Smith & Wesson Brands, Inc. (SWBI) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Smith & Wesson Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference call may be recorded. I'd now like to introduce your host for today's conference, Ms. Liz Sharp, Vice President of Investor Relations. Ma'am, please go ahead.

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, believe, and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding revenue, earnings per share, non-GAAP earnings per share, fully diluted share count, and tax rate for future periods, our product development, focus, objectives, strategies, and vision, our strategic evolution and organizational development, our market share and market demand for our product, market and inventory conditions related to our product, and in our industry in general, and growth opportunities and 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 today’s 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 certain non-GAAP financial measures. The reconciliations of GAAP financial measures to non-GAAP financial measures can be found in today's filing, as well as today's earnings press release, which are posted to our Web site or will be discussed on this call. Also, when we reference EPS, we're always referencing diluted EPS. For detailed information on our results, please refer to our 10-K for the year ended April 30, 2016, which filed this afternoon. I will now turn the call over to James Debney, President and CEO of Smith & Wesson.

Thank you, Liz. Good afternoon and thanks to everyone 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 guidance for the first quarter and full fiscal 2017. Fiscal 2016 was a very strong year for Smith & Wesson. Our solid performance across all parts of the business, moves us closer to our vision, which is to become the leading provider of quality products, for the shooting, hunting, and rugged outdoor enthusiasts. We continue to successfully execute on this long term strategy, while our Firearms, Accessories and manufacturing services divisions contributed results that helped set a number of new company records. These included quarterly and annual records for nearly every financial metric on the income statement from revenue to earnings per share. Now let me cover some highlights from the fourth quarter; total company revenue and EPS exceeded the high end of our guidance range. Revenue growth in our Firearms division was driven by increased orders for our handgun designed for personal protection, including our SDVE, our M&P shield, our M&P bodyguard and our small frame revolvers to name a few. Firearms gross margins were very strong a 41.3% versus 37.3% last year. Revenue growth in our Accessories division was strong at nearly 20%, helped in part by the inclusion of our Thompson Center Accessories business, as well as orders for the new products we introduced at SHOT Show. Accessories gross margins were 45.8%, an expected decline from last year, which did not yet include our lower margin Thompson Center Accessories business. Despite our record levels of shipments, distributor inventory of our Firearms remained flat on a sequential basis. There were approximately 92,000 of our units in distributor inventory at the end of Q3 and at the end of Q4; demonstrating, what we believe was healthy consumer fall-through. Adjusted net background check during our fiscal quarter grew 12.5% year-over-year, reflecting increased consumer demand for Firearms. While our units shipped into the consumer channel for the same period were up 28.4%, indicating that we gained market share. We made important progress on several new products and product extensions, many of which were launched to some very enthusiastic consumers in May, at the NRA annual meeting. Lastly, we expanded our executive leadership team with two important appointments, that support our new multidivisional structure and our growth strategy in the shooting, hunting, and outdoor markets. With that introduction, I will ask Jeff to review our fourth quarter and full year financial results.

Thanks James. Revenue for the full year was a record $722.9 million, of which $65.3 million was from the Accessories division. Strong consumer interest in our products and market share gains contributed to our record results, with total revenue up 31% from the prior year. Revenues for Q4 was a record $221.1 million, an increase of 23.2% from last year. The Accessories division contributed $17.5 million, a 19.8% increase from last year. To exceed [ph] our estimates in Q4, as a result of great execution by our operations team and leveraging our flexible manufacturing model, which allows us to promptly respond to volume and mix changes in times of heightened demand. Our gross margins were 41.6% for the fourth quarter and 40.6% for the full year. Gross margins increased because of product mix and absorption. The Accessories division gross margin of 49.9% for the full year increased the total company gross margin by 90 basis points. We are pleased with our gross margins, which are at the top end of our targeted range of 37% to 41%. Operating expenses in the quarter were $35.2 million or 15.9% of revenue, as compared with $29.8 million or 16.5% of revenue last year. The biggest contributor to the increased operating expense dollars, came from higher incentive compensation and profit sharing, due to our strong financial results. On an non-GAAP basis, which excludes amortization, resulting from the BTI acquisition, fourth quarter operating expenses were 14.7% of revenue versus 15.2% last year. For the year, operating expenses were 18.7% of revenue, as compared with 19.1% last year. On a non-GAAP basis, full year operating expenses were 17.5% of revenue, versus 18% last year. Q4 operating margin was 25.7%, an increase of 5.1 percentage points from Q4 of last year. Full year operating margin in fiscal 2016 was 21.9%, an increase of 5.7 percentage points over the prior year. On a non-GAAP basis, Q4 operating margins were 27% versus 23.3% last year, and full year non-GAAP operating margin was 23.1% compared with 18.1% last year. Our EPS for Q4 came in at a record $0.63 as compared with $0.40 last year, a nearly 58% increase. Non-GAAP EPS came in at $0.66, well above the top end of our guidance range. Our full year EPS was also a record at $1.68, which is an 86.7% increase from the prior year. On a non-GAAP basis, EPS was $1.83. In quarter four, our adjusted EBITDA, a non-GAAP measure, was a record $68.7 million or a 31.1% EBITDAS margin. For the full year, our adjusted EBITDAS was a record $202.4 million, a 28% EBITDAS margin. As a result of our record performance, we ended the quarter with cash totaling $191.3 million, and total debt on our bank loan and senior notes of $175.3 million, thus ending the quarter with no net debt. This is the first time this has occurred, since we borrowed/repurchased $165 million of our own stock in fiscal 2014, and is worth noting, our average purchase price for that stock buyback was $11.49. Our strong financial position was aided by our $94.8 million of operating cash flow in the quarter, and $168.6 million of operating cash flow in the year, both records. In addition, despite the significant increase in sales, we kept our inventory levels nearly flat at $77.8 million, thus, generating a significant benefit from increased inventory turns in the year. For the year, our CapEx was $29.5 million, about $10 million less than we had projected. In fiscal 2017, we expect to spend approximately $50 million in CapEx, that amount includes approximately $30 million in maintenance CapEx, plus investments in our base capacity, tooling for new products and ongoing SAP expense. Also included was the $10 million carryover from fiscal 2016. James?

Thanks Jeff. We believe that adjusted NICS result provide a good indicator of consumer retail activity. For our fourth quarter, adjusted NICS grew by more than 12% over last year, supporting our belief in the long term growth prospects for the Firearms market. Breaking down adjusted NICS in Q4, and handguns, which made up about 81% of our total firearm unit shift, NICS check increased 19.9%, while our units shipped into the consumer channel grew by 25.4%, largely driven by increased shipments of our M&P shield. And long gun, which made up about 19% of our total firearm shift, NICS check increased 2.2%, while our units shipped into the consumer channel grew by 41.9%. These are strong results, especially, when we consider that the channel inventory of our products at wholesale remain sequentially flat from the end of Q3 to the end of Q4. At the close of Q4, upsales [ph] or weeks of sales in the channel, remained below our eight week threshold. We would expect the weeks of sales number to rise over the summer, in keeping with typical seasonality and distributor inventory buildup for the busy fall and winter shopping season. With virtually all product categories experiencing strong demand, we captured incremental sales and market share by leveraging our flexible manufacturing model. That model, combined with strong order flow, allowed us to better match our production with those products most in demand. You will recall, that last quarter, I said that we were leveraging this model to allow us to increase capacity to certain high demand or market leading products, such as our M&P shield. We did that, without investing in expensive assets or increasing the size of our manufacturing footprint. These assets were successful, as evidenced by our Q4 results. Turning to new products, during the quarter, we developed a number of new product introductions, which were launched at the NRA show in May. Among those, was our M&P 45 shield pistol, designed for personal protection, and which is an important caliber expansion for our popular M&P polymer pistol family, that has also been much requested and anticipated by many of our customers and consumers. Turning now to the MHS program; there have been no significant updates since we spoke with you last quarter. Together with our partner General Dynamics, we stand ready to respond to the army's next phase of the competition. As we said before, we expect this to be a very lengthy process, with the final award expected to occur in those sooner than calendar 2017. Next, I want to share with you, some recent progress towards our vision for the company's strategic evolution. Smith & Wesson was comprised of two divisions in fiscal 2016, the Firearms division and the Accessories division. Our multidivisional structure has since been expanded, following the recent creation of the manufacturing services division, which provides services to both internal and external customers. The external customers are important to us, since they help us to fully utilize our capacity across multiple different processes, and therefore increased absorption and support expansion of our gross margins. With that, I am pleased to say that Mark Smith, who has been with Smith & Wesson for six years now, and who has served as our Vice President of Manufacturing and Supply Chain, was promoted to President of our Manufacturing Services Division in our fourth quarter. In addition, we appointed Matt Buckingham as President of the Firearms Division. Matt joined Smith & Wesson from Brownells Inc., an industry leader and global provider of firearms parts and accessories. Matt served as President and Chief Operating Officer for Brownells, a role in which he oversaw the development of the company's strategic direction, and the execution of its day-to-day operations. With this expanded management team, we are very well positioned to explore new opportunities, both organic and inorganic in the shooting, hunting, and rugged outdoor markets. Our inorganic strategy is allowing us to expand our consumer base, and we continue to explore categories in the rugged outdoor market, that would serve to significantly expand our overall addressable market. As we explore those opportunities, we will be extremely selective, employing very strict criteria for the return on our investment. Our successful acquisitions to-date have yielded important experience and insights, and we intend to build upon our record of execution and creating long term value for our shareholders. With that, I will now ask Jeff to provide our financial outlook.

Thanks James. So as we look ahead to fiscal 2017, we see many organic and inorganic growth opportunities. These include, continued product innovation across our Firearms and Accessories divisions, as well as targeted high margin and earnings accretive acquisition opportunities. In reviewing our guidance for fiscal 2017, it should be noted that we plan our business outlook and set our growth parameters, based on our strategic direction, exclusive of any political or election cycle influence, that resides outside of our control. Thus, as we provide guidance, please make note of what is and what is not included in that guidance. First, our guidance, takes into account our expectations for firearms growth. Given that the heightened firearms demand we saw in fiscal 2016, may make comps in fiscal 2017 a bit more challenging. But also taking into account, the fact, that we expect to introduce several new products. Second, our guidance assumes solid growth in our Accessories business, which has delivered a long history of double digit compounded growth. Third, our guidance does not take into account, any potential consumer spike in firearms demand, driven by [indiscernible] firearms regulation. And fourth, our guidance does not take into account, any acquisitions we may pursue as plan of our planned inorganic growth strategy. So based on that, we expect revenue for full year fiscal 2017 to be between $740 million and $760 million, with EPS of between $1.71 and $1.81 and non-GAAP EPS of between $1.83 and $1.93. And for the first quarter of fiscal 2017, we expect revenue to be between $190 million and $200 million, with an EPS of between $0.46 and $0.50 and non-GAAP EPS of between $0.49 and $0.53. This guidance is based on an estimated fully diluted share count of 57 million shares, and expected tax rate of 36%. James?

Thank you, Jeff. I want to thank the entire Smith & Wesson team for delivering a year of very strong results. With that, operator, please open up the call for questions from our analysts.

[Operator Instructions]. Our first question comes from the line of Brian Ruttenbur with BB&T. Your line is now open.

Yes. Thank you very much. Couple of quick questions, can you talk a little bit about the mix in your guidance on that $740 million to $760 million or versus Accessories, you talk about rapid growth there. Can you give us some kind of estimate, is that double digit growth, is that 20% plus, give us a ballpark on that?

Actually, we haven't specified the actual percentage of Accessories on growth. I did say that we expect to see the continued strong growth, and that it has had double digits on growth. Probably for the last 15 years, as an independent [indiscernible] company, including when it joins Smith & Wesson.

So the growth that Accessories had in 2016, because it was a subyear -- 2016 versus fiscal 2015, can you give us what it actually was --?

It was actually about 20% on a pro forma basis.

Okay. And then, on CapEx, just to understand that, it's up $20 million, can you go over what your spending had been historically, what you have been spending at least last year; the additional $20 million, is that -- is anything involving, expanding your capacity to manufacture firearms, or what is the additional $20 million for, on a year-over-year basis?

Well each year it's different, and last year, we planned on spending $40 million. So some of that rolled over and some of that is maintenance on CapEx, there was just a deferred -- other parts of that do include the building, the base, the capacity. I think as James has mentioned in the past, we do have an outsourcing strategy, but as the outsourcing gets to be a large number, we claw back on some of that outsourcing by building base capacity, which then leaves more of the overall outsourcing at the top in essence. But it also includes SAP, as we integrate our various divisions, and as we talked about in the past, on both programs, as we get more from sophisticating our use of SAP in all the related programs.

Okay. And no physical plant expansion, correct?

No.

Sorry Brian, say again?

Are you going to physically expand your plant? I don't believe so, I just want to clarify?

You mean build a new building?

That is correct.

No plans.

No plans. Great. And then last question and I will hop off here is; in terms of your guidance, just trying to understand, military style rifles is still the preponderance of your long guns, and that was, I believe, 19% of your total revenue. In your guidance, do you anticipate, that part of the business continue to grow rapidly?

You are referring to modern sporting rifles, yes Brian -- and yes, they are a component of the long gun category, as we explained in our prepared remarks, they were 19% of total units shipped. That's everything, both action rifles, single shot, muzzleloader. So as you think forward how we are looking to grow the Firearms division, is really two pronged to that growth strategy; the first is obviously continuing to focus on handguns, personal protection such as the M&P shield, which remains the number one selling handgun in the U.S. today, and then in terms of long gun, it is about long guns for hunting, so this bolt action rifle we just recently launched, the Compass, which is a fantastic bolt action rifle, multiple calibers at an opening price point, we know that's going to be very popular, just can tell already from the way it has been received. So that's strategically how we are looking to grow the Firearms division. Modern sporting rifles, a fact that you know, we are already the market leader. We have a very strong presence there. We respect the volatility that we have experienced from time-to-time in that product category, and that's one of the reasons the vast majority of the components required to assemble on modern sporting rifle, both Smith & Wesson's and our M&P 15 family, is outsourced. Okay? So we utilize very-very little of our base capacity, to manufacture our modern sporting rifle, and therefore, we don't have to worry about unfavorable absorption, as we see some of the swings up and down in terms of the demand for that product. But we are a market leader, and we intend to be a market leader.

Okay. Thank you very much.

Our next question comes from the line of Cai von Rumohr with Cowen and Company. Your line is now open.

Yes. Thank you very much and great performance again. So if we look at your guidance -- so what are you assuming in terms of what the total gross margin might be, and then Army be some color on the op expenses?

We didn't really give any color on gross margin or op expenses. In general, we expect op expenses to rise a bit, as we continue to add infrastructure into our business. We talked about in the past, that we are focused on building a structure that allows for inorganic acquisitions, so got to spend a little bit of money in preparation and floor deck. I would say that, in general, our gross margins are solidly in our range of 37% to 41% each quarter, and we certainly expect to be above our EBITDA target of 20%.

So if I just follow-up to I guess Brian's question, it was in fact, you know, we should expect Battenfeld and Accessories to grow in excess of the corporate average, which essentially looks reasonable to any of the midpoint of the investment, and given that they have above average gross margins. Is it fair -- when I kind of do the math, it looks like, you can get there with gross margin of the total company, flat to up op expense, flat to down, and you know, because net interest is down. That's how you get there. So no major swings in terms of growth --?

Yeah. I don't think there is going to be any major swings, but I think op expense is going to be flat to up, not down, op expense.

No no, but as a percent of sales, roughly comparable?

Right. I think.

Okay. And then, I am a little confused, you say you don't assume a surge, but I think the issue really has been the reverse that we have been in a surge, clearly looking at kind of the extent of the vigor, and that we may be in a de-surge. Are you allowing for a de-surge so to speak?

Cai, I mean, we are talking about -- you are really talking about Q4, if you were to call our surge, and again, we have chosen not to define that period of the surge. I mean, definitely it was a period of heightened demand, but I think there were some very different dynamics of play, and you could see normal seasonality of play as well, as you think about the tail end of our third quarter and our fourth quarter. As you think about our guidance going forward for this fiscal year, I guess, just like a little bit of clarity about what your question really is, I mean, you are saying, we are in a surge, because you know something I don't?

Well the third -- certainly year-over-year compares more in the third than the fourth. Certainly the third was one would have called a surge; and so, when you say no surge, I mean, are we -- does this anticipate kind of a fall-off from the third quarter level; because the fourth quarter was strong more from a pipeline fillings, but I guess, that's the question?

I mean again, we don't give that level of granularity, so it's difficult for me to answer with anything that would be valuable to you.

I will go back over to what I said at the end of the script. We took fiscal 2016, for what it was. We have done -- we always do extensive work on analyzing what we think is going to happen in the future, on mix and talk to our customers and our product introductions; and we take all that and me make assumptions about what's going to happen in the year. We don't make assumptions about things out of our control. If I accepted your premise that there was a surge, and now we are in a de-surge, then I would have taken that into account, because that's something we know. That if there's going to be a surge in the future, we don't know that, and we don't take that into account.

Got it. Okay. That's very helpful. And then in terms of -- now that you kind of have all of this excess cash, do you have any sense about how much cash are you comfortable having around? Are you a little more interested in repurchasing your stock, which has come down here; how do you think about M&A and do you have fairly robust pipelines at this point?

As we said in the past, the first thing we like to do with our cash is invest in ourselves, and we put $50 million in CapEx this year. But of course, in fiscal 2017, we will generate a lot more cash, based on the guidance. So the first thing, other than investing in, internal -- ourselves internally, we said, I think and tried to convey in the script, that we do have an inorganic strategy, and we are looking at many things in a disciplined approach, that has to meet our IRR guidelines. And we would prefer to spend our cash on those items, so organic and inorganic growth. And again, if we get to a point, where we believe we have excess available cash, or alternatively, investing in our stock is a better return than investing in an outside company, then we would consider doing that. So it's always a mix between what's Wall Street doing, what's our stock doing, what's happening with organic growth initiatives, and what's happening on inorganic growth initiatives. Take all that, and we analyze it on a constant basis.

Okay. And the last one, the military handgun competition, you said, possible decision not until 2017. Refresh my memory in terms of -- at this point, how large is the thought that the buy might be?

It is up to 500,000 units over a period of year, which I believe remembering, is seven years.

Got it. Okay. Excellent. Thank you very much.

Thanks Cai.

Our next question comes from the line of Scott Stember with C.L. King. Your line is now open.

Good evening.

Hi Scott.

Just want to piggyback on the topic of guidance again; the NICS data has shown, in the last couple of months, at least in the month of May, a deceleration. And again, just not to harp on this too much, but just, when you give your guidance for the full year in the first quarter, obviously, you are looking for a near 70% increase in the first quarter, so that would assume, in the back half of the year, that things would get a little bit more difficult. Are you factoring just the current trends that we are seeing with NICS right now, excluding any surges or de-surging, whatsoever, or this is just to be viewed as the usual conservative, initial guidance that you guys usually put out, at the beginning of the year?

Well we don't give color on whether or not our guidance is conservative or not. Scott, the only thing I can say is that, you take into account, yes, that the comps may be tough in Q3 and Q4 of next year. But on the other hand, we have a lot of new product introductions upcoming. And we have talked about with Cai, and we do expect some solid growth in our Accessories business. So I am not sure, what more I can say, other than -- quarter four is usually a higher quarter than Q2 and Q3. I don't think it has ever not been a higher quarter than Q2 or Q3.

Got you. And just talk about the Accessories; a lot of talk about, obviously at retail across the board; I believe in some of your customers, that might sell some of your Accessories of slow traffic, and yet you guys are still putting up these plus 20% comp numbers, which is very impressive. Could you just maybe speak to that? Is it just new product introductions or is it just the quality of the product and how it sits in the marketplace?

I mean, it’s a whole combination of things. I mean, you got to go back and look at the family of brands that exists in the Accessories division, they are all very-very strong. We have just integrated the Thompson Center Accessories business into the division. So it's now fully their responsibility under their leadership. So I know they will be doing good things with the TC business. Launched a lot of new products under the Firearms brand, that they now have access to, Smith & Wesson, M&P, and again, TC. So that has been very successful, although these introductions took place at SHOT Show. So it's going to be a hybrid of leveraging existing products, the new product introductions, the value that's in the brand, continue to raise awareness of those brands with the consumer. The little tuck-in acquisitions will pay back very favorably to the performance of the Accessories division, so we are very early in stages of the [indiscernible] business that we acquired shortly after acquiring Battenfeld, and of course, we just acquired the flashlight business, PowerTech as well, so that tuck-in has gone very well. All of those have great returns, as you would expect. And of course, as Jeff said, we are always looking ahead to see, what's in the pipeline for M&A, that has good potential to add value for our shareholders.

Okay. Just two quick last questions, just on the other line; last couple of quarters, that has been down, I think 14% and then 4% sequentially, and here we are in the fourth quarter, we are up 8% and that's despite the fact that you shipped some of the -- was there a shift of some sort of Accessories from there? And maybe just talk about the strength there, because I know that, there has been some weakness in the last couple of quarters?

Yes. I mean, the Thompson Accessories business was shifted. So the comparison against last year -- last year in Q4 of 2015 would not have had Thompson sales. Thompson Accessories would have been in other and now Thompson Accessories is in Accessories. But the other also includes the manufacturing and services revenue, that James had mentioned, where we formed a manufacturing service division, that services both internal and external customers. So we have several processes that we sell externally, including the polymer business and forging, plating a variety of stuff. And as James said, we do that, to keep utilization high and absorption has maxed out, if at all, that' possible.

Okay. Just a last question; you gave the gross margin for the Accessories business for the question, I think it was 38.5%, what was the comparable number last year in the fourth quarter?

I don't think we said it was 45.8% this year, and I think it was just a little over 50% in the comparable quarter.

Oh okay, got you. My mistake. That's all I have. Thanks for taking my questions.

Thanks Scott.

Our next question comes from the line of Chris Krueger with Lake Street Capital. Your line is now open.

Good afternoon. Great quarter.

Thanks Chris.

Just a couple of quick questions; I think you stated that your channel weeks of sales inventory is currently still tracking below your eight week threshold? Can you remind us, two years ago, when that big surge kind of started to settle down, how high did that get at that time?

We never described it that way, I thought we said that, whenever we are above, we say we are above, and if we are below, we say we are below. We may give some color on how close we are. But it's expected that we will build inventory during the summer, normal seasonality is in play, you can see that in the NICS. So far, you know, talking about the calendar year today, NICS profile, very much tracking to what you'd expect the normal seasonality, we will see what happens next, but that's where we are. Our expectation is hopefully, that we can build some inventory internally and externally with our distribution partners as well, so we can better serve retailers, as we go into that busier, fall hunting and then holiday giftgiving season as well. Where as you always know, we are historically very busy. And then as you roll into the new year, the calendar year, we are in show season again, show for new product launches, and then most importantly, the wholesaler shows, where a lot of orders are taken from independent retailers and a lot of those for immediate share. So it would be nice to build some inventory, there may be challenges there. We will see what happens.

Okay. Then on the pricing of your products, has that been pretty steady this year? Is there competition on --

Absolutely, as you know, very strategic about our pricing. Dialing back many years, earlier in my tenure, we did a strategic price repositioning, which is very successful a company, allowed us to scale the business significantly. So we will do nothing to undo that. We are not opportunistic when it comes to pricing. For us, it’s a long term strategic view, what we do is pricing. We take lots of data inputs, obviously a very important one is, what is the competitive set doing, and equally important is, what is the consumer willing to pay.

All right. That's all I got. Thank you.

Thanks Chris.

Our next question comes from the line of James Hardiman with Wedbush. Your line is now open.

Good afternoon and thanks for taking my call. Couple of questions for me, I guess first; just help me understand the nature of the week [ph] in the fourth quarter. On your third quarter call, there seemed to be some reservations or some concerns that the guidance given was close to the upper limit of what you'd be able to do, just given limitations from a factory inventory perspective, and yet you were able to beat your guide by $0.13 at the high end of the guidance. How are you able to do that, just given what it seems like you expected to be, some limitations in 4Q?

It all comes down to really what we described in the prepared remarks, James. We are talking about leveraging a very flexible manufacturing model, and the key part of that, which really helped us in the quarter, was the outsourcing capacity that was available to us, and we were really able to take advantage of that. We also fine tuned it, to make sure that our mix was better matching the demand from the consumer. So operations team did a great job there. Very pleased with the results that we got.

Got it. And then, with respect to the guidance, I think you have generally answered this question, but just so that we are clear, obviously over the weekend situation in Orlando, the world changed to a degree; was this guidance already in place, prior to that situation, or is it something that evolves, as you have seen trends play out in the last four or five days?

Basically, this guidance does not take into account any surge -- any potential spike in consumer demand, as a result of any event. Basically, all we can do as a business, is focus on the things we know, and delivering our -- and execute our strategy. So with regard to what happened, any impact on demand is unknown, and therefore is not included in our guidance.

And just so we are clear then, then obviously, you are not predicting any future surge, but presumably, you have a general understanding over the last week or so of demand, but what you are saying is, none of even that, none of the current trends or recent past trends are currently factored into your guidance?

So it has only been a couple of days. So it’s a little hard to tell, what any long term impact on demand is by two or three days of activity.

Okay. That's completely fair. And then, as I think about your guidance from a top line perspective, I think its 3% to 5% growth on the top line; maybe to ask a surge or de-surge question in a slightly different way; it seems like you're pretty confident that you are going to be gaining share. It's not clear to me, if you see an opportunity to just build channel inventories over the course of the year. But maybe sort of, to any degree possible, parse that out and ultimately do you think the industry grows at all this year, or do you think the entirety of your top line growth is a function of sort of internal initiatives?

Again -- this is James, we just can't go into that much detail, that's way too granular for us; as you know, we believe in the long term growth prospects of the market overall, and that's one of our major assumptions. Jeff has gone through in detail what he is basing guidance on. So I think you just need to look at those prepared remarks, and they will give you the -- our assumptions that we have based our guidance on. Of course, when it comes to taking market share, you will hear me say that like a broken record. That is our primary objective across the whole business, all divisions, is to take market share from the competition, and that's exactly what we have done year-on-year-on-year and demonstrated very strongly. That's very important to us, as we move forward.

Let me ask you this way then, is it safe to say that from a channel perspective, that your shipments into the channel are going to be greater than your shipments -- the sell-through out of the channels, just given the fact that it seems like you're still a little bit short of where you'd like to be, in terms of channel inventories?

James, I will have to stop you there -- you can ask it as many different ways that you want to ask it, but we will give you the same answer, and we will just give you the same pushback.

Got it. I had to try. Thanks guys.

Thank you.

Our next question comes from the line of Rommel Dionisio with Wunderlich Securities. Your line is now open.

Thanks. Good afternoon. A couple of questions about the new product launch, just for the ratio, the M&P shield 45; also a significant addition to your best single line; so three quick questions, first, do you have a rough guesstimate as to what percentage of this compact slim category as a whole 45s constitute? I just don't know if it’s 20% or 30% or 2%? Second, I notice you didn't bring an imported model, but seems with the recall of 45, it seems like it would be logical; is there a reason why that wouldn't work, or just any particular reason why it didn't? And lastly, I know that you sell the M&P 940 in California, this being a new caliber, does that actually get grandfathered in because it’s the same design, or does that constitute an entirely new pistol, in which case, if you don't [indiscernible] but you can't bring it to California. Thank you.

Okay. Let me start first with California; no, it's not going to get grandfathered in, sadly. The requirements on microstamping totally prohibits any additional semi-automatic pistols going on to the roster and that will becoming available for sale to the consumer. In regards to our ported version, I can't comment. I mean, that's getting into our new product pipeline. So again, as you know, we give very little visibility for that. And then, back to your first part, the breakdown between 940 and 945, all I will say is, which is very well known is, by far, 9 millimeter is the most popular round, by far 945 though, does have a following, it is popular. You do have a number of consumers, we are trying to get this anecdotal information; they own both the 9 and the 40 and they are out there strongly saying, well now I guess, I could buy the 45 as well. As you know, from research, people don't stop buying one firearm. They will buy multiple firearms. There is a collector mentality out there, and it appears there is a collector mentality, when it comes to owning all the different shields that are available on the market. The ported version, just a little bit more color on that, for the 9, it has been very popular. Extremely popular and very well received. So overall, with the SHIELD family, as you know, incredibly important to us. We look after it very closely. We are always looking to refresh, where it's needed. So you keep the consumer excited about the SHIELD family, and we will continue to do that, and I will say that, there are obviously products in our new product pipeline, as we look out over the next 36 months, that relates to the SHIELD.

Great. Thanks a lot James. Congrats on the quarter.

Thanks Rommel. Take care.

[Operator Instructions]. Our next question comes from the line of Steven Dyer with Craig-Hallum. Your line is now open.

Thanks. Good afternoon guys.

Hi Steve.

Most of mine at this point have been answered. I guess, maybe just one more question on the channel, fill or refill, I had expected, I guess, just given a slowing in mix, maybe, channel inventory to get back a little bit higher this quarter. Have you guys ever said, what you sort of view as an optimal number in the channel or an optimal level? I am trying to gauge, I guess, is that a one quarter phenomenon, two quarter phenomenon, what's sort of involved in refilling that to a satisfactory level?

No. we have never said what a level would be, in terms of units, because we don't have one. This all relates to what we have in the channel, in inventory, with our distribution partners, and velocity of sell-through, and that's why we talked about it in weeks to cover, that's the most important thing. So that's where we monitor very closely, that's what we think about, when we are planning the year, and what inventory levels that we actually need, as we go into that busy full hunting holiday season.

Got it. Okay. Makes sense, and then as it relates to competition, you guys continue to gain share; particularly recently, I mean do you feel like is it just -- this is just better product, more product, are you taking advantage of some capacity pinches elsewhere in the industry? Any color there would be helpful?

For us, it’s a strong combination of brand and product. We have an iconic brand, as you know, have up and coming brands with a very strong name, M&P. We have very strong product names that are out there as well. There is a high level of trust with the consumer in our brands and our products across both divisions, Firearms and Accessories; and as I said earlier, there is a very strong family of brands in our Accessories division as well. So that trust is extremely important to us, that's what creates a lot of value for our shareholders, and then combine that with our strong new product development processes that we have. We have demonstrated across all three divisions as well. Puts us in a formidable position, certainly I feel puts us in a driving seat, and you have seen some of the new products that have come out recently. Over a 100 product introductions by the Accessories division. The major product introductions in the Firearms divisions, such as the M&P 45 shield, the Thompson Center compass bolt action rifle, Victory 22 caliber target shooting pistol. We are attacking the competition in product categories that we haven't really had a presence before with a quality product. Well, now we are here, with quality product. So again, it comes back to what I said earlier, our primary goal is taking market share, whether the market is flat, soft, growing, whatever, we are going to take market share.

Got it. And then lastly, as it relates to the acquisition pipeline, I think you've often talked about bolt-ons and things like that; what's your appetite for doing something larger, if it presented itself? You obviously have plenty of liquidity and cash flow and everything else, how do you think about sort of the size of things you're looking at?

Yes, absolutely. We have openly said we will explore larger acquisitions. Tuck-ins are great, but we have also said that we would like to acquire larger businesses that are a fit with us, obviously meet our financial criteria if they are a fit, in terms of the spaces that we want to explore, such as the rugged outdoors. The larger businesses that we could add in product categories that we currently do not service, that can become their own standalone division, and so we have an appetite for that.

Great. Thanks very much.

Thanks Steve.

I am showing no further questions in queue at this time. I'd like to turn the call back to Mr. Debney for closing remarks.

Thank you, operator, and thank you everyone for joining us on the call today. We look forward to speaking with you next quarter. Take care everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.