property competitively and without appropriate limitations.
We may incur substantial expenses and devote management resources in prosecuting others for their unauthorized use of our intellectual property rights.
We may become involved in litigation regarding patents and other intellectual property rights. Other companies, including our competitors, may develop intellectual property that is similar or superior to our intellectual property, duplicate our intellectual property, or design around our patents and may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries in which we sell products or from which competing products may be sold. Unauthorized parties may attempt to copy or otherwise use aspects of our intellectual property and products that we regard as proprietary. Our means of protecting our proprietary rights in the United States or abroad may prove to be inadequate and competitors may be able to independently develop similar intellectual property. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the markets for our products.
Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions because our business would be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome is favorable, this proceeding could result in substantial cost to us and disrupt our business.
In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition, and operating results.
We face risks associated with international currency exchange.
While we transact business predominantly in U.S. dollars and bill and collect most of our sales in U.S. dollars, a portion of our revenue results from goods that are purchased, in whole or in part, from a European supplier, in euros, thereby exposing us to some foreign exchange fluctuations. In the future, more customers or suppliers may make or require payments in non-U.S. currencies, such as the euro.
Fluctuations in foreign currency exchange rates could affect the sale of our products or the cost of goods and operating margins and could result in exchange losses. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact of future exchange rate fluctuations on our operating results.
We do not enter into any market risk sensitive instruments for trading purposes. Our principal market risk relates to changes in the value of the euro relative to the U.S. dollar. Annually, we purchase approximately $20 million of inventory from a European supplier. This exposes us to risk from foreign exchange rate fluctuations. A 10% drop in the value of the U.S. dollar in relation to the euro would, to the extent not covered through price adjustments, reduce our gross profit on that $20 million of inventory by approximately $2.0 million. In an effort to
offset our risks from unfavorable foreign exchange fluctuations, we periodically enter into euro participating forward options under which we purchase euros to be used to pay the European manufacturer.
We face risks associated with international activities.
Political and economic conditions abroad may result in a reduction of our foreign sales, as a result of the sale of our products in 50 countries; our importation of firearms from Walther, which is based in Germany; and our purchase of ammunition magazines from Mec-Gar in Italy. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export or import compliance laws, or other trade policies, could reduce our ability to sell our products in foreign markets, the ability of foreign customers to purchase our products, and our ability to import firearms and parts from Walther and other foreign suppliers.
Our foreign sales of handguns and our importation of handguns from Walther create a number of logistical and communications challenges. These activities also expose us to various economic, political, and other risks, including the following:
|•||compliance with local laws and regulatory requirements as well as changes in those laws and requirements;|
|•||transportation delays or interruptions and other effects of less developed infrastructures;|
|•||foreign exchange rate fluctuations;|
|•||limitations on imports and exports;|
|•||imposition of restrictions on currency conversion or the transfer of funds;|
|•||the possibility of appropriation of our assets without just compensation;|
|•||difficulties in staffing and managing foreign personnel and diverse cultures;|
|•||overlap of tax issues;|
|•||tariffs and duties;|
|•||possible employee turnover or labor unrest;|
|•||the burdens and costs of compliance with a variety of foreign laws; and|
|•||political or economic instability in countries in which we conduct business, including possible terrorist acts.|
Changes in policies by the United States or foreign governments resulting in, among other things, increased duties, higher taxation, currency conversion limitations, restrictions on the transfer or repatriation of funds, or limitations on imports or exports also could have a material adverse effect on us. Any actions by foreign countries to reverse policies that encourage foreign trade also could adversely affect our operating results. In addition, U.S. trade policies, such as "most favored nation" status and trade preferences, could affect the attractiveness of our products to our U.S. customers.
We are subject to extensive regulation.
Our business, as well as the business of all producers and marketers of firearms and firearm parts, is subject to numerous federal, state, and local laws and governmental regulations and protocols, including the National Firearms Act and the Gun Control Act of 1968. These laws generally prohibit the private ownership of fully automatic weapons and place certain restrictions on the interstate sale of firearms unless certain licenses are obtained. We manufacture fully automatic weapons for the law enforcement and military markets, and hold all necessary licenses under these federal laws. From time to time, congressional committees consider proposed bills and various states enact laws relating to the regulation of firearms. These proposed bills and enacted state laws generally seek either to restrict or ban the sale and, in some cases, the ownership of various types of firearms. We believe we are in compliance with all such laws applicable to us and hold all necessary licenses. The regulation of firearms could become more restrictive in the future and any such restriction would harm our business.
We are currently involved in numerous lawsuits.
We are currently defending a lawsuit brought by the City of Gary, Indiana against us and numerous other manufacturers and distributors arising out of the design, manufacture, marketing, and distribution of handguns. The city seeks to recover substantial damages, as well as various types of injunctive relief that, if granted, could affect the future design, manufacture, marketing, and distribution of handguns by the defendant manufacturers and distributors. We believe that the various allegations are unfounded and, in addition, that any accidents and any results from them were due to negligence or misuse of the firearm by a third party and that there should be no recovery against us.
We, our Chairman of the Board, our Chief Executive Officer, and our former Chief Financial Officer were named in three similar purported securities class action lawsuits. The complaints in these actions, which have been consolidated into one action, were brought individually and on behalf of all persons who purchased securities of our company between June 15, 2007 and December 6, 2007. The plaintiffs seek unspecified damages for alleged violations of Section 10(b) and Section 20(a) of the Exchange Act. The Court, on our motion, dismissed our Chairman of the Board from the litigation in March 2009.
We are also involved in a purported stockholder derivative lawsuit brought in the U.S. District Court for the District of Nevada. The action was brought by a plaintiff on behalf of our company against certain of our officers and directors. The complaint seeks to assert state law claims, including alleged breach of fiduciary duties, waste of corporate assets, and unjust enrichment arising from our earnings guidance in June 2007 and September 2007, our reduction of earnings guidance in October 2007 and December 2007, our decision in January 2008 to suspend further guidance and not confirm prior guidance until certain market conditions settled, and certain sales of our stock. The putative plaintiffs seek unspecified damages on behalf of our company from the individual defendants.
We intend to defend ourselves vigorously in these lawsuits. There can be no assurance, however, that we will not have to pay significant damages or amounts in settlement above insurance coverage. An unfavorable outcome or prolonged litigation could harm our business. Litigation of this nature also is expensive and time consuming and diverts the time and attention of our management.
Environmental laws and regulations may impact our business.
We are subject to numerous federal, state, and local laws that regulate or otherwise relate to the protection of the environment, including the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, or RCRA. CERCLA, RCRA, and related state laws subject us to the potential obligation to remove or mitigate the environmental effects of the disposal or release of certain pollutants at our manufacturing facilities and at third-party or formerly owned sites at which contaminants generated by us may be located. This requires us to make expenditures of both a capital and expense nature.
In our efforts to satisfy our environmental responsibilities and to comply with environmental laws and regulations, we maintain policies relating to the environmental standards of performance for our operations and conduct programs to monitor compliance with various environmental regulations. However, in the normal course of our manufacturing operations, we may become subject to governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment. We believe that we are generally in compliance with applicable environmental regulations.
We may not have identified all existing contamination on our properties, including the property associated with our Thompson/Center Arms acquisition in January 2007, and we cannot predict whether our operations will cause contamination in the future. As a result, we could incur additional material costs to clean up contamination that exceed the amount of our reserves and escrows. We will periodically review the probable and reasonably estimable environmental costs in order to update the environmental reserves. Furthermore, it is not possible to predict with certainty the impact on us of future environmental compliance requirements or of the cost of resolution of future environmental proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under federal environmental laws is joint and several in nature, and environmental laws and regulations are
subject to modification and changes in interpretation. Additional or changing environmental regulation may become burdensome in the future, and any such development could have a material adverse effect on us.
We increased our leverage as a result of the sale of senior convertible notes.
As a result of the sale in December 2006 of 4% Senior Convertible Notes due in 2026 ("senior convertible notes"), we incurred $80 million of indebtedness. As a result of this indebtedness, our interest payment obligations have increased. Our interest payment obligation on these notes is $3.2 million annually. The degree to which we are now leveraged could adversely affect our ability to obtain further financing for working capital, acquisitions, or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will depend upon our future performance, which will be subject to the financial, business, and other factors affecting our operations, many of which are beyond our control.
Our indebtedness could adversely affect our business and limit our ability to plan for or respond to changes in our business, and we may be unable to generate sufficient cash flow to satisfy significant debt service obligations.
As of April 30, 2009, our consolidated long-term indebtedness was approximately $86.0 million. We may incur additional indebtedness in the future, including additional borrowings under our revolving credit facility. Our substantial indebtedness and the fact that a substantial portion of our cash flow from operations must be used to make principal and interest payments on this indebtedness could have important consequences, including the following:
|•||increasing our vulnerability to general adverse economic and industry conditions;|
|•||reducing the availability of our cash flow for other purposes;|
|•||limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, which would place us at a competitive disadvantage compared to our competitors that may have less debt;|
|•||limiting, by the financial and other restrictive covenants in our debt agreements, our ability to borrow additional funds; and|
|•||having a material adverse effect on our business if we fail to comply with the covenants in our debt agreements, because such failure could result in an event of default that, if not cured or waived, could result in all or a substantial amount of our indebtedness becoming immediately due and payable.|
Our ability to incur significant future indebtedness, whether to finance potential acquisitions or for general corporate purposes, will depend on our ability to generate cash. To a certain extent, our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us under our revolving credit facility in amounts sufficient to enable us to fund our liquidity needs, our financial condition and results of operations may be adversely affected. If we cannot make scheduled principal and interest payments on our debt obligations in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures, or seek additional equity.
Under the terms of the indenture governing our senior convertible notes, we are limited in our ability to incur future indebtedness until certain conditions are met.
Under the terms of the indenture governing our senior convertible notes, we agreed to a limitation on the incurrence of debt by us and our subsidiaries. Until such time as the closing price of our common stock has exceeded 200% of the conversion price of the notes for at least 30 trading days during any period of 40 consecutive trading days, we may not, directly or indirectly, incur debt in excess of designated amounts. This limitation affects our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, which would place us at a competitive disadvantage compared to our competitors, including the ability to finance potential
acquisitions. If we are unable to make additional borrowings as a result of this limitation, our financial condition and results of operations may be adversely affected.
We may not have the funds necessary to repay the senior convertible notes at maturity or purchase the notes at the option of the noteholders or upon a fundamental change as required by the indenture governing the notes.
At maturity, the entire outstanding principal amount of the senior convertible notes will become due and payable by us. In addition, on December 15, 2011, December 15, 2016, and December 15, 2021, holders of the notes may require us to purchase their notes for cash. Noteholders may also require us to purchase their notes for cash upon a fundamental change as described in the indenture governing the notes. It is possible that we may not have sufficient funds to repay or repurchase the notes when required. No sinking fund is provided for the notes.
Our charter documents and Nevada law could make it more difficult for a third party to acquire us and discourage a takeover.
Certain provisions of our articles of incorporation and bylaws and Nevada law make it more difficult for a third party to acquire us and make a takeover more difficult to complete, even if such a transaction were in our stockholders' interest or might result in a premium over the market price for the shares held by our stockholders.
Our stockholders' rights plan may adversely affect existing stockholders.
Our stockholders' rights plan may have the effect of deterring, delaying, or preventing a change in control that might otherwise be in the best interests of our stockholders. In general and subject to certain exceptions as to existing major stockholders, stock purchase rights issued under the plan become exercisable when a person or group acquires 15% or more of our common stock or a tender offer or exchange offer of 15% or more of our common stock is announced or commenced. After any such event, our other stockholders may purchase additional shares of our common stock at 50% of the then-current market price. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors. The rights should not interfere with any merger or other business combination approved by our board of directors since the rights may be redeemed by us at $0.01 per stock purchase right at any time before any person or group acquires 15% or more of our outstanding common stock. The rights expire in August 2015.
The issuance of additional common stock in the future, including shares that we may issue pursuant to option grants, may result in dilution in the net tangible book value per share of our common stock.
Our board of directors has the legal power and authority to determine the terms of an offering of shares of our capital stock, or securities convertible into or exchangeable for these shares, to the extent of our shares of authorized and unissued capital stock.
Sale of a substantial number of shares that are eligible for sale could adversely affect the price of our common stock.
As of April 30, 2009, there were 47,767,938 shares of our common stock outstanding. Substantially all of these shares are freely tradable without restriction or further registration under the securities laws, unless held by an "affiliate" of our company, as that term is defined in Rule 144 under the securities laws. Shares held by affiliates of our company, which generally include our directors, officers, and certain principal stockholders, are subject to the resale limitations of Rule 144 described below.
In general, under Rule 144 as currently in effect, any person or persons whose shares are aggregated for purposes of Rule 144, who is deemed an affiliate of our company and beneficially owns restricted securities with respect to which at least six months has elapsed since the later of the date the shares were acquired from us, or from an affiliate of ours, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of our common stock and the average weekly trading volume in common stock during the four calendar weeks preceding such sale. Sales by affiliates under Rule 144 also are subject to certain manner-of-sale provisions and notice requirements and to the availability of current public
information about us. Rule 701, as currently in effect, permits our employees, officers, directors, and consultants who purchase shares pursuant to a written compensatory plan or contract to resell these shares in reliance upon Rule 144, but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell their shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation, or notice provisions of Rule 144. A person who is not an affiliate, who has not been an affiliate within three months prior to sale, and who beneficially owns restricted securities with respect to which at least one year has elapsed since the later of the date the shares were acquired from us, or from an affiliate of ours, is entitled to sell such shares under Rule 144 without regard to any of the volume limitations or other requirements described above. Sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices.
As of April 30, 2009, we had outstanding options to purchase 2,428,263 shares of common stock under our stock option plans and other option agreements and 346,944 undelivered restricted stock units under our stock option plans, and we had issued 1,264,323 of the 10,000,000 shares of common stock reserved for issuance under our employee stock purchase plan. As of April 30, 2009, we also had outstanding warrants to purchase 70,000 shares of common stock. We have registered for offer and sale the shares of common stock that are reserved for issuance pursuant to our stock option plans and available for issuance pursuant to the employee stock purchase plan as well as the shares underlying the warrants. Shares covered by such registration statements upon the exercise of stock options or warrants or pursuant to the employee stock purchase plan generally will be eligible for sale in the public market, except that affiliates will continue to be subject to volume limitations and other requirements of Rule 144. The issuance or sale of such shares could depress the market price of our common stock.
If holders of our senior convertible notes elect to convert their notes and sell material amounts of our common stock in the market, such sales could cause the price of our common stock to decline, and such downward pressure on the price of our common stock may encourage short selling of our common stock by holders of our senior convertible notes or others.
The conversion of some or all of our senior convertible notes will dilute the ownership interests of existing stockholders. To the extent that holders of our senior convertible notes elect to convert the notes into shares of our common stock and sell material amounts of those shares in the market, our stock price may decrease as a result of the additional amount of shares available on the market. The subsequent sales of these shares could encourage short sales by holders of senior convertible notes and others, placing further downward pressure on our stock price.
If there is significant downward pressure on the price of our common stock, it may encourage holders of senior convertible notes or others to sell shares by means of short sales to the extent permitted under the U.S. securities laws. Short sales involve the sale by a holder of notes, usually with a future delivery date, of common stock the seller does not own. Covered short sales are sales made in an amount not greater than the number of shares subject to the short seller's right to acquire common stock, such as upon conversion of notes. A holder of notes may close out any covered short position by converting its notes or purchasing shares in the open market. In determining the source of shares to close out the covered short position, a holder of notes will likely consider, among other things, the price of common stock available for purchase in the open market as compared to the conversion price of the notes. The existence of a significant number of short sales generally causes the price of common stock to decline, in part because it indicates that a number of market participants are taking a position that will be profitable only if the price of the common stock declines.
We may issue securities that could dilute your ownership and the net tangible book value per share of our common stock.
We may decide to raise additional funds through public or private debt or equity financing to fund our operations. If we raise funds by issuing equity securities, the percentage ownership of our current stockholders will be reduced and the new equity securities may have rights superior to those of our common stock. We may not obtain sufficient financing on terms that are favorable to us. We may delay, limit, or eliminate some or all of our proposed operations if adequate funds are not available. We may also issue equity securities as consideration for acquisitions we may make. The issuance of additional common stock in the future, including shares that we may issue pursuant to option grants, may result in dilution in the net tangible book value per share of our common stock.
Our Springfield, Massachusetts facility is critical to our success.
Our Springfield, Massachusetts facility is critical to our success, as we currently produce the majority of our handguns and tactical rifles at this facility. The facility also houses our principal research, development, engineering, design, shipping, sales, finance, and management functions. Any event that causes a disruption of the operation of this facility for even a relatively short period of time would adversely affect our ability to produce and ship our products and to provide service to our customers. We frequently make certain changes in our manufacturing operations and modernize our equipment as a result of the age of the facility and certain inefficient manufacturing processes in order to produce our anticipated volume of products in a more efficient and cost-efficient manner. We may not be successful in attaining increased production efficiencies.
We may incur higher employee medical costs in the future.
We are self-insured for our employee medical plan. The average age of our workforce is 47 years. Approximately 15% of our employees are age 60 or over. While our medical costs in recent years have generally increased at the same level as the regional average, the age of our workforce could result in higher than anticipated medical claims, resulting in an increase in our costs beyond what we have experienced. We do have stop loss coverage in place for catastrophic events, but the aggregate impact may have an effect on our profitability.
Insurance is expensive and difficult to obtain.
Insurance coverage for firearm companies, including our company, is expensive and from time to time relatively difficult to obtain. Our insurance costs were approximately $6.5 million for the fiscal year ended April 30, 2009. An inability to obtain insurance, significant increases in the cost of insurance we obtain, or losses in excess of our insurance coverage would have a material adverse effect on our business, financial condition, and operating results.
Our business is seasonal.
Historically, our fiscal quarter ending July 31 had been our weakest quarter, primarily as a result of customers pursuing other sporting activities outdoors with the arrival of more temperate weather and the reduced disposable income of our customers after using their tax refunds for purchases in March and April, historically our strongest months. As a result of our acquisition of Thompson/Center Arms, the degree to which summer seasonality impacts our business may lessen because the hunting industry generally prepares for the hunting season well in advance of cooler temperatures. We now expect that our fiscal quarter ending January 31 will be our weakest quarter, as sales associated with hunting sharply decline as the season winds down. This decline in net sales may result in decreases in our stock price during the late fall and early winter months.
We face intense competition that could result in our losing or failing to gain market share and suffering reduced revenue.
We operate in intensely competitive markets that are characterized by competition from major domestic and international companies. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Any movement away from high-quality, domestic handguns to lower priced or comparable foreign alternatives would adversely affect our business. Some of our competitors have greater financial, technical, marketing, distribution, and other resources and, in certain cases, may have lower cost structures than we possess and that may afford them competitive advantages. As a result, they may be able to devote greater resources to the promotion and sale of products, to negotiate lower prices on raw materials and components, to deliver competitive products at lower prices, and to introduce new products and respond to customer requirements more effectively and quickly than we can.
Competition is primarily based on quality of products, product innovation, price, consumer brand awareness, and customer service and support. Product image, quality, and innovation are the dominant competitive factors in the firearm industry.
Shortages of components and materials may delay or reduce our sales and increase our costs, thereby harming our operating results.
The inability to obtain sufficient quantities of raw materials, components, and other supplies from independent sources necessary for the production of our products could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. Many of the materials used in the production of our products are available only from a limited number of suppliers. In most cases, we do not have long-term supply contracts with these suppliers. As a result, we could be subject to increased costs, supply interruptions, and difficulties in obtaining materials. Our suppliers also may encounter difficulties or increased costs in obtaining the materials necessary to produce their products that we use in our products. The time lost in seeking and acquiring new sources could hurt our net sales and profitability. Shortages of ammunition also can adversely affect the demand for our products.
Our operating results may involve significant fluctuations.
Various factors contribute to significant periodic and seasonal fluctuations in our results of operations. These factors include the following:
|•||the volume of customer orders relative to our capacity;|
|•||the success of product introductions and market acceptance of new products by us and our competitors;|
|•||timing of expenditures in anticipation of future customer orders;|
|•||effectiveness in managing manufacturing processes and costs;|
|•||changes in cost and availability of labor and components;|
|•||ability to manage inventory and inventory obsolescence;|
|•||pricing and other competitive pressures; and|
|•||changes or anticipated changes in economic conditions.|
Accordingly, you should not rely on the results of any period as an indication of our future performance. If our operating results fall below expectations of securities analysts or investors, our stock price may decline.
The market price of our common stock could be subject to wide fluctuations as a result of many factors.
Many factors could affect the trading price of our common stock, including the following:
|•||variations in our operating results;|
|•||the relatively small public float of our common stock;|
|•||introductions of new products by us or our competitors;|
|•||the success of our distributors;|
|•||changes in the estimates of our operating performance or changes in recommendations by any securities analysts that follow our stock;|
|•||general economic, political, and market conditions;|
|•||governmental policies and regulations;|
|•||the performance of the firearm industry in general; and|
|•||factors relating to suppliers and competitors.|
In addition, market demand for small-capitalization stocks, and price and volume fluctuations in the stock market unrelated to our performance, could result in significant fluctuations in market price of our common stock. The performance of our common stock could adversely affect our ability to raise equity in the public markets and adversely affect the growth of our business.
We do not pay cash dividends.
We do not anticipate paying cash dividends in the foreseeable future. Moreover, financial covenants under certain of our credit facilities, as well as under the indenture covering our senior convertible notes, restrict our ability to pay dividends.
|Item 1B.||Unresolved Staff Comments|
We own three manufacturing facilities. Our principal facility is an approximately 530,323 square-foot plant located in Springfield, Massachusetts. We also own a 38,115 square-foot plant in Houlton, Maine, and a 160,000 square-foot plant in Rochester, New Hampshire. The Springfield facility is primarily used to manufacture our handguns and rifles; the Houlton facility is primarily used to manufacture handcuffs, restraints, .22 caliber pistols, and the Walther PPK; and the New Hampshire facility is used primarily to produce black powder firearms, interchangeable firearm systems, and long gun barrels. We believe that each facility is in good condition and capable of producing products at current and projected levels of demand except in the case of certain recently introduced popular products. In addition, we own a 56,869 square-foot facility in Springfield, Massachusetts, that we use for the Smith & Wesson Academy, a state-accredited firearm training institution, a public shooting facility, and a retail store; and a 6,000 square-foot retail facility in Rochester, New Hampshire.
We lease approximately 2,800 square feet of office space in Scottsdale, Arizona, which houses our investor relations department as well as offices for our board of directors. The lease expires on December 31, 2010. In February 2008, we sublet a portion of this office space to a company affiliated with one member of our board of directors.
We believe that all our facilities are adequate for present requirements and that our current equipment is in good condition and are suitable for the operations involved.
|Item 3.||Legal Proceedings|
The nature of the legal proceedings against us is discussed in Note 22 to our consolidated financial statements, commencing on page F-1 of this report, which is incorporated herein by reference.
|Item 4.||Submission of Matters to a Vote of Security Holders|
|Item 5.||Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities|
From November 29, 2002 until July 19, 2006, our common stock traded on the American Stock Exchange under the symbol "SWB." Our common stock has been traded on the Nasdaq Global Select Market under the symbol "SWHC" since July 20, 2006. The following table sets forth the high and low sale prices of our common stock for each quarter in our fiscal years ended on April 30 indicated as reported on the American Stock Exchange or the Nasdaq Global Select Market, as applicable.
On June 29, 2009, the last reported sale price of our common stock was $5.53 per share. On June 29, 2009, there were approximately 667 record holders of our common stock.
We have never declared or paid cash dividends on our preferred stock or our common stock. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations, and capital requirements as well as other factors deemed relevant by our board of directors. In addition, our credit facilities, as well as the indenture covering our senior convertible notes, restrict our ability to pay dividends.
The following line graph compares cumulative total stockholder returns for the five years ended April 30, 2009 for (i) our common stock; (ii) the S&P SmallCap 600 Index; (iii) Sturm, Ruger & Company, Inc., which is the most direct comparable (Peer Group (2) on the graph below); and (iv) a peer group consisting of Sturm, Ruger & Company, Inc.; Point Blank Solutions, Inc.; Ceradyne, Inc.; and Mace Security International, Inc. (Peer Group (1) on the graph below). The graph assumes an investment of $100 on April 30, 2004. The calculations of cumulative stockholder return on the S&P SmallCap 600 and the peer groups include reinvestment of dividends, but the calculation of cumulative stockholder return on our common stock does not include reinvestment of dividends because we did not pay any dividends during the measurement period. The performance shown is not necessarily indicative of future performance.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among Smith & Wesson Holding Corporation, The S&P Smallcap 600 Index,
And Two Peer Groups
|*||$100 invested on April 30, 2004 in stock or index – including reinvestment of dividends. Fiscal year ending April 30.|
The performance graph above shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. The performance graph above will not be deemed incorporated by reference into any filing of our company under the Securities Act of 1933, as amended, or the Exchange Act.
Repurchases of Common Stock
We did not repurchase any shares of our common stock during fiscal 2009.
|Item 6.||Selected Financial Data|
The selected financial data presented below is derived from our consolidated financial statements and the notes thereto and should be read in connection with those statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operation" included elsewhere in this report.
|Smith & Wesson Holding Corporation|
|Fiscal Year Ended April 30,|
|(In thousands, except per share data)|
Net product and services sales
Cost of revenue
Income/(loss) from operations
Income/(loss) before income taxes
Income taxes (benefit)
Net income/(loss) per share
Weighted average number of shares outstanding
Depreciation and amortization
Year-end financial position
Long-term debt and notes payable
|Item 7.||Management's Discussion and Analysis of Financial Condition and Results of Operations|
You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, "Risk Factors" and elsewhere in this report.
Our fiscal 2009 net sales of $335.0 million represented an increase of 13.2% over fiscal 2008 levels. Sales in our firearm core business increased by 14.2% to approximately $313.0 million. Net loss for fiscal 2009 of $64.2 million was significantly impacted by an impairment charge related to goodwill and intangible assets of $76.5 million, net of deferred taxes of $21.8 million. Excluding this item, net income for fiscal 2009 increased by $3.1 million, or 34.5%, over fiscal 2008 net income. Net income was affected by numerous factors, including the following:
|•||Despite weakness in the overall economy, our handgun and tactical rifle sales experienced growth throughout the first half of fiscal 2009. We began to experience very strong consumer demand for our handguns and tactical rifle products beginning in our third fiscal quarter. We believe this increased demand was related to multiple factors, including heightened fears of terrorism and crime, speculation surrounding increased gun control, and a new administration taking office in Washington, D.C. We are unable to assess whether or for how long the increase in consumer demand will last or whether the orders constituting our backlog will be cancelled if consumer demand decreases. The demand for these products was much larger than our ability to produce, and our backlog grew from $20 million in our second quarter to more than $123 million in our third quarter to more than $268 million at the end of our fiscal year. Excluding the impact of hunting products, sales for fiscal 2009 grew 29.5% over sales for similar products in fiscal 2008.|
|•||During fiscal 2009, we experienced a significant decline in demand for our hunting products, including bolt-action hunting rifles, fixed-barrel black powder firearms, and related parts and accessories. Hunting firearm sales declined by more than 33% for the fiscal year ended April 30, 2009, and we recorded an impairment charge relating to our hunting business of $98.2 million, less related deferred tax liabilities of $21.8 million, resulting in a $76.5 million adverse impact to after-tax profits. Among other things, we attribute the weakness in our hunting products to the severe weakness in the economy, excess levels of hunting product inventory in the sporting good distribution channel, and the premium nature of the hunting products we offer. We have taken a number of actions to address the weak demand for our hunting products and to reduce the losses we have been incurring, including the introduction of lower price-point products in an effort to reach a larger segment of the market, moving from a direct sales force to a manufacturers' representative model, and instituting cost-cutting initiatives and workforce reductions.|
We are one of the world's leading manufacturers of firearms. We manufacture a wide array of pistols, revolvers, tactical rifles, hunting rifles, black powder firearms, handcuffs, and firearm-related products and accessories for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, protection focused individuals, law enforcement agencies and officers, and military agencies in the United States and throughout the world. We are the largest manufacturer of handguns and handcuffs in the United States, the largest U.S. exporter of handguns, and a growing participant in the tactical and hunting rifle markets that we recently entered. We manufacture these products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Rochester, New Hampshire. In addition, we pursue opportunities to license our name and trademarks to third parties for use in association with their products and services. We plan to substantially increase our product offerings and our licensing program to leverage the 150-plus year old "Smith & Wesson" brand and capitalize on the goodwill developed through our historic American tradition by expanding consumer awareness of products we produce or license in the safety, security, protection, and sport markets.
Key Performance Indicators
We evaluate the performance of our business based upon operating profit, which includes net sales, cost of sales, selling and administrative expenses, and certain components of other income and expense. We also use adjusted EBITDAS (earnings before interest, taxes, depreciation, amortization, and stock-based compensation expense, excluding large non-recurring items) to evaluate our performance. We evaluate our various product lines by such measurements as cost per unit produced, units produced per day, and incoming orders per day.
Key Industry Data
Handguns have been subject to legislative actions in the past, and the market has reacted to these actions. There was a substantial increase in sales in the early 1990s during the period leading up to and shortly after the enactment of the Brady Bill. In the period from 1992 through 1994, the U.S. handgun market increased by over 50%, as consumers purchased handguns in fear of prohibition of handgun ownership. The market levels then returned to pre-1992 levels and have remained relatively unchanged until late in calendar 2008 when the market increased in what appears to be fears surrounding crime and terrorism, an economic downturn, and a change in the White House administration. Like with the increase in 1992, we expect this current increase in the market to be temporary in nature and expect that the market will return to normal levels at some point. Within the U.S. handgun market, we estimate that approximately 81% of the market is pistols and 19% is revolvers. We also estimate that we have approximately a 19% share of the U.S. consumer market for handguns. This compares with approximately 10% in the period just before we acquired Smith & Wesson Corp. in 2001. It also compares favorably with market share figures of the 1990s when we had an estimated 16% market share.
Results of Operations
Net Product and Services Sales
The following table sets forth certain information relative to net sales for the fiscal years ended April 30, 2009, 2008, and 2007 (dollars in thousands):
| $|| %|
Parts & Accessories
Fiscal 2009 Net Product and Services Sales Compared with Fiscal 2008
Net sales for fiscal 2009 increased on strong consumer driven growth in handguns and tactical rifles. Excluding hunting products, firearm unit sales increased by 22% over the prior year to approximately 710,000 units. Revolver sales were driven primarily by consumer demand; however, because this product is much more capital intensive, the growth year over year is smaller than in other handgun product lines. Pistol sales increased on strong demand for Sigmas and M&P, with sales for those product lines up 59.9% and 41.7%, respectively, over the prior year. Walther
sales increased significantly over the prior year as a result of higher sales of the P22 pistol and the full year benefit of the PPS pistol, which was introduced in fiscal 2008. Walther PPK pistol sales were suspended in the fourth quarter of fiscal 2009 because of the February 2009 recall of this product, adversely impacting fourth quarter sales. Tactical rifle sales continued to increase as a result of increased consumer demand, as well as continued acceptance by law enforcement agencies. To date, 235 police and security agencies have either selected the M&P 15 or approved the M&P 15 for on-duty use. Hunting firearms have been severely impacted by economic factors, with black powder dropping 39.4% from fiscal 2008 levels. The decrease in parts and accessories correlated to the decrease in black powder rifle sales. Non-firearm sales for fiscal 2009 were flat with increased handcuff sales offset by reduced foundry sales.
The order backlog at the end of fiscal 2009 was $267,862,000, which was $217,934,000 higher than at the end of fiscal 2008 and $144,719,000 higher than at the end of our previous fiscal quarter. The extraordinary increase in backlog related directly to the increase in consumer demand that we experienced in the third and fourth fiscal quarters. It also increased as a result of our existing manufacturing capacity having been planned for demand levels experienced prior to the significant increase in consumer demand. At this time, we have limited data by which to determine how long this increase in consumer demand will last. Orders received that have not yet shipped, which constitutes our reported backlog, could be cancelled if demand were to suddenly decrease. Therefore, the backlog numbers provided may not be indicative of future sales.
Sales in the consumer channel were approximately $279,812,000, a $35,731,000, or 14.6%, increase over sales of $244,081,000 for fiscal 2008. Excluding hunting products, sporting goods increased 31.9% over fiscal 2008 levels. Sales to state and local government agencies were approximately $25,175,000, a $3,261,000, or 14.9%, increase over fiscal 2008 sales of $21,914,000. International sales of approximately $24,686,000 represented a $251,000, or 1.0%, increase over fiscal 2008 sales. Federal government sales of $3,294,000 were $127,000 lower than fiscal 2008 sales of $3,421,000.
Fiscal 2008 Net Product and Services Sales Compared with Fiscal 2007
The impact of owning Thompson/Center Arms for the full fiscal year accounted for $46,570,000 of the firearm sales increase. Excluding Thompson/Center Arms, firearm sales increased by $6,256,000, or 3.1%. Total firearm unit sales for fiscal 2008 (excluding Thompson/Center Arms) were approximately 589,000 units, an increase of 5.4% over fiscal 2007 sales of approximately 559,000 units. Firearm backlog as of April 30, 2008 was approximately $49,928,000. Non-firearm sales for fiscal 2008 increased as a result of the full year impact of the Thompson/Center Arms specialty services and retail operations.
The increase in revolver sales was fueled by the sale of small frame revolvers, partially offset by lower large frame revolver sales. Large frame revolvers were adversely impacted by the weak fall hunting season. Pistol sales were lower than the prior year as fiscal 2007 sales included $8,700,000 in pistol sales to the Afghanistan military and $6,177,000 in pistol sales to the California Highway Patrol. There were no comparable sales during fiscal 2008. The average selling price for pistols was reduced by the promotional programs implemented during the second half of fiscal 2008. Fiscal 2008 M&P pistol sales increased 38.0% over fiscal 2007 levels. The increase in sales of Walther firearms, for which we are the exclusive U.S. distributor, was attributable to the introduction of the PPS and SP22 pistols as well as strong international sales of the PPK pistol. Tactical rifle sales increased significantly in their second full year of being offered. Premium products sales for fiscal 2008 decreased because of the effect of the weak hunting season on large frame Performance Center revolver sales and the inclusion in fiscal 2007 of the 50th anniversary commemorative Model 29 that was introduced in mid-fiscal 2007 and drove sales significantly higher for that year. Hunting firearm sales grew significantly over fiscal 2007 primarily as a result of the full year impact of owning Thompson/Center Arms, as well as the impact of sales of ICON rifles, which were introduced at the 2007 SHOT show. Hunting firearms also includes shipments of our fixed-action and semi-automatic shotguns. Parts and accessories sales increased primarily as a result of the full year impact of selling Thompson/Center Arms black powder accessories. Non-firearm sales reflected the full year impact of the Thompson/Center Arms foundry operations, which are included in Specialty Services. Handcuff sales remained stable year-over-year.
Sales in the consumer channel were approximately $244,081,000, a $62,453,000, or 34.4%, increase over sales of $181,628,000 for fiscal 2007. The full year impact of Thompson/Center Arms added approximately $52,418,000 to fiscal 2008 consumer sales. Excluding Thompson/Center Arms sales, consumer sales grew at a rate of 8.9%. Sales to state and local government agencies were approximately $21,914,000, a $1,079,000, or 4.7%, decrease from fiscal 2007 sales of $22,993,000. Fiscal 2007 state and local government sales included a $6,177,000 order from the California Highway Patrol. Excluding the impact of this large order, our state and local government sales increased $5,098,000, or 30.3%, on continued strong performance of our M&P line of firearms. Excluding the $2,988,000 impact of Thompson/Center Arms, international sales of approximately $21,447,000 represented a $2,103,000, or 10.9%, increase over fiscal 2007 sales. Federal government sales of $3,421,000 were $7,297,000 lower than fiscal 2007 sales of $10,718,000. Fiscal 2007 included $9,766,000 in product shipments to Afghanistan. No new contracts for our products for use in Afghanistan were awarded during fiscal 2008.
Cost of Revenue and Gross Profit
The following table sets forth certain information regarding cost of revenue and gross profit for the fiscal years ended April 30, 2009, 2008, and 2007 (dollars in thousands):
| $|| %|
Cost of revenue
% of net revenue
% of net revenue
Gross profit for fiscal 2009 increased as a result of the increase in sales while gross profit as a percentage of net revenue declined as a result of the impact of significantly lower sales and production volumes of our higher margin hunting products as well as a $2,271,000 accrual related to the February 2009 Walther PPK and PPK/S recall. Reduced production levels and a reduced number of operating days at our Rochester, New Hampshire plant resulted in underutilized capacity and fixed overhead not being fully absorbed into inventory. In addition, increased capital spending over the last several years increased depreciation expense by $1,103,000 for fiscal 2009. Promotion costs were $8,368,000 compared with $8,862,000 for the year ended April 30, 2008.
Excluding the $20,015,000 full year impact of owning Thompson/Center Arms, fiscal 2008 gross profit dollars decreased $3,978,000 while gross profit as a percentage of net revenue declined 2.8%. Promotion costs of $8,862,000 were incurred to spur consumer demand and clear inventory from the supply chain, eroding gross margins for fiscal 2008 and substantially offsetting the increase in gross margin dollars caused by the growth in sales. In addition, unabsorbed fixed costs associated with a three-week plant shutdown in Springfield, Massachusetts, and a one-week plant shutdown in Rochester, New Hampshire, negatively impacted gross profit by $2,600,000.
The following table sets forth certain information regarding operating expenses for the fiscal years ended April 30, 2009, 2008, and 2007 (dollars in thousands):
| $|| %|
Research and development
Sales and marketing
General and administrative
Impairment of long-lived assets
% of net revenue
In October 2008, due to serious, unfavorable, and recurring economic and market conditions and other factors that had an adverse effect on the hunting market, it became apparent that goodwill and other long-lived assets related to our investment in Thompson/Center Arms were significantly impaired. We conducted a review of the reporting unit related to these products and determined that the fair value as defined in Statement of Financial Accounting Standards ("SFAS") 142 and SFAS 144 was lower than book value, requiring us to record an impairment charge of $98,243,000. Excluding the impact of the impairment charge noted above, operating expenses for fiscal 2009 increased by $4,032,000, or 5.9%, over fiscal 2008 levels.
The increase in research and development related to $232,000 in increased testing materials as a result of the increasing cost of ammunition, $334,000 in third-party engineering costs, $70,000 in increased salaries and benefits, and $126,000 of reduced allocations to manufacturing based on an increased focus on new product engineering. The increase in sales and marketing expense reflected increased sales incentives incurred as a result of the higher handgun sales levels. The increase in general and administrative expenses included $2,690,000 in increased profit sharing related to our Springfield, Massachusetts and Houlton, Maine facilities. In addition, because of weak economic factors impacting certain of our regional retail customers, we increased our bad debt reserves by $2,312,000 in fiscal 2009. Finally, increased salaries and benefits, recruiting, and relocation resulting from changes in our management structure totaling $1,065,000 were offset by $1,742,000 in reduced amortization of intangibles as a result of the impairment charge and lower stock-based compensation expense of $1,578,000 due to lower awards and the reversal of expense associated with performance-based options that were not achieved based on actual operating results.
Operating expenses as a percentage of net revenue, excluding the impairment charge, was 21.6% for fiscal 2009, 1.5% lower than the fiscal 2008 ratio due to reduced amortization of intangibles as a result of the impairment charge as well as increased revenue caused by the increased consumer demand. General and administrative costs for fiscal 2009 included $2,437,000 of amortization while fiscal 2008 included $4,119,000 of amortization.
Operating expenses for fiscal 2008 increased primarily as a result of the full year impact of owning Thompson/Center Arms, which accounted for $13,027,000 of the total increase. The remaining $3,299,000 increase in spending included a $418,000 increase in research and development expenses, a $720,000 increase in sales and marketing expense, and a $2,161,000 increase in general and administrative expenses. The increase in research and development related to expansion of the long gun product offerings while the increase in sales and marketing expense reflected increased advertising efforts in a down market as well as increased travel by our expanded consumer sales force. The increase in general and administrative expenses included $2,145,000 in higher stock-based compensation expense and $1,502,000 in additional professional fees resulting from increased audit costs associated with the Thompson/Center Arms acquisition and the first-year costs of implementing internal controls compliance under Section 404 of the Sarbanes-Oxley Act for that location as well as increased legal fees. This was partially offset by $1,246,000 in reduced profit sharing expense. Stock-based compensation expense for fiscal 2008 included a $1,004,000 adjustment to amortize restricted stock units issued in fiscal 2007 on an accelerated method rather than the straight-line method in order to comply with our amortization policy for other stock-based awards. The adjustment did not have a material affect on prior periods.
Operating expenses as a percentage of net revenue was 23.1% for fiscal 2008, which was 1.2% higher than the fiscal 2007 ratio due to increased amortization of intangibles associated with the Thompson/Center Arms acquisition. General and administrative costs for fiscal 2008 included $4,119,000 of amortization while fiscal 2007 included $1,630,000 of amortization.
Income/(Loss) from Operations
The following table sets forth certain information regarding income/(loss) from operations for the fiscal years ended April 30, 2009, 2008, and 2007 (dollars in thousands):
| $|| %|
Income/(loss) from operations
% of net revenue
Excluding the impact of the $98,243,000 impairment of Thompson/Center Arms assets, fiscal 2009 operating income of $25,521,000 was $1,381,000, or 5.7%, higher than operating income for fiscal 2008. The impact associated with the consumer-driven demand more than offset the unfavorable absorption and product mix at Thompson/Center Arms, the impact of the Walther PPK and PPK/S recall, and the increase in operating expenses.
Operating income for fiscal 2008 decreased $288,000, or 1.2%, compared with operating income for fiscal 2007. The decrease in operating income was caused by a combination of increased promotion costs, increased unabsorbed overhead costs due to plant shutdowns, and increased operating expenses, partially offset by increased sales and the effect of owning Thompson/Center Arms for a full year in fiscal 2008.
The following table sets forth certain information regarding interest expense for the fiscal years ended April 30, 2009, 2008, and 2007 (dollars in thousands):
| $|| %|
Interest expense decreased for fiscal 2009 as a result of the repayment of the $28,000,000 acquisition line in May 2008, the repayment of $4,367,000 of long-term debt in June 2008, reduced borrowings under our revolving line of credit, and overall lower interest rates. In addition, our 6,250,000-share stock offering in May 2008 and the increased cash flow associated with consumer demand enabled us to reduce our overall outstanding indebtedness throughout fiscal 2009.
Interest expense increased for fiscal 2008 as a result of the additional debt incurred in mid-fiscal 2007 to acquire Thompson/Center Arms. In addition, higher revolving loan balances from lower operating cash flows caused interest expense to increase during fiscal 2008.
The following table sets forth certain information regarding income tax expense/(benefit) for the fiscal years ended April 30, 2009, 2008, and 2007 (dollars in thousands):
| $|| %|
Income tax expense/(benefit)
Our income tax benefit for fiscal 2009 included the effect of changes in temporary differences between the financial reporting and tax bases of assets and liabilities, and net operating loss carryforwards. These amounts are reflected in the balance of our net deferred tax assets, which totaled $13,648,000, after valuation allowance, at April 30, 2009. Net deferred tax liabilities were reduced in fiscal 2009 by $21,766,000 as a result of the impairment of the Thompson/Center Arms goodwill and other long-lived assets.
As required by SFAS No. 109, "Accounting for Income Taxes," we record tax assets or liabilities for the temporary differences between the book value and tax bases in assets and liabilities. In assessing the realization of our deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred income tax assets depends upon generating future taxable income during the periods in which our temporary differences become deductible and before our net operating loss carryforwards expire. We evaluate the recoverability of our deferred income tax assets by assessing the need for a valuation allowance on a quarterly basis. If we determine that it is more likely than not that our deferred income tax assets will not be recovered, we establish a valuation allowance against some or all of our deferred income tax assets. Recording a valuation allowance or reversing a valuation allowance could have a significant effect on our future results of operations and financial position.
A valuation allowance of approximately $26,000 was provided on our deferred federal tax assets for a capital loss carryforward, which we do not anticipate using prior to its expiration. No other valuation allowance was
provided on our deferred federal income tax assets as of April 30, 2009 or 2008, as we believe that it is more likely than not that all such assets will be realized.
We had federal net operating loss carryforwards amounting to $2,285,000, $2,394,000, and $2,502,000 as of April 30, 2009, 2008, and 2007, respectively. The net operating loss carryforward at April 30, 2009 expires in fiscal years 2019 and 2020. Internal Revenue Code Section 382 limits utilization of these losses to $108,000 per year. It is possible that future substantial changes in our ownership could occur that could result in additional ownership changes pursuant to Internal Revenue Code Section 382. If such an ownership change were to occur, there would be an annual limitation on the remaining tax loss carryforwards that can be utilized. Federal net operating losses have increased the overall net deferred tax asset of $13,648,000 by $800,000 as of April 30, 2009. Federal net operating losses account for $838,000 of the total net deferred tax liability of $10,269,000 as of April 30, 2008.
There were no state net operating loss carryforwards as of the end of fiscal 2009, 2008, or 2007.
On October 22, 2004, the American Jobs Creation Act, or AJCA, was signed into law. The AJCA provides a deduction for income from qualified domestic production activity, or QPA, which will be phased in from 2005 through 2010. Pursuant to the Financial Accounting Standards Board ("FASB") Staff Position No. 109-1, "Application of SFAS No. 109 (Accounting for Income Taxes), to the Tax Deduction on Qualified Production Activity provided by the AJCA of 2004," the effect of this deduction is reported in the period in which it is claimed on our tax return. The QPA benefit for us was approximately $1,405,000 in fiscal 2009 and $970,000 in fiscal 2008 and resulted in the reduction of tax expense of $492,000 in fiscal 2009 and $339,000 in fiscal 2008. The annual deduction for the remaining federal net operating loss carryforward is so limited by Internal Revenue Code Section 382 that the unfavorable impact on the future benefits of the QPA should be negligible.
Our income tax expense for fiscal 2008 included changes in deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, and net operating loss carryforwards. These amounts are reflected in the balance of our net deferred tax assets, which totaled $9,947,000, before valuation allowance, as well as net deferred tax liabilities, which totaled $20,216,000 at April 30, 2008. Net deferred tax liabilities were reduced in fiscal 2008 by $5,404,000 as a result of amortization of intangibles related to the Thompson/Center Arms acquisition. Net tax assets (liabilities) changed substantially during the year ended April 30, 2007 primarily as a result of the acquisition of Thompson/Center Arms in January 2007.
The following table sets forth certain information regarding net income and the related per share data for the fiscal years ended April 30, 2009, 2008, and 2007 (dollars in thousands, except per share data):
| $|| %|
Net income/(loss) per share
The decrease in net income and net income per share for fiscal 2009 was primarily attributable to the impairment of long-lived assets and goodwill associated with the acquisition of Thompson/Center Arms, which totaled $76,477,000 (net of deferred taxes of $21,766,000). Excluding this write-off, income would have increased $3,149,000 to $12,270,000 and earnings per share would have been $0.26. This increase in income was a result of increased sales due to the consumer-driven demand, partially offset by reduced volume and the corresponding gross margin impact in the hunting business. In addition, EPS was lower in fiscal 2009 due to an additional 6,250,000 shares issued during May 2008. The decrease in net income and net income per share for fiscal 2008 was primarily attributable to a weak consumer market that prompted increased promotion costs and two unscheduled plant shutdowns leading to unabsorbed overhead.
Liquidity and Capital Resources
Our principal cash requirements are to finance the growth of our firearm and other operations, including acquisitions, and to service our existing debt. Capital expenditures for new products, capacity expansion, and process improvements represent important cash needs.
The following table sets forth certain cash flow information for the fiscal years ended April 30, 2009, 2008, and 2007 (dollars in thousands):
| $|| %|
Operating activities represent the principal source of our cash flow. Cash flow from operating activities increased significantly for fiscal 2009 over fiscal 2008 levels resulting largely from a $5,431,000 decrease in inventory in fiscal 2009. In addition, accounts receivable decreased by $3,619,000 in fiscal 2009. Finally, a $3,149,000 increase in net income (excluding the non-cash impairment) and an increase in current accrual levels of $6,468,000 over the prior year increase contributed to the increase in cash from operating activities.
Cash flow from operating activities decreased for fiscal 2008 from fiscal 2007 levels. The reduction in operating cash flow for fiscal 2008 was attributable to lower net income (offset by higher non-cash items included in net income, such as depreciation and amortization, deferred taxes, and stock-based compensation expense) as well as a $15,138,000 increase in inventory and a $2,457,000 increase in accounts receivable. The negative cash flow was partially offset by $3,891,000 in increased accruals over fiscal 2007, caused primarily by accrued promotion costs for the fourth quarter promotions.
Cash used for investing activities was lower in fiscal 2009 than for fiscal 2008 due to reduced capital spending of $4,515,000.
Cash used for investing activities in fiscal 2008 was significantly lower than in fiscal 2007 due to the $103,342,000 used to acquire Thompson/Center Arms in January 2007. Capital spending was $1,706,000 lower in fiscal 2008 than in fiscal 2007. Fiscal 2007 spending was partially offset by $1,000,000 in cash received from the Springfield Redevelopment Authority as part of the final payment on 85 acres of land sold to them in fiscal 2003.
Cash used by financing activities was unfavorable compared with the prior year due to the repayment of the $28,000,000 in acquisition loan, $4,367,000 in term loans, and $7,000,000 in the revolving line partially offset by the proceeds from the May 2008 6,250,000-share stock offering.
Cash generated by financing activities in fiscal 2008 was lower than in fiscal 2007 due to $108,000,000 in debt incurred related to the acquisition of Thompson/Center Arms in January 2007, partially offset by $6,396,000 in payments to acquire treasury stock in that same fiscal year. The remaining increase in 2008 of $4,438,000 was due to $7,000,000 in increased revolving credit line borrowings to cover current cash requirements, offset by $3,954,000 in lower debt issue costs.
At April 30, 2009, we had open letters of credit aggregating $3,805,000.
At April 30, 2009, we had $39,822,000 in cash and cash equivalents on hand. We have a $40,000,000 revolving line of credit with Toronto Dominion (Texas) LLC with no balance outstanding as of April 30, 2009. In May 2009, we completed a stock offering of 6,000,000 shares of common stock, which yielded net proceeds of approximately $35,000,000 that we expect to use for general corporate purposes, including the potential purchase of additional equipment to expand our manufacturing capacity. In addition, on June 18, 2009, we reported our entry into a material definitive agreement to acquire Universal Security Response, Inc. This acquisition will utilize up to a maximum of $26,000,000 in cash. To the extent that opportunities present themselves, we may utilize a portion of the net proceeds of this offering to purchase a portion of our $80 million of outstanding senior convertible notes and strategic investments. We may also use a portion of the net proceeds of this offering to pursue opportunities for
strategic relationships and other acquisitions. Based upon our current working capital position, current operating plans, and expected business conditions, we believe that our existing capital resources and credit facilities will be adequate to fund our operations, including our outstanding debt and other commitments, for the next 12 months, apart from major acquisitions.
We do not believe that inflation had a material impact on us during fiscal 2009, 2008, or 2007.
Critical Accounting Policies
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from these estimates and assumptions. In addition, future facts and circumstances could alter our estimates with respect to the adequacy of insurance reserves. Our significant estimates include accruals for warranty, product liability, workers' compensation, environmental liability, excess and obsolete inventory, forfeiture rates on stock-based awards, asset impairments, and medical claims payable. Actual results could differ from those estimates.
We recognize revenue when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured.
Product sales account for a substantial portion of our revenue. We recognize revenue from product sales when the earnings process is complete and the risks and rewards of ownership have transferred to the customer, which is generally upon shipment. We also provide tooling, forging, heat treating, finishing, plating, and engineering support services to customers; we recognize this revenue when accepted by the customer, when no further contingencies or material performance obligations exist, and when collectibility is reasonably assured, thereby earning us the right to receive and retain payments for services performed and billed.
We recognize trademark licensing revenue for all individual licensees on a quarterly basis based on actual receipts from licensees. This revenue consists of minimum royalties and/or a percentage of a licensee's sales on licensed products. Under our current licensing agreements, this revenue is payable on a calendar quarter basis. We recognize fees received upon initial signing of license agreements as revenue when no future obligation is required on our part. As a result of a combination of uncertain factors regarding existing licensees, including current and past payment performance, market acceptance of the licensee's product, and insufficient historical experience, we believe that reasonable assurance of collectibility does not exist based on the results and past payment performance of licensees in general. Therefore, we do not initially recognize minimum royalty payments but instead record such revenue monthly when the minimum royalty can be reasonably estimated for that month and payment is assured. As of April 30, 2009, minimum royalties to be collected in the future amounted to approximately $7,283,000.
Valuation of Long-lived Tangible and Intangible Assets and Goodwill
We have significant long-lived tangible and intangible assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant long-lived tangible and intangible assets are fixed assets, developed technology, patents, trademarks, and tradenames. We amortize all finite-lived intangible assets either on a straight-line basis or based upon patterns in which we expect to utilize the economic benefits of such assets. With the exception of goodwill and intangible assets with indefinite lives, we initially determine the values of intangible assets by a risk-adjusted, discounted cash flow approach. We assess the potential impairment of
identifiable intangible assets and fixed assets whenever events or changes in circumstances indicate that the carrying values may not be recoverable and at least annually. Factors we consider important, which could trigger an impairment of such assets, include the following:
|•||significant underperformance relative to historical or projected future operating results;|
|•||significant changes in the manner of or use of the assets or the strategy for our overall business;|
|•||significant negative industry or economic trends;|
|•||significant decline in our stock price for a sustained period; and|
|•||a decline in our market capitalization below net book value.|
Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would materially impact future results of operations and financial position in the reporting period identified.
In accordance with SFAS 142, "Goodwill and Other Intangible Assets," we test goodwill and intangible assets with indefinite lives for impairment on an annual basis as of the end of our fiscal third quarter and between annual tests if indicators of potential impairment exist. The impairment test compares the fair value of the reporting unit to its carrying amount, including goodwill and intangible assets with indefinite lives, to assess whether impairment is present. We have reviewed the provisions of SFAS 142 with respect to the criteria necessary to evaluate the number of reporting units that exist. Based on our review of SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," we have determined that we operate in two reporting units: one for our Springfield, Massachusetts and Houlton, Maine facilities and a second for our Rochester, New Hampshire facility. Goodwill recorded on our books is associated only with the Rochester, New Hampshire reporting unit as it arose out of our acquisition of Thompson/Center Arms on January 3, 2007. Based on a combination of factors occurring during fiscal 2009, including the current economic environment and market conditions in the hunting industry, we determined that indicators for impairment of goodwill and intangible assets existed in our Rochester, New Hampshire reporting unit. As a result, we conducted an evaluation of these assets pursuant to SFAS 142. Based on lower order intake in the past several quarters and lower than expected operating profits and cash flows in this reporting unit, the earnings forecast for the next ten years was revised. The fair value of this reporting unit was estimated using the expected present value of future cash flows. Based on the work performed, we recorded a goodwill impairment loss of $41,173,000 during the three months ended October 31, 2008.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we periodically review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded carrying value for the asset. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. As noted above, economic and market conditions affecting the Rochester, New Hampshire reporting unit required us to test for impairment of long-lived assets pertaining to that location during the second quarter of fiscal 2009. Based on this assessment, under SFAS 144, we recorded an impairment charge of $57,070,000 to reflect the excess of the carrying value of long-lived intangible assets over the discounted cash flows. No impairment charges were taken in fiscal 2008 or 2007 based on the review of long-lived assets under SFAS 144.
Significant judgments and estimates are involved in determining the useful lives of our long-lived assets, determining what reporting units exist, and assessing when events or circumstances would require an interim impairment analysis of goodwill or other long-lived assets to be performed. Changes in our organization or our management reporting structure, as well as other events and circumstances, including technological advances, increased competition, and changing economic or market conditions, could result in (a) shorter estimated useful lives, (b) additional reporting units, which may require alternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit, and (c) other changes in previous assumptions or
estimates. In turn, this could have an additional impact on our consolidated financial statements through accelerated amortization and impairment charges.
Goodwill and Acquired Intangibles
We completed a significant business acquisition in fiscal 2007, which resulted in significant goodwill and other intangible asset balances. Our business strategy contemplates that we may make additional acquisitions in the future. Our accounting for acquisitions involves significant judgments and estimates, including the fair value of certain forms of consideration, the fair value of acquired intangible assets, which involve projections of future revenue and cash flows, the fair value of other acquired assets and assumed liabilities, including potential contingencies, and the useful lives, and as applicable, the reporting unit, of the assets. Our financial position and results of operations may be materially impacted by changes in our initial assumptions and estimates relating to prior or future acquisitions. Additionally, under SFAS 142, we determine the fair value of the reporting unit, for purposes of the first step in our annual goodwill impairment test, based on our market value. If prior or future acquisitions are not accretive to our results of operations as expected or our market value declines dramatically, we may be required to complete the second step, which requires significant judgments and estimates and which may result in material impairment charges in the period in which they are determined.
We provide reserves for potential product liability defense costs based on estimates determined in consultation with litigation counsel. Adjustments to the provision for product liability are evaluated on an ongoing basis and are charged or credited to cost of products and services sold. This evaluation is based upon information regarding potential or existing product liability cases. Any future costs related to this evaluation are recorded when considered both probable and reasonably estimable. At this time, the estimated range of reasonably possible additional losses, as that term is defined in SFAS No. 5, "Accounting for Contingencies," is zero.
We provide reserves for potential environmental obligations that we consider probable and for which reasonable estimates of such obligations can be made. As of April 30, 2009, we had a reserve of approximately $754,000 for environmental matters, which is recorded on an undiscounted basis.
We value inventories, consisting primarily of finished firearm components, finished firearms, and related products and accessories, at the lower of cost, using the first-in, first-out (FIFO) method, or market. An allowance for potential non-saleable inventory due to excess stock or obsolescence is based upon a detailed review of inventory components, past history, and expected future usage.
We generally provide a lifetime warranty to the "original" purchaser of our new firearm products. We provide for estimated warranty obligations in the period in which we recognize the related revenue. We quantify and record an estimate for warranty-related costs based on our actual historical claims experience and the current repair costs. We make adjustments to accruals as warranty claim data and historical experience warrant. Should we experience actual claims and repair costs that are higher than the estimated claims and repair costs used to calculate the provision, our operating results for the period or periods in which such returns or additional costs materialize would be adversely impacted.
Allowance for Doubtful Accounts
We extend credit to our domestic customers and some foreign distributors based on their financial condition. We offer discounts for early payment. When we believe the extension of credit is not advisable, we rely on either a prepayment or a letter of credit. We place past due balances for collection with an outside agency after 90 days. We write off balances deemed uncollectible by us against our allowance for doubtful accounts. We estimate our
allowance for doubtful accounts through current past due balances, knowledge of our customers' financial situations, and past payment history.
The provision for income taxes is based upon income reported in the accompanying consolidated financial statements. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. We measure these deferred taxes by applying tax rates expected to be in place when the deferred items become subject to income tax or deductible for income tax purposes.
We are self-insured through retentions or deductibles for our workers' compensation. Our liability for estimated premiums and incurred losses are actuarially determined and recorded on an undiscounted basis.
We account for stock-based employee compensation arrangements in accordance with the provisions of SFAS No. 123(R), "Shared-Based Payment (Revised)." Under SFAS No. 123(R), we calculate compensation cost on the date of the grant using the Black-Scholes method. We then amortize compensation expense over the vesting period. We estimate the fair value of each stock option or purchase under our employee stock purchase program on the date of the grant using the Black-Scholes option pricing model (using the risk-free interest rate, expected term, expected volatility, dividend yield variables, and estimated forfeiture rates).
Recent Accounting Pronouncements
Recently Issued Accounting Standards
In December 2007, the FASB issued SFAS No. 141 (revised), "Business Combinations." SFAS No. 141R changes the accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs, and the recognition of changes in the acquirer's income tax valuation allowance. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Although the adoption of SFAS No. 141R will not have any impact on our current consolidated financial statements, we expect that it will affect the accounting treatment of future acquisitions, if any, that we may consummate.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51." SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 160 to have a material impact on our consolidated financial statements.
In December 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force ("EITF") in EITF Issue No. 07-01, "Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property." The EITF concluded that a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenue and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," and other accounting literature. Payments to or from collaborators would be evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity's business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are to be disclosed along with the accounting policies and the classification and amounts of significant financial statement amounts related to the arrangements. Activities in the
arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however, required disclosure under EITF Issue No. 07-01 applies to the entire collaborative agreement. This Issue is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. We do not expect the adoption of EITF No. 07-01 to have any impact on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position ("FSP") 142-3, "Determination of the Useful Life of Intangible Assets." FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets." FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, as well as interim periods within those fiscal years. We are currently in the process of evaluating the impact of adopting this pronouncement.
In May 2008, the FASB issued FSP No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)." This staff position requires that entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion should separately account for the liability and equity components of the instrument in a manner that reflects the issuer's economic interest cost. The effect of the proposed new rules for the debentures is that the equity component would be included in the paid-in-capital section of shareholders' equity on an entity's consolidated balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of convertible debt. The FSP will be effective for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years, with retrospective application required. Early adoption is not permitted. We are currently evaluating the proposed new rules and the impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." We do not expect SFAS No. 162 to have a material impact on our consolidated financial statements.
In June 2008, the FASB ratified EITF Issue 07-05, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock," which addresses the accounting for certain instruments as derivatives under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Under this pronouncement, specific guidance is provided regarding requirements for an entity to consider embedded features as indexed to the entity's own stock. This Issue is effective for fiscal years beginning after December 15, 2008. We are currently in the process of evaluating the impact of adopting this pronouncement.
In April 2009, the FASB issued FSP 141R-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies." This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. This FSP is effective for the fiscal years beginning after December 15, 2008. Although the adoption of FSP141R-1 will not have any impact on our current consolidated financial statements, we expect that it will affect the accounting treatment of future acquisitions, if any, that we may consummate.
In April 2009, the FASB issued FSP 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly . " FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be
appropriate. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009. We do not expect FSP 157-4 to have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FSP 115-2 and FSP 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments." FSP 115-2 and FSP 124-2 amend the other-than-temporary impairment guidance for debt securities to improve presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements. FSP 115-2 and FSP 124-2 are effective for all reporting periods ending after June 15, 2009. We do not expect either of these FSP's to have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FSP 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments . " FSP 107-1 and APB 28-1 amend SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, "Interim Financial Reporting," to require those disclosures in all interim financial statements. FSP 107-1 and APB 28-1 are effective for all reporting periods ending after June 15, 2009. We do not expect these pronouncements to have any impact on our consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet data but before financial statements are issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. We are currently evaluating the impact of this statement.
Recently Adopted Accounting Standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The FASB has provided a one-year deferral for the implementation for other non-financial assets and liabilities. Earlier application is encouraged. We adopted the required provisions of SFAS No. 157 on May 1, 2008. The adoption of SFAS No. 157 did not have any impact on our consolidated financial statements. For further information about the adoption of the required provisions of SFAS No. 157, see Note 14 to our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement 115" that permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings at each subsequent reporting date. The following balance sheet items are within the scope of SFAS No. 159:
|•||recognized financial assets and financial liabilities unless a special exception applies;|
|•||firm commitments that would otherwise not be recognized at inception and that involve only financial instruments;|
|•||non-financial insurance contracts; and|
|•||most financial instruments resulting from separation of an embedded non-financial derivative instrument from a non-financial hybrid instrument.|
SFAS No. 159 became effective for fiscal years beginning after November 2007. We did not elect to measure any items at fair value other than those that had already been recorded as such. Therefore, the adoption of SFAS No. 159 did not have any impact on our consolidated financial statements.
In October 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." FSP 157-3 clarifies the application of SFAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of these provisions did not have any impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133." This statement requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. It also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS No. 133 have been applied, and the impact that hedges have on an entity's financial position, financial performance, and cash flows. This statement was effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The adoption of SFAS No. 161 did not have any impact on our consolidated financial statements. For further information about the adoption of the required provisions of SFAS No. 161, see Note 14 to our consolidated financial statements.
Contractual Obligations and Commercial Commitments
The following table sets forth a summary of our material contractual obligations and commercial commitments as of April 30, 2009 (dollars in thousands):
| Less Than|| More Than|
|Total||1 Year||1-3 Years||3-5 Years||5 Years|
Long-term debt obligations
Operating lease obligations
Other long-term obligations
reflected on the balance
sheet under GAAP
On December 15, 2006, we issued and sold an aggregate of $80.0 million of senior convertible notes due 2026 to qualified institutional buyers, pursuant to the terms and conditions of an indenture and securities purchase agreement, each dated as of December 15, 2006. The notes are convertible into shares of our common stock, initially at a conversion price of approximately $12.34 per share (subject to adjustment in certain events), or 81.0636 shares per $1,000 principal amount of notes. The notes may be converted at any time. The notes pay interest on June 15 and December 15 of each year at an annual rate of 4% of the unpaid principal amount. On or after December 15, 2009 until December 15, 2011, we may at our election redeem all or a portion of the notes at a redemption price of 100% of the principal amount of the notes plus accrued and unpaid interest only if the closing price of our common stock for no fewer than 20 trading days in any period of 30 consecutive trading days exceeds 150% of the then applicable conversion price of the notes. After December 15, 2011, we may redeem at our election all or a portion of the notes at a redemption price of 100% of the principal amount of the notes plus accrued and unpaid interest. Holders of the notes may require us to repurchase all or part of their notes on December 15, 2011, December 15, 2016, or December 15, 2021, and in the event of a fundamental change in our company, at a price of 100% of the principal amount of the notes plus accrued and unpaid interest, including contingent interest. If not redeemed by us or repaid pursuant to the holders' right to require repurchase, the notes mature on December 15, 2026. Included in the above $92.4 million of long-term debt obligation is $6.4 million of contractually obligated interest payments pertaining to the $80.0 million in convertible debt. This amount represents interest payments through December 15, 2011, or the first redemption milestone. We may be required to pay additional interest
subsequent to December 15, 2011 redemption date; however, due to the uncertainty of subsequent interest payments, they are not reflected in the above table.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support or that engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financial statements.
In August 2003, we amended various reports previously filed with the SEC to modify certain accounting matters related to our acquisition of Smith & Wesson Corp. We restated our Form 10-KSB Report for the fiscal year ended April 30, 2002 as well as our Form 10-QSB Reports for the quarters ended July 31, 2001 and 2002, October 31, 2001 and 2002, and January 31, 2002 and 2003. The Form 10-KSB Report for the fiscal year ended April 30, 2003 was filed in December 2003 and included restated financial statements for fiscal 2002. The amended Form 10-QSB Reports for the July and October quarters were filed in January 2004, and the amended Form 10-QSB Reports for the January quarters were filed in March 2004. The SEC conducted an informal inquiry regarding the circumstances surrounding the restatement and, on June 18, 2009, notified us that it had completed its investigation and was not recommending any enforcement action against us.
|Item 7A.||Quantitative and Qualitative Disclosure about Market Risk|
We do not enter into any market risk sensitive instruments for trading purposes. Our principal market risk relates to changes in the value of the euro relative to the U.S. dollar. A portion of our gross revenue during the three and 12 months ended April 30, 2009 ($11.5 million and $31.5 million, respectively, representing approximately 11.6% and 10.6%, respectively, of aggregate gross revenue) came from the sale of goods that were purchased, wholly or partially, from a European manufacturer, in euros. Annually, we purchase approximately $20.0 million of inventory from a European supplier. This exposes us to risk from foreign exchange rate fluctuations. A 10% drop in the value of the U.S. dollar in relation to the euro would, to the extent not covered through price adjustments, reduce our gross profit on that $20.0 million of inventory by approximately $2.0 million. In an effort to offset our risks from unfavorable foreign exchange fluctuations, we periodically enter into euro participating forward options under which we purchase euros to be used to pay the European manufacturer. As of April 30, 2009, we had no forward contracts remaining as the last contract was exhausted in April 2009. We will continue to review the dollar/euro relationship and will purchase euros at the spot rate until such time that we determine that our foreign exchange risk will be best mitigated by entering into one or more forward contracts.
Participating forward options provide full protection for us against the depreciation of the U.S. dollar to the euro and partial benefit from the appreciation of the U.S. dollar to the euro. If the euro strengthens above the average rate, we will not pay more than the average rate. If the euro weakens below the average rate, 50% of the euros are at the average rate and the remaining 50% of the euros are paid for at the spot rate. Each option, unless used on the first day, will be converted to a forward contract, due when needed during the month at a slight up charge in rate. During the three and 12 months ended April 30, 2009, we experienced a net unfavorable opportunity cost of $304,000 and $613,000, respectively, on foreign exchange transactions that we executed during the period in an effort to limit our exposure to fluctuations in the euro/dollar exchange rate.
|Item 8.||Financial Statements and Supplementary Data|
Reference is made to the financial statements, the notes thereto, and the report thereon, commencing on page F-1 of this report, which financial statements, notes, and report are incorporated herein by reference.
|Item 9.||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure|
|Item 9A.||Controls and Procedures|
Conclusions Regarding Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, as of April 30, 2009, concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act was recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's report on our internal control over financial reporting is presented on page F-2 of this report. The effectiveness of our internal control over financial reporting as of April 30, 2009 has been audited by BDO Seidman LLP, an independent registered public accounting firm, as stated in its report below.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the fourth quarter of fiscal 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our company have been or will be prevented or detected. Further, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
Report of Independent Registered Public Accounting Firm
Smith & Wesson Holding Corporation
We have audited Smith & Wesson Holding Corporation's (the "Company") internal control over financial reporting as of April 30, 2009, based upon the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management's Report on Internal Control over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records, that, in reasonable detail, accurately, and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
In our opinion, Smith & Wesson Holding Corporation maintained, in all material respects, effective internal control over financial reporting as of April 30, 2009, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Smith & Wesson Holding Corporation as of April 30, 2009 and 2008 and the related consolidated statements of income/(loss) and comprehensive income/(loss), stockholders' equity and cash flows for each of the three years in the period ended April 30, 2009 and our report dated June 30, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
June 30, 2009
|Item 9B.||Other Information|
|Item 10.||Directors, Executive Officers and Corporate Governance|
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2009 Annual Meeting of Stockholders. The information required by this Item relating to our executive officers is included in Item 1, "Business - Executive Officers" of this report.
|Item 11.||Executive Compensation|
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2009 Annual Meeting of Stockholders.
|Item 12.||Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters|
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2009 Annual Meeting of Stockholders.
|Item 13.||Certain Relationships and Related Transactions, and Director Independence|
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2009 Annual Meeting of Stockholders.
|Item 14.||Principal Accountant Fees and Services|
|Item 15.||Exhibits and Financial Statement Schedules|
(a) Financial Statements and Financial Statement Schedules
(1) Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report.
(2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for the years ended April 30, 2009, 2008, and 2007 is set forth on page F-50 of this report.
|2||.1||Agreement and Plan of Merger, dated December 15, 2006, by and among the Registrant, SWAC-TC, Inc., Bear Lake Acquisition Corp., TGV Partners-TCA Investors, LLC, E.G. Kendrick Jr., and Gregory J. Ritz(1)|
|2||.8||Agreement and Plan of Merger, dated as of June 18, 2009, among the Registrant, SWAC-USR I, Inc., SWAC-USR II, Inc., Universal Safety Response, Inc., and William C. Cohen, Jr., as Stockholders' Representative(24)|
|3||.1||Amended and Restated Articles of Incorporation(2)|
|3||.3||Amended and Restated Bylaws(3)|
|3||.9||Certificate of Designation of Series A Junior Participating Preferred Stock(4)|
|4||.1||Form of Common Stock Certificate(5)|
|4||.5||Registration Rights Agreement between Saf-T-Hammer Corporation and Colton Melby dated May 6, 2001(6)|
|4||.10||Registration Rights Agreement, dated December 15, 2006, among the Registrant and the purchasers named therein(7)|
|4||.11||Indenture, dated December 15, 2006, between the Registrant and The Bank of New York Trust Company, N.A.(7)|
|4||.12||Rights Agreement, dated as of August 25, 2005, by and between the Registrant and Interwest Transfer Company, Inc., as Rights Agent(4)|
|10||.2||Trademark Agency Agreement with UMAREX dated March 11, 2000(8)|
|10||.3||Agreement with Walther/ UMAREX, dated August 1, 1999(8)|
|10||.5(a)||Trademark License Agreement with UMAREX/ Gutman Cutlery dated July 1, 2000(8)|
|10||.5(b)*||Non-Qualified Stock Option Agreement issued on December 6, 2004 between the Registrant and Michael F. Golden(9)|
|10||.5(c)*||Employment Agreement, dated as of November 12, 2007 between the Registrant and Michael F. Golden(10)|
|10||.12||Agreement with Western Mass Electric dated July 6, 1998(8)|
|10||.13||Agreement with Western Mass Electric dated December 18, 2000(8)|
|10||.14||Settlement Agreement with Dept. of Treasury and HUD dated March 17, 2000(8)|
|10||.15||Letter Agreement with Dept. of Treasury and HUD dated May 2, 2000(8)|
|10||.18||Trademark License Agreement with Canadian Security Agency dated May 31, 1996(8)|
|10||.22||Master Supply Agreement with Remington Arms dated August 1, 2001(11)|
|10||.23*||2001 Stock Option Plan(9)|
|10||.24*||2004 Incentive Stock Plan(9)|
|10||.25*||Form of Option to 2001 Stock Option Plan(12)|
|10||.26*||2001 Employee Stock Purchase Plan(12)|
|10||.27*||Form of Subscription Agreement to 2001 Employee Stock Purchase Plan(12)|
|10||.28*||Amendments to 2004 Incentive Stock Plan(13)|
|10||.34||Purchase and Sale Agreement with Springfield Redevelopment Authority(14)|
|10||.35||Environmental Agreement with Springfield Redevelopment Authority(14)|
|10||.36||Promissory Note from Springfield Redevelopment Authority(14)|
|10||.38||Securities Purchase Agreement, dated December 15, 2006, among the Registrant and the purchasers named therein(7)|
|10||.40||Agreement with Carl Walther GmbH(15)|
|10||.51**||Agreement with Respect to Defense of Smith & Wesson: Firearms Litigation, dated as of November 11, 2004(16)|
|10||.55||Amendment to Agreements with Carl Walther GmbH(17)|
|10||.56*||Form of Restricted Stock Unit Award Agreement to the 2004 Stock Incentive Plan(18)|
|10||.57||Credit Agreement, dated as of November 30, 2007, among Smith & Wesson Holding Corporation, Smith & Wesson Corp., and Thompson/Center Arms Company, Inc., as Borrowers, Toronto Dominion (Texas) LLC, as Administrative Agent, and the Lenders party thereto(19)|
|10||.57(a)||Amendment No. 1 to Credit Agreement and Assignment and Acceptance of Collateral Documents, dated as of October 31, 2008, among Smith & Wesson Holding Corporation, Smith & Wesson Corp., and Thompson/Center Arms Company, Inc., as Borrowers, the other Credit Parties named therein, the Lenders named therein, Toronto Dominion (Texas) LLC, as resigning Administrative Agent, and TD Bank, N.A., as successor Administrative Agent(22)|
|10||.57(b)||Amendment No. 2 to Credit Agreement and Assignment and Acceptance of Collateral Documents, dated as of March 12, 2009, among Smith & Wesson Holding Corporation, Smith & Wesson corp., and Thompson/Center Arms Company, Inc., as Borrowers, the other Credit Parties named therein, the Lenders named therein, and TD Bank, N.A., as Administrative Agent(23)|
|10||.58||Pledge and Security Agreement, dated as of November 30, 2007, by and among Smith & Wesson Holding Corporation, Smith & Wesson Corp., and Thompson/Center Arms Company, Inc., as Borrowers, and the Guarantors party thereto in favor of Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.58(a)||Amendment No. 1 to Pledge and Security Agreement, dated as of October 31, 2008, by and among Smith & Wesson Holding Corporation, the other Pledgors named therein, and Toronto Dominion (Texas) LLC, as Administrative Agent(22)|
|10||.59||Copyright Security Agreement, dated as of November 30, 2007, by Smith & Wesson Corp. and Thompson/Center Arms Company, Inc. in favor of Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.60||Patent Security Agreement, dated as of November 30, 2007, by Smith & Wesson Corp., Thompson/Center Arms Company, Inc., and Bear Lake Holdings, Inc. in favor of Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.61||Trademark Security Agreement, dated as of November 30, 2007, by Smith & Wesson Corp., Smith & Wesson Holding Corporation, Thompson/Center Arms Company, Inc., and Bear Lake Holdings, Inc. in favor of Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.62||Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated as of November 30, 2007, between Smith & Wesson Corp. and Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.63||Open-End Mortgage Deed, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated as of November 30, 2007, between Smith & Wesson Corp. and Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.64||Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing, dated as of November 30, 2007, between O.L. Development, Inc. and Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.65||Subsidiary Guarantee, dated as of November 30, 2007, by and among each of the Guarantors party thereto and Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.66||Operating Companies Guarantee, dated as of November 30, 2007, by and among Smith & Wesson Corp., Thompson/Center Arms Company, Inc., the other Guarantors party thereto, and Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.67||Holdings/Thompson/Center Arms Guaranty, dated as of November 30, 2007, by and among Smith & Wesson Holding Corporation, Thompson/Center Arms Company, Inc., the other Guarantors party thereto, and Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.68||Holdings/Smith & Wesson Corp. Guaranty, dated as of November 30, 2007, by and among Smith & Wesson Holding Corporation, Smith & Wesson Corp., the other Guarantors party thereto, and Toronto Dominion (Texas) LLC, as Administrative Agent(19)|
|10||.69*||Severance and Change in Control Agreement, dated as of July 1, 2008 with William F. Spengler(20)|
|10||.70*||Severance Agreement, dated as of September 25, 2008, by and between the Registrant and Leland A. Nichols(21)|
|10||.71||Voting Agreement, dated as of June 18, 2009, by and among the Registrant, SWAC-USR I, Inc., and the Principal Stockholders named therein(24)|
|10||.72*||Form of Indemnity Agreement|
|10||.73*||Severance Agreement, dated as of June 29, 2009, by and between the Registrant and Kenneth W. Chandler|
|21||.1||Subsidiaries of the Registrant|
|23||.1||Consent of BDO Seidman, LLP|
|31||.1||Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer|
|31||.2||Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer|
|32||.1||Section 1350 Certification of Principal Executive Officer|
|32||.2||Section 1350 Certification of Principal Financial Officer|
|*||Management contract or compensatory arrangement|
|**||An application has been submitted to the Securities and Exchange Commission for confidential treatment, pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, of portions of this exhibit. These portions have been omitted from this exhibit.|
|(1)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on December 18, 2006.|
|(2)||Incorporated by reference to the Registrant's Proxy Statement on Schedule 14A filed with the SEC on August 11, 2004.|
|(3)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on December 5, 2007.|
|(4)||Incorporated by reference to the Registrant's Form 8-A filed with the SEC on August 25, 2005.|
|(5)||Incorporated by reference to the Registrant's Form S-3 (No. 333-136842) filed with the SEC on August 23, 2006.|
|(6)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on May 29, 2001.|
|(7)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on December 18, 2006.|
|(8)||Incorporated by reference to the Registrant's Form 10-QSB filed with the SEC on August 13, 2001.|
|(9)||Incorporated by reference to the Registrant's Form S-8 (No. 333-128804) filed with the SEC on October 4, 2005.|
|(10)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on November 16, 2007.|
|(11)||Incorporated by reference to the Registrant's Form 10-QSB filed with the SEC on September 14, 2001.|
|(12)||Incorporated by reference to the Registrant's Proxy Statement on Schedule 14A filed with the SEC on December 28, 2001.|
|(13)||Incorporated by reference to the Registrant's Proxy Statement on Schedule 14A filed with the SEC on August 14, 2006.|
|(14)||Incorporated by reference to the Registrant's Form 10-KSB filed with the SEC on December 18, 2003.|
|(15)||Incorporated by reference to the Registrant's Form 10-K filed with the SEC on July 16, 2004.|
|(16)||Incorporated by reference to the Registrant's Form 10-Q filed with the SEC on March 10, 2005.|
|(17)||Incorporated by reference to the Registrant's Form 10-Q filed with the SEC on March 17, 2006.|
|(18)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on May 19, 2006.|
|(19)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on December 6, 2007.|
|(20)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on July 3, 2008.|
|(21)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on September 25, 2008.|
|(22)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on November 5, 2008.|
|(23)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on March 17, 2009.|
|(24)||Incorporated by reference to the Registrant's Form 8-K filed with the SEC on June 19, 2009.|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
smith & wesson holding corporation
/s/ Michael F. Golden
Michael F. Golden
President and Chief Executive Officer
Date: June 30, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ Michael F. Golden
Michael F. Golden
|President, Chief Executive Officer, and Director (Principal Executive Officer)||June 30, 2009|
/s/ William F. Spengler
William F. Spengler
|Executive Vice President, Chief Financial Officer, and Treasurer (Principal Accounting and Financial Officer)||June 30, 2009|
/s/ Barry M. Monheit
Barry M. Monheit
|Chairman of the Board||June 30, 2009|
/s/ Robert L. Scott
Robert L. Scott
|Vice Chairman of the Board||June 30, 2009|
/s/ Jeffrey D. Buchanan
Jeffrey D. Buchanan
|Director||June 30, 2009|
/s/ John B. Furman
John B. Furman
|Director||June 30, 2009|
/s/ Mitchell A. Saltz
Mitchell A. Saltz
|Director||June 30, 2009|
/s/ David M. Stone
David M. Stone
|Director||June 30, 2009|
/s/ I. Marie Wadecki
I. Marie Wadecki
|Director||June 30, 2009|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of April 30, 2009 and 2008
Consolidated Statements of Income/(Loss) and Comprehensive Income/(Loss) for the years ended April 30, 2009, 2008, and 2007
Consolidated Statements of Changes in Stockholders' Equity for the years ended April 30, 2009, 2008, and 2007
Consolidated Statements of Cash Flows for the years ended April 30, 2009, 2008, and 2007
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts for the years ended April 30, 2009, 2008 and 2007
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Smith & Wesson Holding Corporation (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of April 30, 2009 as required by Rule 13a-15(c) under the Securities Exchange Act of 1934. The Company utilized the criteria and framework established by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control - Integrated Framework in performing this assessment. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of April 30, 2009. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Smith & Wesson Holding Corporation's independent auditor, BDO Seidman, LLP, an independent registered public accounting firm, has audited the effectiveness of the Company's internal control over financial reporting as of April 30, 2009 as stated in their report, which appears in Item 9A on page 48 of this Annual Report on Form 10-K.
/s/ Michael F. Golden
Michael F. Golden
President and Chief Executive Officer
/s/ William F. Spengler
William F. Spengler
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Smith & Wesson Holding Corporation
We have audited the accompanying consolidated balance sheets of Smith & Wesson Holding Corporation and subsidiaries as of April 30, 2009 and 2008 and the related consolidated statements of income/(loss) and comprehensive income/(loss), stockholders' equity, and cash flows for each of the three years in the period ended April 30, 2009. We have also audited the schedule listed in the accompanying index for the years ended April 30, 2009, 2008, and 2007. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Smith & Wesson Holding Corporation and subsidiaries at April 30, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2009, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule referred to above presents fairly, in all material respects, the information for the years ended April 30, 2009, 2008, and 2007, set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Smith & Wesson Holding Corporation's internal control over financial reporting as of April 30, 2009 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 30, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
June 30, 2009
WESSON HOLDING CORPORATION AND SUBSIDIARIES