Smith & Wesson Brands, Inc. (SWBI) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Smith & Wesson Holding Corporation Earnings Conference Call. My name is Aisha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Liz Sharp, Vice President, Investor Relations. You may proceed, ma'am.

Thank you, and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, belief and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding net sales, margins, expenses, earnings per share, non-GAAP EBITDA, and production days for future periods; our product development initiatives, objectives and strategies; market demand for our products and growth trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings, including our Forms 8-K, 10-K and 10-Q. You can find those documents, as well as a replay of this call, on our website at smith-wesson.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements contained herein. Our actual results could differ materially from our statements today. I have a few important items to note with regard to our comments on today's call. First, we reference non-GAAP adjusted EBITDA. Note that the reconciliations of GAAP net income to non-GAAP adjusted EBITDA and estimated GAAP income from continuing operations to estimated non-GAAP adjusted EBITDAS can be found in today's 8-K filing as well as today's earnings press release, which are posted to our website. Also, when we reference EPS, we are always referencing diluted EPS. And finally, please note that this call references only our continuing operations. For the results of our discontinued operations, please refer to our 10-Q for the period ended July 31, 2013, which filed this afternoon. I'll now turn the call over to James Debney, President and CEO of Smith & Wesson.

Thank you, Liz. Good afternoon, everyone, and thanks for joining us. With me on today's call is Jeff Buchanan, our Chief Financial Officer. Later in the call, Jeff will provide a recap of our financial performance, as well as our second quarter and our increased fiscal 2014 revenue outlook. Our results for the first quarter of fiscal 2014 reflect a continued successful implementation of our growth strategies. We delivered impressive growth in year-over-year sales and significant expansion of our gross margin. Ongoing increasing -- increases in our manufacturing capacity combined with strong consumer demand for firearms resulted in higher sales of our most popular M&P products and we believe market share gains. Amid that robust growth, we drove a number of significant initiatives in the quarter designed to strengthen our business and return increased value to our stockholders. Now, let me provide some of the highlights from the first quarter. We continue to add capacity during the first quarter, and sales for the quarter rose 25.8% year-over-year. Excluding last year's Walther distribution business, our sales grew 36.5%. Gross margins expanded to 42.6% as we continue to operate more efficiently. Our M&P polymer pistol continue to sell exceptionally well and we believe we continue to take market share with this product family. While we think the channel inventory levels have generally been replenished, inventory still remain low for our popular M&P polymer pistols especially our M&P Shield; along with our M&P15 Sport rifle; our 1911 E Series; our BODYGUARD 380; and our small frame revolvers, including our BODYGUARD 38. We have made tremendous strides in growing our manufacturing operations over the past 2 years, so accordingly, we are investing in our operating systems and infrastructure to allow us to more effectively scale our business in the future. With that in mind, we executed a number of key strategic objectives to enhance the performance of our business by replacing our legacy ERP system with a new SAP platform. Finally, we executed a number of actions to optimize our capital structure and provide us with a solid platform for future stockholder value. Jeff will provide details of these actions later in the call. Overall, our growth strategy remains focused on continuing to take market share with our M&P polymer pistol family, leveraging our established high-value product portfolio and bringing to market innovative new products that meet the needs, wants and desires of a growing and diverse base of responsible firearm users. Based upon our favorable outlook, today, we are raising our full year revenue guidance. With that, I'll ask Jeff to review the financial results.

Thank you, James. Revenue for the quarter was $171 million versus $125 million of comparable non-Walther revenue in the prior year. This is an increase over the prior year of $46 million or 36.5%. We continue to operate in maximum production capacity during the first quarter as we have for the last 6 quarters. Gross margins continue to rise and we're 42.6% in the quarter as compared with 37.7% last year. The gross margin improvement primarily resulted from increased volumes, manufacturing efficiencies, product mix and the end of the Walther agreement. In the quarter, operating expenses were $24.8 million or 14.5% of revenue versus last year's $19.9 million or 14.7% of revenue. In terms of actual dollars, operating expenses increased as expected on a year-over-year basis in support of our overall growth strategy, and we expect this increase to continue throughout the year. In fact, we estimate our total operating expenses in the second quarter will rise sequentially by about 20%, with approximately $2 million of that increase related to onetime expenses, including costs relating to the startup of SAP, which went live at the beginning of August. Operating income in the first quarter was 28.1% compared to 23% in the prior year. Net income in Q1 was $26.5 million or an EPS of $0.40. This compares with net income in the year ago on[ph] quarter of $18.9 million or an EPS of $0.28. Note that the first quarter interest expense included approximately $5.1 million or $0.05 per share of costs associated with the retirement of the 9.5% notes and the issuance of the new 5 7/8% notes. Without those onetime charges, EPS would have been $0.45. Non-GAAP adjusted EBITDA for Q1 was $55.2 million compared with $36.1 million in the year-ago period. Non-GAAP adjusted EBITDAS for the last 2 quarters totaled nearly $108 million. In the first quarter, operating cash flow was $19 million and capital spending was $12 million resulting in free cash flow of $7 million. We will continue in fiscal '14 to expand capital with a higher than normal rate for capacity increases and infrastructure improvements, and we estimate the capital expenditures in fiscal '14 will approximate $50 million. So turning to the balance sheet. We took a number of significant steps during the first quarter to optimize the capital structure of our company. These actions evidenced our commitment to further developing our financial flexibility generating greater value for our stockholders. At the end of the quarter, we had $146.5 million in cash. During the first quarter, we sold $100 million of newly issued 5 7/8 notes due in 2017. We used about half of those proceeds to repurchase our outstanding 9.5 notes and added the remaining balance to cash-on-hand to fund the new $100 million stock buyback authorized by our Board of Directors. The $100 million authorization included the repurchase of up to $75 million of stock through a fixed price tender offer at $11, a roughly 20% premium to our closing stock price prior to the tender announcement. Apparently, stockholders did not want to sell at that price and the tender did not fill. We only repurchased approximately 1.4 million shares for $15.6 million. That left us with 80 point -- $84.4 million available for repurchases in the open market. I would note that our buying opportunities have been limited because of quiet period restrictions and advance of earnings. But through the close of business yesterday, we have been able to purchase just over 1.8 million shares in the open market for just over $20 million utilizing our cash on hand, and we are committed to continuing the stock buyback program. At the end of the quarter, we had an unused $55 million secured credit facility. In August, after the end of the first quarter, we completed a new $75 million revolving line of credit, which is unsecured and which includes an expandable accordion feature for up to $175 million of maximum borrowings. And with that, I'll turn the call back over to James for a discussion of our operational results.

Thank you, Jeff. As I stated earlier, the first quarter demonstrated continuing strength in our core firearm business and in the overall U.S. consumer market for firearms as measured by the FBI's adjusted NICS background checks data. The reason that NICS checks are a good proxy for retail sales is that we sell products only to federally licensed firearms dealers. We must, by law, conduct a background check on every firearm they sell, whether they sell it to the gun show, in a retail location or anywhere. Our total firearm unit sales into the consumer channel, excluding Walther, increased 30% for our fiscal first quarter on a year-over-year basis compared to adjusted NICS growth for the same period of 6.4%. When factoring in the movement of inventories through the channel, this leads us to believe that we took market share in the quarter. In terms of dollars, total sales in our domestic consumer channel during the first quarter, again, excluding Walther products, were $149 million, which is more than 34% higher than last year. While sales have been constrained by our capacity and the rate at which we can intelligently have capacity, we have maintained a disciplined focus on our long-term growth strategy. Our professional channel, which includes international sales, contributed notably to our first quarter results. First quarter revenue, again excluding Walther products, was $19.8 million, an increase of about 58% over the comparable quarter last year. Growth in the channel was due to increased orders of M&P Pistols and M&P Modern Sporting Rifles to several domestic law enforcement agencies and distributors specialized in law enforcement sales, as well as increased international shipments to the Japanese Coast Guard and the Japanese Ministry of Justice. After the close of the quarter, we were pleased to announce that the Los Angeles County Sheriff's Department, a force of about 13,000 personnel, have chosen our M&P Pistols for their duty sidearm through a rigorous evaluation process in which we beat several major competitors. This 5-year contract is a ringing endorsement of our M&P pistols. And we are honored to support the Los Angeles County Sheriff's Department with our firearms. Before I discuss marketing activities, I want to point out that the August adjusted NICS results came out this week and they marked a market slight decline on a year-over-year basis. Further, August NICS checks, which numbered over 1 million in the month, also marks the first sequential monthly increase since December of 2012. And we believe that is good news. First, its sequential monthly uptick of 19% is consistent with the seasonality we see occurring in the past 10 years. In addition, August NICS checks are a full 24.6% higher than 2 years ago. We believe that long-term NICS data also supports the growth trend. When you look at the past 120 months of adjusted NICS checks, within that time frame, 96 months out of 120 showed year-over-year increases in background checks. Out of those 120 months, only 20 have shown NICS checks that numbered more than 1 million, and August 2013 is in that top 20. We also believe there are strong underlying growth trends that are driven by new consumers entering the market. And we believe that presence will continue to support market growth. This was evident in the results of the National Shooting Sports Foundation study issued last week. The findings in that report stated that of those surveyed, among those who went target or sports shooting in 2012, 20% were new to shooting within the past 5 years. That included 11% who just begun shooting in 2012. These numbers represent a robust influx of new shooters. Lastly and importantly, as I have stated for some time our growth strategy is not simply to grow with the market, but to manage our business in a way that gives us the ability to take market share, independent or whether or not the market is growing. As I said earlier, based upon the flow of inventory through the channel, combined with the recent NICS background check, we believe we took market share in Q1. Moreover, we believe we can take additional market share in the future with our M&P polymer pistols, which continues to be readily adopted by consumers and professionals. In fact, we have several of the most in-demand products in the channel today according to retailers. These include our popular M&P polymer pistols, especially our M&P Shield, and also our M&P15 Sport rifle, our 1911 E Series, our BODYGUARD 380, and all of our small frame revolvers, including our BODYGUARD 38. So with that, I will outline some of our marketing activities we are engaging in to support that strategy. During the first quarter, we launched the new Smith & Wesson Connect program, a key element in our go-to-market strategy. Connect is our new retail associate incentive program. We believe that Connect serves not only as an awareness tool, but also provides the opportunity for an ongoing 2-way dialogue between Smith & Wesson and participating retail associates. The Connect program allows us to fine tune, via direct feedback, our marketing activities to more effectively support our objective. In addition to Connect, we also began to ramp our advertising activities with new print, digital and broadcast media campaigns using new creative that supports our M&P Pistols and our high-end performance-centered product lines. This is a key element in communicating directly with consumers, driving awareness of our brands and our products. Now turning to operations, we continue to invest in capacity in the quarter, a key factor in our ability to deliver increased sales given the level of demand. The operations team, yet again, did an outstanding job bringing this added capacity online and delivering strong gross margins in the process. Going forward, we plan to continue to only add capacity intelligently. That is where we believe it is appropriate, and with a focus on balancing internal and external capacity expansion of certain components, which we outsource. This approach provides us with significant flexibility designed to facilitate growth while at the same time providing a layer of insulation should the market soften. This, we believe, will allow us to optimize internal capacity utilization well into the future. In conclusion, we continue to believe that our industry is in the midst of an underlying long-term growth trend, and our objective is to grow faster than the market. We will do this by continuing to execute on new product strategy; investing in marketing initiatives that communicate directly with the consumer, and raise product and brand awareness; continuing to add flexible capacity, both internally and externally; increasing efficiencies and reducing costs; and improving the processes we use to operate our business and distribute our products in the marketplace. All of these initiatives are designed to support our primary goal of taking market share from our competitors with the M&P polymer pistol family. And with that, I will ask Jeff to provide our financial outlook.

Thanks, James. But before I provide our guidance, I want to talk briefly about our new ERP implementation, which went live on SAP at the beginning of the second quarter. As James mentioned, the new system is an important step on our strategic plan to optimize our business. In fact, the ERP conversion represents one of the final major building blocks that had yet to be completed in the organization. The SAP platform is replacing a dated legacy system and will provide us with the scalability and the visibility required for future growth. As is, and typical with ERP implementations, we incurred some unforeseen onetime issues. We believe that most of those issues are behind us. We want to thank the entire team for the hard work that they have put in over the past year. So turning now to our guidance for the second quarter. We continue to see strong pull for a majority of our products portfolio. Therefore, this second quarter estimate is once again mostly based on our capacity. Our second quarter typically has a reduced number of manufacturing days because of our 2-week planned factory shutdown each summer. This year, production days in Q2 will be lower by an incremental 8 days as a result of the SAP conversion. Specifically, production days in Q2 will be approximately 50. As a comparison, there were 63 production days in Q1, and we are planning for 57 days in Q3, and 63 days in Q4. We, therefore, expect that Q2 will be our lowest revenue and lowest gross margin quarter in fiscal '14. Also note that ERP-related costs through the end of Q1 will capitalize. However, now that we have gone live, ERP costs going forward must be expensed. This has been factored into our guidance for Q2 and balance of fiscal '14. So based on these factors, we estimate that our second quarter net sales will be between $135 million and $140 million. It is important to note that last year's Q2 Walther sales were $9.7 million, and that the Walther agreement ended in April of this year. In addition, last year's Q2 had 54 production days versus the expected 50 days this year. Based on our estimated sales and the increase in operating expenses discussed earlier, we anticipate second quarter EPS of between $0.20 and $0.22. Looking now to the full year, we continue to be encouraged by the strength of our business. Based on our expectations regarding the future demand for our products and continued increases in production capacity, we are raising our fiscal '14 estimate of net sales to between $610 million and $620 million. We expect EPS to be between $1.30 and $1.35. Finally, we are assuming an average share count by the end of the year of 60.1 million shares and a tax rate of 36%. James?

Thanks, Jeff. Operator, that concludes our prepared remarks. I'd like to open up the call for questions from our analysts, please.

[Operator Instructions] Your first question comes from the line of Cai Von Rumohr with Cowen and Company.

Jeff, when you talked of op expenses up 20% in the second quarter, is that year-over-year or is that versus the $24.8 million in the first quarter?

That is year -- that is sequentially.

Sequentially. So essentially, a little over $29 million. I mean, so where is that coming from? Is it -- basically[ph], sales and marketing was up in the first quarter, is it all in G&A going up $2-plus million?

Well, yes. At least a couple of million of that is related to the ERP conversion. Other expenses relates to G&A expenses including profit sharing, stock comp, things like that. But also, we're adding advertising, marketing, as James said -- had talked about, the Connect program is rolling out. So it's a little bit of everywhere.

Okay. And then, could you help us how much -- where should we look for op expenses for the year because it looked like -- it certainly now looks like it's a much bigger number than what any of us have thought or something that I had thought?

Well, I mean, I think, like based on the guidance, you can probably go back into a run rate that we're at around the $27 million, not including the onetime expenses in Q2 for the ERP conversion.

So essentially that $27 million more or less would be the run rate in the second half? I mean, plus or minus $1 million or so?

Exactly. Now, of course, our operating expenses, if sales are higher or lower...

No, no. I understand...

Yes, a lot of those expenses relate to things like profit sharing and stock expense, which are -- and compensation, which is tied in with the results. So it's kind of based on the results or forecast.

Right. And then I don't know if you have it, but we have all the manufacturing days for this year and last year except for Q1 and Q3. And just so we can get a sense of your sales for manufacturing days, do you have those available?

Q1 and Q3 of last year?

Yes.

63 in Q1 and 65 in Q4.

No, no, Q1 and Q3?

Q3 was 56.

And then the last one, your Q alludes to a price hike in January, could you indicate how big was the price hike on average and where -- some color on that and how big of a benefit was that to your gross margin in the quarter?

It wasn't really a price hike. It was really -- we talked about this last couple of times, it was kind of a change in the go-to-market strategy. But, James, did you want to talk about that?

Yes, we have always -- yes, I think we've mentioned it before we moved much closer to a net pricing model. So we did a lot of work with our customers, particularly our 2-step distribution partners in eliminating certain discounts and rebates. So in addition to that, there were certainly some -- I'd say small tweaking of certain pricing for a small number of products, and those are products that we view just at that time didn't have an acceptable gross margin, for example. But nothing particularly major that.

Your next question comes from the line of Scott Stember with Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: You guys typically put your backlog data in your Q, I didn't see it this time around. Could you maybe just quantify how the demand outlook is looking, and maybe you can give us what the backlog number was?

We're not actually disclosing our backlog on a quarterly basis. We're actually -- I mentioned this before, we're going to do it on an annual basis. For us, we have an initiative underway through [indiscernible] which is looking to eliminate backlog and operate our business under more lean principles, let's say. And as I said before, we've emphasized this, when we look at backlog, we like to analyze it, we like to understand the content, the split and breakdown between certain product category, but it's not something that we take to the bank, okay? It's a number that can be canceled by our customers. We don't hold our customers bound to those orders. I want to reassure everybody that, quarter[ph], we're monitoring that on an ongoing basis and analyzing it in the way that I've just described. Scott L. Stember - Sidoti & Company, LLC: Okay. And I asked this question last quarter as well, but your guidance for sales growth this year, what are you looking at or your expectations for NICS growth this year or at all?

Specifically, we stick by what we've said before in terms of how we see the market growing on average, so I'm talking over a much longer period of time, obviously. We have in-depth analysis of the mix for the last 10 years, as you're aware. So we stick by that to the 9% to 10% market growth rate on average. Scott L. Stember - Sidoti & Company, LLC: Okay. And just last question. Within the long gun segment, could you maybe talk about how the sporting rifles performs just sequentially and year-over-year? How that side of the business is going?

Well, we actually don't, like, break down our sporting rifles. We just talk about long guns by quarter over -- by quarter, it was up on 30% on a comparable basis as compared to handguns, which were up on 43%.

But going back to our prepared remarks, we've seen -- we've talked about inventory replenishment for Modern Sporting Rifles as a whole, but when you look at one of our key products, which is the M&P15 Sport rifle, that remains in demand, and we believe there's very low level of inventory out there in the channel currently. Scott L. Stember - Sidoti & Company, LLC: Okay. And just actually one more follow-up just on new product development. Could you just give us an update there on timing, if any new stuff coming out potentially?

Really, no. We can't really add any color to that. I can only say the high-level stuff that I've said before, and that is -- it's obviously a strategic focus of ours. We look far ahead in terms of our new product pipeline. I will act accordingly in terms of when we decide to launch. It's, as I said, strategic. Time's got to be right. The market's got to be ready. We've got to be capable. The inventory have to be in place and customers, both distributors and retailers briefed [ph] and participating in the launch program. So I can't ruin any surprises for sure, but you'll find out when everybody else does.

[Operator Instructions] Your next question comes from the line of Andrea James with Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: First, is it fair to say that if it weren't for the loss production days in Q2, your revenue guidance would have been $15 million to $20 million higher?

Yes. It's fair to say that. And you can pretty much -- if you look at the revenue for each quarter and divide by the production days, that's up about where you'd get to. Andrea James - Dougherty & Company LLC, Research Division: Okay. And then also, can you just discuss the puts and takes on the margins? I think it seems like replacing the Walther capacity with your own product helps the margins, but maybe migration on product mix away from long guns eventually would have the opposite effect. So I just wonder if you could just talk about sort of margin expectations and puts and takes.

Sure, I'll start. I mean, we've said for some time that the Walther distribution business was some of our lowest margin business, so there is no doubt there is a benefit to our margins now that we have terminated that agreement and moved past it. As you look at margins, gross margins for Q1, there was a benefits of an inventory revaluation. But I want to stress that, that even though eliminating that benefit, we would still be above 40% of the gross margin. So it really is an outcome, a result of executing our strategic direction in terms of driving M&P polymer pistol sales, taking market share, which is obviously driving our favorable production product mix as well. We've also spent significant amount of time driving efficiencies in this operation, which is definitely showing benefits in gross margin as well. Jeff, do you want to add anything to that?

No, I think that covered it. Andrea James - Dougherty & Company LLC, Research Division: Just one final one. What's your implied share count for Q2 and the full year for your EPS guidance?

About a little over -- about 60.3 million for Q2 and 60 million for the full year. 60.1 million for... Andrea James - Dougherty & Company LLC, Research Division: So there's a sort of implied margin guidance upside because the tender is sort of going slower than you guys had expected, is that accurate?

Well, the tender is over. And it didn't -- all we got is a few share of 1.5 million shares. But we are ongoing on the open market purchase, and the price has been -- recently has been at or below the tender price. And so we were able to pick up like more shares in the open market than we were in the tender, and we plan to continue to aggressively do that. When we did the analysis, when we raised the $100 million with the plan of doing $100 million stock buyback, that transaction was accretive all the way up into the mid-teens.

Your next question comes from the line of Reed Anderson with Northland Securities.

A couple of questions. James, I would argue that both anecdotally and then some -- I think some pretty good evidence I've heard from talking to other people that the ammunition shortage throughout your first quarter was probably a bit of a headwind, at least at the consumer retail level. I'm curious if you agree with that. And also just curious as you saw inventory levels rebuild, particularly, like on .223 , things like that, if you saw that as evidence of a little bit of pickup in your sales activity.

I would agree that the ammo situation is definitely providing somewhat of a headwind at the moment. But I do believe it is more acute when it comes to 22 caliber than anywhere else. I think you see inventory of ammo when it comes to .223 or 5.56 is starting to improve, especially certainly other handgun calibers are starting to improve, but there seems to be much more of an acute shortage when it comes to .22 ammo. And certainly, that could -- will present a potential headwind in the future and certainly one that we've baked into our guidance going forward. As you know, we have a number of key win by our firearms in terms of long guns, and one of those is the M&P15-22, which has proved to be a market leader for some time now. So that's probably one of our biggest challenges, I would say. I don't see anything else in rimfire, rimfire products that would cause me any great concern at all. And coming back to the 15-22, that's certainly something that we've baked into our guidance and into our plans as we go forward.

Okay. And then you had commented on your prepared remarks that in a lot of your key products or your best sellers, et cetera, you still see your -- there's still shortages, if you will, if the demand exceeding -- what your ability to produce. But I'm curious, I mean, if you look at this quarter versus 3 months ago or 6 months ago, I'm presuming you did see some improvement in your ability to keep more product in stock or keep in stock longer. Data has gotten better. It certainly, from a shopping standpoint, you can see it visibly in the MSR category, certainly?

Yes, perhaps, as we've said, in the MSR category, certainly inventory has -- is more replenished, let's say, than anywhere else. But if it comes to handguns, really no. As you know, we've continued our ramp. And until it's particularly difficult to find an M&P Shield in both 9 millimeter or 40, you make the pockets of improvement in terms of retail availability of BODYGUARD 380s, but again that's limited as well. One of the most acute ones that we've come across has been in our J-Frame revolvers, our small frame revolvers have been particularly in demand as well. And again, as we have said before, the strongest trend out there remains personal protection, so people continue to look for concealed carry firearms and we have a pretty good number of firearms now from our M&P Compact to the M&P Shield, to BODYGUARD 38, the BODYGUARD 380, all of our small frame revolvers that are a match with the needs, wants and desires of consumers who are responding to that trend.

Okay. And then just one last one, the Connect program you talked about, I'm just curious how quickly that will roll out, or is there a number of retail outlets to expect to have that in their customers? Just kind of a sense of the magnitude of how that will be rolled out.

Yes, sure. Obviously, I can't go into details too much, but yes, it's active. It was active in Q1. So we are aggressively rolling that out, we have a dedicated sales teams. we have 2 teams, the West team and an East team, they're one of the major objectives is the deployment of that initiative, and they're working hard at that. We're also working with big-box retailers as well to bring that sales associates on board as well. So it's not something that just focuses on the independent firearms retailers. And we have some lofty goals in place there. We're very excited about the whole program, as our a lot of sales incentive. We started to talk to sales incentive, to owners of retailers, directly about how their associates are responding to the program, and it's been very favorable. They're very excited about that. So we look forward to deploying that as and when we need to. Remember, again, it's not something that we're just deploying across the whole product range. It will be extremely selective, and overall will support our strategic objective.

[Operator Instructions] Your next question comes from the line of Arnold (sic) [Ronald] Bookbinder with The Benchmark Company.

With the beat in Q1 on both revenue and EPS, and raising revenue guidance on the Q1 revenue beat, where is the difference compared to your prior guidance, because it seems like you still are counting on all the shares being repurchased over the years -- I mean, over the year, and the gross margin seems to be going better than expected?

Yes, I mean, the -- obviously, our gross margin is a little better than expected and OpEx is a little higher. So the SAP costs, for example, were sort of not as expected last time. But other than that, I mean, we've gotten more -- we raised the revenue because we've gotten more comfortable with the current demand situations, especially for our key products in the concealed carry. I think we understand the MSR demand, and so I think we were -- we felt that we could raise that.

So if it wasn't for the onetime S&P costs -- SAP costs going forward, you would have been raising full year guidance on...

Yes, I mean -- yes, because -- not only that, we lost the 8 days that we didn't really like forecast last time because I gave the production days last time, and I think it was to Cai, and I believe I said 58. And so now we're saying 50. So that's quite a chunk out of the revenue, yet we're still increasing the overall. So you can see that there's really quite a large increase in our expectations as to how we think quarter 3 and quarter 4 are going to go. And of course, that comes out of gross margin, too. The fact that you missed 8 days is all that fixed overhead that wasn't absorbed.

Yes. And you may ask the question, "Well, why didn't you anticipate any lost days in the first place?" Well, we timed it to go live during our 2-week shutdown, so that we insulated ourselves from any -- anything that could arise from go live. But of course, we -- and we will pass that, as Jeff, described.

And when do you see the pistol channel being fully replenished going forward, such that you're going to be more running at demand rather than just running that capacity?

That's a great question. I can't really say I know the answer to that because I've said, when you look at NICS check for August -- as we said -- and just reiterated, NICS checks are a great proxy for retail sales. They were only marginally different to August last year, actually around the 26,000 mark. So in terms of it being a good proxy, that's just a rounding error to us. I mean, what's exciting as well is if you look at September 2012, that was only just over 1 million checks. So August this year actually beat September. Historically, as you look at the trend, September is normally higher than August as we uptick towards the holiday season and then obviously, coming out to the new year. We're into show season and we're into a period that is very active with the consumer in terms of purchasing firearms as well. So I really don't know. I guess, we're -- as Jeff said, we're encouraged that's why we've raised our annual revenue guidance, and we're looking forward to the next few months.

And, Ron, I think you could infer that our quarter 4, like, number is probably not at full capacity based on our previous quarters that we have done. So I would say that, at least, part of our forecast now is beginning to -- it's a blend of capacity and then out into the future, it's more of our expectations about demand.

You have a follow-up question coming from the line of Andrea James with Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: The state of Illinois is going to start allowing people to carry concealed and apply for that permit, I guess, in January. And I guess, I'm just curious if that's a needle mover for you guys especially during the holiday season?

Yes. I mean, there's no doubt that it can be favorable. There's certainly no downside. To what degree, we really don't know, because as we've said before, concealed carry firearms, our most popular, that is going to be the hardest part of our whole product portfolio for us to get ahead of demand. Certainly, we know there was a significant uptick in sales in Wisconsin when they started to allow concealed carry. And that's always rippled through the channel back to the manufacturers for sure. But again, Jeff's inferred that perhaps, we're not going to be capacity constraining in Q4, there are certainly going to be the hot product categories, particularly in concealed carry, where very likely we will be capacity constrained. So that will obviously diminish the impact overall, but it just bodes well for the long term.

[Operator Instructions] Your next question comes from the line of Scott Hannan with KeyBanc.

This is actually Brett Andress on for Scott. Majority of my questions were answered here. But on the CapEx guidance a little bit more than we were modeling, any color on that and how much of that was related to the SAP?

The increase is really more related to -- on capacity versus like the last time that we spoke. Last time, we had -- I think, we had dialed in most of our expected SAP, and there maybe $1 million or $2 million more. I think the total SAP was around $15 million, approximately. Although that's been spread over like 2 years, so it's not all of the $50 million. So the $50 million is a mixture of SAP follow-up for new projects, infrastructure improvements and then on capacity improvements.

Your next question comes from the line of Arnold (sic) [Ronald] Bookbinder with The Benchmark Company.

Just a quick follow-up. You mentioned the growth of new gun owners, I think you were talking about up 20%, how long -- how many guns does the average gun owner have and how long does a new gun owner typically take to ramp up to more of a full gun ownership?

Well, we know from a survey that was performed by the National Shooting Sports Foundation, where they reached out to 10,000 handgun owners. So we have good data on the handgun side of it. How many handguns did they own? They said 10% came back and said they own 1. The balance, of the remaining 90% said they owned an average of just around 9. So fairly significant. As to how long it takes them to reach whatever, well, let's call it the average of 9, very difficult to tell. And I think it all depends, obviously, on disposable income and lots of other factors. But certainly, that's an encouraging piece of research for us and one that has played a key part in our thinking.

Ron, I would say that last summer, when we were in the late spring, early summer, before any like political issues were extent, we were in a discussion with some people who thought that, that was a political buying, but we actually thought that, that was in essence the shadow boom from the surge that occurred when President Obama was elected. And so that was about 2 years after that we were starting to see a lot more buying again.

[Operator Instructions] You have a follow-up question coming from the line of Cai Von Rumohr with Cowen and Company.

One housekeeping issue. What are you looking for, for the tax rate for the year?

36%.

36%. And then I think you said 60.3 million diluted shares in the second quarter, is that correct?

That's correct.

But I mean, you had 62 million, so to get there, you probably need to average 59 million shares -- basic shares out, and you have 62.7 million out of September. So basically, it looks to me like you're assuming you buy something like 6 million shares in this quarter in total, is that...

Well, we had an average of 65.6 million for -- at quarter 1 and we already, obviously, after that -- after the end of the quarter, we already have bought 1.8 million. And of course, we have an aggressive stock buyback plan in place. So I would expect that we get our recapitalization in order to buy back $100 million of shares and we plan on executing on that.

Okay. So I mean, with your cash flow, it looks like you could go beyond that. So, I mean, it looks like you're doing a lot of your kind of planned buyback here in the second quarter because if you buy, like I said 6 million shares, you're down to like 57 million in the third, and so you don't have to buy that much in the second half to get you home. So given...

Right. Well, the -- our bonds -- the 5 7/8 bonds, the high-yield bonds, do have a restriction on buying. It's not -- we can't unlimited buy. And I believe that after this quarterly announcement, we can do about 115 million through the end of this fiscal year. That's in total. So counting what was in the tender, what we've bought and what -- and then adding that, so we have $100 million -- another way of saying that we have $100 million authorization, we could authorize another $15 million.

There are no further questions in the queue at this time. I would now like to turn the call over to James Debney, President and CEO, for closing remarks.

Thank you, operator. I want to thank the entire Smith & Wesson team for all their hard work and delivering another great quarter. We have a few investor conferences coming out this fall that I want to share with you. We will be attending the Credit Suisse Conference in New York on September 17. We will be at the Sidoti conference in New York on November 18. And we'll be at the Deutsche Bank conference in Coral Gables, Florida on November 19. Hopefully, we'll see some of you at one of those events. Thank you again for joining us, and we look forward to speaking with you next quarter. Thank you again, operator.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.