Smith & Wesson Brands Inc (SWBI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth-quarter and full fiscal 2008 Smith & Wesson Holdings Corporation earnings conference call. My name is Marcia, and I will be your coordinator for today's call. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, the conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Liz Sharp, Vice President of Investor Relations. You may proceed, ma'am.

Thank you and good afternoon. Before we begin the formal part of our presentation, let me tell you that what we're about to say as well as any questions we may answer could contain predictions, estimates, and other forward-looking statements. Our use of words like project, estimate, forecast, and other similar expressions is intended to identify those forward-looking statements.

Any forward-looking statements that we might make, represent our current judgment on what the future holds. As such those statements are subject to a variety of risks and uncertainties. Important risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings including our forms F-3, 10-Q, and 10-Q. I encourage you to review those documents.

A replay of there call can be found on our website later today at www.Smith-Wesson.com. This conference contains time-sensitive information that is accurate only as of the time hereof. If any portion this presentation is rebroadcast, retransmitted, or redistributed at a later date, we will not be reviewing or updating material content herein. Our actual results could differ materially from these statements.

Our speakers on today's call are Mike Golden, President and CEO, and John Kelly, Chief Financial Officer. With that I'll turn the call over to Mike.

Thank you, Liz. And thanks, everyone, for joining us. Let me give you the agenda for today's call. First, John will review our financial results.

Then I will share my thoughts with you regarding our performance for the quarter as well as our strategy and outlook for the future. After that, we will open up the call for questions from our analysts. Go ahead, John.

Thanks, Mike. Bills for the year ended April 30th, 2008 were $293.9 million, a 59.1 million or 25.2% increase over sales of $234.8 million for the year ended April 30, 2007. Firearms sales increased by $53 million, or 23.9%, over the previous year. Net income for the year ended April 30, 2008, was 9.1 million or $0.22 per diluted share compared with $13 million $0.31 per diluted share for the year ended April 30, '07.

The increase in firearms sales in fiscal 2008 was primarily attributable to the full-year impact of Thompson/Center Arms, which was acquired in January 2007 and accounted for $46.6 million of the $53 million sales increase. Revolvers grew at rate of 9.6% year over year. Sales of our M&P tactical rifle increased by 30.5% over the previous year. Pistol sales declined $8.5 million or 10.9%. It should be noted, however, that pistol sales in fiscal 2007 included $8.7 million shipped to the Afghanistan national police and $6.2 million to the California Highway Patrol.

Excluding those two sizable contracts, pistol sales were up 10.1% year over year. Walther product sales grew by $3.8 million or 16.4%, benefiting from continued strong growth of the P-22 pistol, as well as the introduction of two new pistols. Gross profit for the year ended April 30, 2008, increased by approximately $16 million over the previous year.

On a quarterly basis, gross margin of 30.6% for the fourth quarter of fiscal 2008, showed dramatic sequential improvement over gross margin of 25% for the third quarter of fiscal 2008. Gross margin as a percentage of sales and licensing was 31.2% for fiscal 2008 compared with 32.3% for fiscal 2007.

Gross margin was adversely impacted by approximately $8.9 million in promotional costs and $2.6 million in unabsorbed fixed costs relative to plant shutdowns: A three-week shutdown at our Springfield facility in the third quarter and a one-week shutdown at our Rochester facility during the fourth quarter. Historically we have always scheduled a one-week holiday shutdown in Springfield during the third quarter. This year that shutdown was expanded by two additional weeks to reduce inventories.

Cost of goods sold for year ended April 30, 2007, included $2.7 million in increased costs, relative to the effects of purchase accounting on top of inventory. Operating expenses for the year were $68.2 million, $16.3 million higher than fiscal 2007. Approximately $13 million of the increase is attributable to the full-year of Thompson operating expenses.

As a percentage of sales and licensing, operating expenses were 23.1% compared with 21.9% in fiscal 2007. Operating expenses also included $4.1 million in amortization of acquisition-related intangibles compared with $1.6 million in fiscal 2007. Capital expenditures for fiscal 2008 totaled $14 million, approximately $1.7 million lower than the capital expenditures for fiscal 2007.

The majority of capital expenditures were related to new product introductions, expansion of our pistol capacity, and process improvements. Free cash outflow for the year was $7.9 million. Cash flow was adversely affected by higher inventory levels.

Inventories peaked at $56.5 million in November 2007, and ended the year at $47.2 million, $15.1million higher than inventories at April 30, 2007. On a positive note, during the fourth quarter, spending decreases and inventory management drove significant improvement in the balance sheet.

Short-term borrowings were reduced by $12.1 million in the fourth quarter to $7 million. We reduced inventory by $4.3 million, even though our year-end inventory included two large international orders which are awaiting shipment. Reducing inventories will remain a focus for us in fiscal 2009.

Free cash flow was a positive $13.1 million for the fourth quarter of fiscal 2008 compared with $565,000 in the fourth quarter of fiscal 2007. In May we completed a registered direct offering of 6.25 million shares of common stock which yielded net proceeds of $31.9 million and allowed us to repay the $28 million bank loan that financed a portion of the Thompson/Center acquisition. In conjunction with this repayment, we have retired the $70 million acquisition line of credit.

Covenants within the convertible debt agreement limit debt, including open lines of credit, to three times trailing 12 month EBITDA. Retirement of this line of credit gives us more options in financing future acquisitions. We expect to incur $485,000 non-cash charge in the first quarter of fiscal 2009 for unamortized debt acquisition costs as a result of our decision to terminate the acquisition line of credit.

The combination of strong fourth-quarter cash flow and the equity offering provides us with a strengthened balance sheet as we enter fiscal 2009. In fiscal 2007 and 2008, we issued restricted stock units to our officers. The RSU's vest evenly over a three-year period. As they vest, the delivery of one-third of these units each year creates a taxable event for the recipient, and the appropriate income and payroll taxes are due at that time. For that reason, as they did last year, most of our officers have filed 10-b-51 sales plans to sell a portion of the shares they will receive later this month to cover the taxes due. Although less than 100,000 shares, we want investors to be aware of this event when the relevant form 4s are filed later in the month.

That concludes my financial discussion. I'll now turn the call back over to Mike.

Thanks, John. When I spoke to you last year at this time, I laid out several objectives that we intended to deliver on in fiscal 2008. Those were: growth in our core firearms business, growth in new markets with a focus on professional products, regular visits to Washington to heighten awareness of our capabilities and a focus on profitable growth with each initiative.

Despite the exceptionally tough challenges in both the general economy and the firearms industry, particularly during the second half of fiscal 2008, we were able to deliver partially or entirely on each of these commitments. I want to first talk to you about the current environment and how we have addressed and will continue to address the challenges there. Then I will recap our fiscal 2008 highlights and accomplishments in detail. And lastly, I will address our strategy for diversification and growth, a strategy that has remained intact despite the challenging environment that we've been facing.

As you all know, the domestic consumer firearms market experienced a decline in demand during our third fiscal quarter, due to lower retail traffic driven by a variety of weak economic factors that caused a general slowdown of consumer spending across many industries and products. Additionally, unseasonably warm autumn weather throughout most of the United States also adversely affected retail traffic in the sporting goods channel. At the same time, significant purchases by distributors and retailers, which had occurred earlier in the year across the industry in anticipation of a strong hunting season, created unexpected high inventory levels in the channel and limited the ability of distributors and retailers to purchase additional products. We have taken many actions to address this situation.

Let me give you an update. Many of you have heard me explain our use of the NICS data. For those of you new to our story, NICS data, which is generated by the FBI, gives us the number of federal background checks that are conducted each month and reflect general trends in consumer purchases. This is only one of the many tools we use at Smith & Wesson to access the health of the retail market and changes in our own market share. Very importantly we also gather feedback from our contributors and large retailers on their sales.

So let me tell you where things stand now. In short we continue to see encouraging signs. And as our release mentioned, we believe that the handgun inventories appear to be back to normal. However, long gun industries in the channel have not yet cleared.

NICS data for the first five months of calendar 2008 is very encouraging. The numbers have been improving. In fact, the most recent data indicates that NICS background checks for the month of May increased nearly 9% over checks done in May of 2007. That's encouraging news, especially when coupled with feedback from our distributors on their Smith & Wesson sales to dealers and POS feedback that indicate we continue to take market share. I'm pleased to say that in this difficult but seemingly rebounding market, Smith & Wesson handguns grew 12% in the sporting good channel in the fourth fiscal quarter. NICS data does not differentiate between handguns and long guns.

So it is important to realize while this is an encouraging trend, it is not an indication that everything in the industry is back on track just yet. We know from discussions with many of our distributors that there is still long gun inventory in the channel from various manufacturers, including Smith & Wesson, which must be cleared out. We also cannot know entirely which competitors may still have large supplies of inventory on hand. As a result, we will begin to scale back some of the promotional programs we launched over the past several months. We will continue to assess how inventories in this channel are moving, and we will adjust our marketing programs accordingly.

Now I'd like to turn my discussion toward the important progress we made on our strategy during fiscal 2008. Because it is our consistent focus on that long-term strategy that will help us build a company that can successfully navigate short-term changes in our environment. Our strategy is to grow our core handgun business while diversifying into new markets of safety, security, protection, and sport, where the Smith & Wesson brand can fuel growth.

We grew our core business in fiscal 2008 by introducing a large number of new products and product line extensions, including the addition of a compact and a mid-size version of our M&P .45 polymer pistol as well as extensions to our M&P 15 tactical rifle. The entire M&P product line has been a tremendous success. These products were designed to cross multiple markets including military, law enforcement, and consumer, and they're hitting their mark in a big way.

Let me give you some facts. Since we launched our first M&P polymer pistol in January 2006, a .40 caliber version, we have continued to expand the product line. Today it includes four calibers in both full size and compact, and an entire series of M&P tactical rifles and M&P revolvers. The portfolio continues to grow and the traction we are getting in both the consumer and the law enforcement market is very strong.

So far, the M&P pistol has been chosen by 348 law enforcement and security agencies. That continues to translate to a win rate of over 80% of all the law enforcement contests in which it has competed.

The tactical rifle is delivering equally impressive numbers, winning 160 law enforcement and security agencies or over 90% of all the law enforcement contests that it enters. With 800,000 officers and about 18,000 agencies nationwide and 150,000 federal agents, the law enforcement channel continues to provide a significant opportunity for us to diversify by growing in the professional market and non-consumer channels.

In fiscal 2008, we also launched a classic version of our popular Thompson/Center, Icon bolt-action rifle and added new calibers for this product line. While the long gun market has been challenging to say the least, the Icon has been very well received. We continue to get accolades on the Icon, so we are particularly excited to think about what this new product, under the strength of the highly regarded Thompson/Center brand, will accomplish as the market for hunting rifles strengthens.

Innovation is an important legacy at Smith & Wesson and Thompson/Center Arms. And that innovation was highlighted in fiscal 2008 by our winning a number of industry awards. We received the NRA Glden Bullseye Award for three of our products.

Our Thompson/Center Icon Bolt-Action Rifle was named rifle of the year. Our Smith & Wesson Elite Gold Shotgun was named shotgun of the year. And our M&P .45 polymer pistol was named handgun of the year. While we are proud to claim these accomplishments as a reflection of our employees' craftsmanship and skill, we are also excited about the exposure these awards generate for Smith & Wesson and Thompson/Center brands and products. For a company that for over 100 years primarily made revolvers, the awards for rifles, shotguns, and pistols reflects significant product diversification.

We achieved many synergies in fiscal 2008 as a result of our acquisition of Thompson/Center Arms. There are a host of services that each company was outsourcing independently that have now moved inside our combined organization.

Our Springfield factory now produces several components for the Thompson/Center Icon Rifle. One of the most high-impact synergies we've obtained is our ability to eliminate an outside vendor for the Icon rifle receivers and manufacture that product completely in house. We just began to realize the resulting savings at the end of fiscal 2008 and will realize a full year of savings in fiscal 2009.

On the Smith & Wesson side, we've now moved all manufacturing for the M&P tactical rifle barrel into the Thompson/Center Rochester, New Hampshire, facility. Again, a notable savings that we will realize for a full year in fiscal 2009. These are just two examples. But the key message here is that there are multiple synergies, and we expect to develop more in the future.

As promised last year, we maintained a heightened awareness in Washington through fiscal 2008. I personally spend a great deal of time in Washington on a regular basis. And let me say it's time well spent.

Our efforts have helped drive an important change in law that went into effect with the signing of this year's Defense Authorization Bill in January. That change was a provision which for the first time will now require the Department of Defense to allow domestic manufacturers to compete for future small arms contracts it issues for weapons that will ship to the Iraqi and Afghanistan military and police. And while it's true that we have actually won the only four new contracts that the Defense Department has issued in the past few years for handguns, it is reassuring to know that we will have an opportunity to bid on every single new small arms contract for Iraq and Afghanistan. And as history shows, when we have a chance to compete, we do well.

Now let me give you a brief update of where we are with the military, because I know everyone is interested to know where that stands. This is the potential business opportunity that may arise from the military's consideration of switching from their .9-millimeter to a new pistol, likely a .45 caliber.

Let me tell you what we know so far. As I mentioned to you on our last call the Air Force has requested $116.4 million for about 100,000 pistols in a larger caliber on its fiscal year 2009 unfunded requirements list. What this means is that the Air Force recognizes the need for a new handgun and is officially asking Congress for the money to start purchasing new weapons. I am happy to report that positive developments continue in regard to the Air Force handgun program.

In April, the US army program manager for soldier weapons, on behalf of the US Air Force, issued a Sources Sought Announcement for a Modular Handgun System. And of course we responded with our pistol recommendations. The Sources Sought Announcement indicates that the procurement will be conducted in three phases.

They are; a Competitive Down Selection Process; a System Development and Demonstration Phase: and a Full Rate Production Phase. At the recent National Defense Industry Association conference, an Air Force officer announced that the request for proposal for the Modular Handgun System would likely be issued late this calendar year. We look forward to competing to provide the US military with the best pistol in the world, and we are actively encouraging Congress to fund new pistols for our war fighters.

We continue to make progress on the licensing front. Our strategy is to use licensing opportunities to diversify and to introduce our strong Smith & Wesson brand into new markets. We signed a licensing agreement in the fourth quarter with Nationwide Digital, a division of New York Merchants Protective Company. This is a very well-established company, over 100 years old, which provides alarm systems and monitoring services to companies and residences. In fact, this company has installed systems and provides monitoring for many of the municipal buildings in New York City. Nationwide is in the process of developing and will be marketing later this calendar year a line of Smith & Wesson-brand security products and services.

That recaps the fiscal 2008 highlights. And I think you will agree there were many. They clearly indicate that we have delivered at every opportunity on a strategy that we set in place sometime ago, and will fuel our ongoing growth and health of our business. With that, let me turn to fiscal 2009 and our key objectives.

Growth in our core firearms business will remain a key objective as will diversification into new markets where we can use our strong brands as leverage in areas of safety, security, protection, and sport.

First our core business; We intend to continue our tradition of innovation in fiscal 2009. While we focus our efforts on product extensions, we also plan to develop and announce at Shot Show 2009 several exciting, innovative new products under the Smith & Wesson, Thompson/Center and Walther brands. Additions to our core firearm product line will be designed to meet and exceed the demands of our customers in both the consumer and the professional markets.

We'll continue to refine and adapt our long gun product line to best meet the needs of an evolving market. We will closely monitor the inventory situation in the industry. We will watch the competitive landscape and tailor our product line, our product offerings and promotional programs to gain leverage and grow market share with our unique and powerful brands.

Next, our diversification strategy; As we focus in fiscal 2009 on growing our core business and our established consumer and professional markets, we will remain equally focused on identifying profitable opportunities to diversify. Thompson/Center was a successful first acquisition. Beyond the short-term challenges in the current market, it continues to deliver the positive results we expected. Our recent offering and pay-down of debt opens up our options in terms of financing future acquisitions and our activity on that front remains high. Expanding into new non-firearms businesses that tap into our brand strength in safety, security, protect, and sport, will provide us with a strong platform for our future growth and success.

Moreover, and this is an important point, we believe our traction in law enforcement with our M&P products has built a platform upon which we can layer future acquisitions. As a result, we are most interested in those companies with products that address the needs of police officers and professionals in the armed services.

Lastly, our operations; Throughout fiscal 2009, we will seek to maximize productivity improvements, minimize costs, and drive manufacturing efficiencies in every facility, at every opportunity. We have some tremendous synergies in our first full year following our acquisition of Thompson/Center Arms and we believe there are additional benefits to be gained. We will also continue to support our customers with exceptional quality and to support our distributors and dealers with innovative products, effective marketing programs, and some of the best on-time delivery in our industry. This performance clearly separates us in the industry and strengthens our partnership with our distributors and retailers.

In January, we suspended providing financial guidance based upon the uncertain business and economic environment that existed at that time. As we said in our press release today, we continue to see some very encouraging signs. Those include 12% growth in our handgun sales into the sporting goods channel in the fourth quarter, an increase in background checks at the retail level in the past several months, and feedback from our distributors that indicates to us that handguns have cleared the channel and we are continuing to take market share. However, that feedback tells us that there are still long guns, specifically hunting rifles and shotguns, in the channel.

In addition, I think we can all agree that our overall economic environment remains quite uncertain. Therefore, we are not going to resume our guidance at this time. We intend to resume guidance in the future, but we will only do so when there is more clarity in these environments.

In the meantime, we have done a good job of building the strength of our business and preparing for future growth. Today we have a robust product line that crosses multiple channels. And we have a strong balance sheet with lower debt and declining inventories. We will remain focused on maintaining our strength and on executing our strategy to grow in the business of safety, security, protection, and sport.

While fiscal 2008 was not without its challenges, it was also not without its accomplishments. I extend my thanks to each of our employees for maintaining their focus on quality and on our customers through a challenging industry period, and for delivering another year of record revenues in fiscal 2008. I look forward to a prosperous new fiscal year.

With that, I would like to open up the call to questions from our Analysts.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS) Your first question comes from the line of Paul Swinand from Stephens, Inc. You may proceed.

Good afternoon and congratulations on navigating this tough environment.

Thanks, Paul. Good to hear your voice.

First question was is with handguns up 12%, I think that's by my calculations, quick math, is $6 million approximately. Tactical rifles up 30%. I know you're lapping Thompson the acquisition in January last year. Something was backed up. What particularly in the product line was weak?

Basically, Paul, what weigh had of the pistol sales were weak, as we talked about. We had two large orders last year for Afghanistan and California highway patrol. They totaled about $15 million. And that's primarily due to driver -- on the pistol side which was about $8.5 million below last year.

Okay. Maybe I'm misunderstanding then. In the -- in the fourth quarter, though, handguns were up, correct? Is that correct?

Handguns were relatively flat in the fourth quarter.

Okay. Okay. I misunderstood then. Then how -- but was Thompson a net increase in sales in the fourth quarter? Or was it a year over year just for the fourth quarter a negative compare?

Thompson sales were down in the fourth quarter.

Okay. And I've noticed that you -- it seems like at retail you're promoted both tactical rifles, the Sigma, in some case the M&P, even though the retailers that we talked to are saying that those are all selling quite well. Is that just part of the normal cadence now, or -- it seems like why would you be promoting those if they're selling well?

Well, Paul -- this is Mike. We put the promotions in place and the -- back in November, late October, November. That went through the end of April. The fairly strong promotions. We always are promoting product. I mean, on a -- that's just a normal course of our business.

What we have done going to this -- this current fiscal year is -- we are scaling back the promotions from what we had done during the -- the third and fourth -- fourth quarter. But it's a consumer business, and we do promote it.

Okay. Fair -- so it's part of the normal cadence now essentially?

Yes. I mean, we're watching it carefully obviously. And -- we'll adjust it accordingly as we see the way the market goes. But we -- even -- two years ago we were promoting.

Okay. And then -- we talked about on the last conference call the synergies that you're talking about now and Thompson. Just if I was trying to make a quick guesstimate on what the savings could be on barrels, is it -- is it a million dollars that you could save next year? Or -- do you care to comment on that?

We really don't give those kind of details out. It's -- it's on the barrel itself, picture a rifle. On the barrel itself, it was a relatively significant savings. And we -- we think, personally, we think there's a quality improvement coming out of the Thompson/Center.

That was one of the reasons we like the company is their ability to make barrels. But there were a number of different things that we've done between Thompson and Smith & Wesson. You have the two that I talked about, we have the heat treat operation. They had a casting foundry up there. We use the outsource casting, they use to outsource heat treat. We synergized the sales organization.

So, we knew when we were looking at the company that there were a lot of things that we could do by bringing the two organizations together. And there were synergies that both businesses would benefit by.

Okay. I'll just ask one more. On -- on the channel clearing that you're talking about for the long guns, what's the time period?

Obviously the hunting season starts around September. You've got ship-in in August. Can you give us any kind of feeling for the magnitude of how that clearing is going to play out and is that -- is that obviously going to hit gross margin?

That's part of the uncertainty, Paul. It is certainly the economic environment and the retail environment is going to have -- to have an impact on that, as to how quickly would their -- actually sells through. I think our distributors are doing the right thing. They're looking at here's what I got in the back room.

And they're going to look at their -- their upfront purchases more conservatively going into the back half or to the hunting season this year. Because of the uncertainties in the economy. So those two factors would -- would really have an effect on that is how quickly the retail demand comes back as we get into the Fall.

Okay. So it sounds like you're saying it's being handled more through reduced purchases than discount. Is that fair?

It's -- it's a combination of both, Paul. I mean, they're managing their inventories going through. That's why when we talked about Thompson sales being down in the fourth quarter, it's part of that management process. There is discounting going on by some of the competitors which you can see there.

I think as we go forward, we're going to do the same things we've done for the last six months in terms of promotions. And assess what we need to do at the consumer level to pull that product through the channel.

Yes. A couple of specific things, Paul. Because we're -- we're going to focus our sales guys on kind of kickstarting this business here. We're going to have preseason blitz with our sales force to the key retailers to make sure people are trained on our products.

We have -- we have consumer proposals that will be in place. We will have some TV on the -- on the long guns that will be featured on the outdoor networks. And that will include the i-Bolt, the shotguns, and then Thompson product, which has been on TV in the past.

So, we're -- we're going to try to spend our money wisely to, we said all along that we intend to be a -- a major market share player in long guns over time. And -- and we're -- we fully mean that.

Okay. Thank you very much.

Hey, thanks, Paul.

Your next question comes from the line of Cai von Rumohr from Cowen. You may proceed.

Yes, thank you. Nice profitability for the sales you achieved, guys.

Thanks, Cai. Appreciate it. Good hearing you.

Could you give us the number for where you were with hunting rifles and shotguns for the year so we can kind of see how they did in the fourth quarter?

On the hunting rifle side? Hunting rifles for the fourth quarter were about $10 million versus about $14 million last year. So they were down about -- about $4.4 million, about 30% for the quarter, Cai.

Uh-huh. And the shotguns?

Shotguns were -- they were up slightly on very low comp.

We weren't shipping shotguns last year. We have shotguns that were in the distribution that some of the promotion programs I just mentioned to Paul, the blitz and the -- getting the retail placement. We got to pull that product through distribution.

I mean, did due about $1 million or close to that in the fourth quarter? Was it even lower than that?

No. It was less than a half a million dollars, Cai.

Okay. And then -- then revolvers, were they down in the fourth quarter? Where were they?

Well, revolvers had a very strong fourth quarter. It was up $3.4 million, about up 19%. We had a very good quarter of revolvers.

Okay. So -- and the Walther numbers were really incredibly strong given the currency. Show that affecting their sales? Is the product just pushing the sales out the door, and to what extent is -- is --

They haven't -- they have a couple of thing going for them. One is, you know, we have our -- they're benefiting from our direct sales force out there, Cai. Calling on the dealers and getting pricing of the product.

They're P-22 was just listed in a recent public indication as the number-one .22-caliber pistol in the marketplace and continues to grow. They launched two new products within the last several months that are doing very, very well.

So they've got -- there's momentum there with new products. It's like we see when we add new products with Smith & Wesson.

Okay. So I mean really the picture is if we take out kind of the law enforcement Afghanistan, the handgun sales look actually good to very good across the board in the fourth quarter. And frankly the hunting rifle shotguns were pretty bad.

Well -- our distributors and retailers are telling us is that the -- the inventory that was the -- the issue on the handgun side has worked its way through. And you can see the NICS data, that's a combination, but it certainly -- we're hearing from dealers is that the handguns are regaining their -- their momentum.

Long guns -- remember, we're out of season on long guns. So it's -- it's very fair to expect the long guns to be slow this time of year, even in a good year. The sell-through because it's out of season.

Mike, do you have any sense what the sell-through of long guns just in total might have been in the fourth quarter versus your sales? I mean, were they -- distributed --

Are you talking about in our fiscal fourth quarter --

In your fiscal fourth quarter? I mean is your guess that distributor inventories were down $4 million or --

I -- I -- I don't think there was a whole lot of movement on long guns during the fourth quarter down season. I don't think -- they've made some adjustment, but nothing dramatic.

Okay. What -- there's been all the talk about, with -- now Obama as a Democratic candidate concern among potential handgun buyers that there may be changes in legislation.

Are you seeing any impact of that in terms of that's an issue raised by your distributors so that there's really kind of -- because it looks like you had pretty good momentum in the fourth quarter.

Seasonally July isn't as good a quarter. Are you seeing momentum on kind of the Presidential election impact?

That's kind of a hard thing to measure, Cai. When we -- I certainly probably would be naive if I said there's none. But I think it's pretty fairly known that the Senate and the House are still very pro-gun regardless of who ends up in the White House.

And also that the second amendment has been built into the fabric of our families and our country. You don't see people -- you don't see Obama and Hillary wanting to -- I guess Hillary doesn't matter now, but Obama, talking much about that second amendment because they know it's part of the fabric of the country.

So is it affecting sales somehow now and up through the election, that's hard to read. People that have been in the industry for a long time will tell you it did back in the 90's. But how do you measure how why someone is buying one things versus another, that's kind of hard.

Okay. You mentioned kind of expanding kind of in the law enforcement area and acquisitions. What can you be any more specific? To the extent, the way you framed it, it kind of sounded like you have a couple of things kind of in your sights. We might see something in the next three to six months. Is that possible?

I can tell you, Cai, that we've -- acquisitioned diversifying through acquisitions to diversify the company have always been part of our strategy. For the time that I've been here. And we continue to look for different opportunities.

When we -- we said all along that we're, we're looking at businesses that are within firearms, that are categories that we're not in today that may be appealing to us. The categories of law enforcement products which is anything that a police officer uses to protect themselves or protect citizens or to perform the duties, we think are fair game businesses for us to look at.

And on the defense side, really the -- the -- the soldier, the foot soldier, what they use to perform their duties, that we think -- and many times that's similar to what law enforcement uses. But we continue to look. There's nothing eminent. But we -- we certainly continue to look. And like the opportunities that have -- could possibly exist for our company.

What are the financial metrics you're looking for as you look at these acquisitions? I mean specifically, do you have to say it's got to be accretive out of the box or has to be at this price? Can you give us any, any guidelines?

The way we think about it is certainly our plan would be that it would be accretive in the first year. However, there could be an opportunity, I've always said this caveat, there could be an opportunity that was, was so obviously an enormous opportunity for our company that it may be a two year before it's accretive, but that would have to be a special situation, I think. John you want to --

Cai, this is John. I think -- I've mentioned this before. That we -- I don't think we'd be looking at something that I guess I would classify something that needs some type of rebuilding effort that would be two to three years out in that -- from that perspective before generating a positive payback. But I think from that perspective we realize that it's got to have a relatively, 18 month or better time to turn accretive.

Okay. Terrific. Thank you very much.

Thank you, Cai.

Nice talking to you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Reed Anderson from D.A. Davidson. You may proceed.

Good afternoon. I promise you I have less than ten questions, too. Hey, Mike, on the pistol side, just kind of following up on one of the last ones. I mean, you guys have had terrific growth and particularly if you normalize the bigger events from last year.

Is there any reason to think, given that you've added a lot of product or you continue to do very well, gain share, any reason to think that that business won't at least grow in '09? I know you don't have a crystal ball, but doesn't that make sense, at least based on what you know today?

Well, the -- the in pistols, Reed, the -- if you take a look at it, there's no -- in businesses that we're in, the type of product that we're in in pistols and categories, we don't have anything that is dramatically different, that's out in the marketplace that would -- change the landscape against our M&P pistols really what's leading the charge.

Law enforcement continues to be a very large opportunity for us, as you know. We continue to win at an 80% rate. We've got a long way to go. A lot of opportunity that's out there. We don't know what's going to end up happening with the -- with the military.

But certainly that's -- that's a pistol, that's not a revolver. And internationally, the M&P is continuing to take hold internationally. They're government contracts, but they'll take longer to do the T&E's, but we are seeing the success we would -- have predicted there. The real Wild Card on all is the -- the retail environment. But the other pieces continue to churn right along.

Go ahead John

Reed, we're down about 10.9% for the year in pistols. But when you think about the fact that you have the Afghan order and CHP order and take those out, we grew a little over 10%. And there was some serious, significant promotion that's took place because of the economy during the quarter.

Which further eroded that sales dollar. So I think we're seeing unit growth was up year over year. The M&P was up 38% for the year. So I mean, there's a lot of good signs in there. And -- and kind of those large one-time orders last year, they're kind of masking some of that.

Yes. Just a caveat, Reed. I mean, I was in the office here all day. So, maybe the economy just got sparkling good today. I doubt it. And that's the Wild Card.

Yes. Absolutely. And as you look at where that's selling you talked about in the quarter being up 12% in the sporting goods channel, just curious as you look at where your product sales and retail, is it your sense, Mike, that the big chains that you sell to which are maybe a quarter of your business, are they doing worse or better, do you think, than your overall customer base?

The -- the big boxes, we really have refocused our efforts. When we put this sales force in place which was, what, about two years ago I guess now, Reed?

Yes.

We focused on the larger dealers the top -- I think the number is 1,000 dealers, our guys calling, and the big box stores which we had not been focusing on in the past. And -- we have some people in our organization that have worked with big boxes and other, other industries. The Home Depot and Wal-Mart and Lowe's, those sort of guys.

And understand how to program these guys and put longer horizon strategies in place than you would with a dealer. We're seeing pretty good growth on the -- at the -- at the big boxes. It's a combination of a couple of thing. Paying attention and focusing on them because it's an important channel for us, which we really hadn't done aggressively in the past.

And by having talented people that can go in and work with the merchants in those companies and the way they're trying to run their business and tie our business into it. So it's a pretty good combination now. And we're seeing, the one we get POS from we're seeing pretty good POS.

John, on the gross margin, you guys had a very good quarter relative to my expectations. And my sense is that we saw the worst of margins based on what we know today. And that's your third quarter.

I mean, anything out there where weather it's a production scaleback or promotion that's unusual that we're not seeing today that would cause gross margins to be unusually moving one way or the other over the next year? I mean, I know you don't want to give guidance, but any color you could provide would be good.

Reed, I think as part of everything that took place during the third quarter, in terms of the, the production shutdowns and the -- we -- we did some things in terms of eliminating some temporary help and we've done reduction in forces where necessary and reset the production levels looking forward. So I mean, we've kind of made all those adjustments in the third quarter.

There's nothing planned in terms of any future shutdowns. We did shut down for a week at Thompson for the first week of the fiscal year. To kind of help get the inventories in line there. And we'll balance, but we like to -- one of the things we kind of pride ourselves on is we have very good way of addressing flexibility in terms of adjusting productions between the various lines as part of the strength of the business.

So I think we've got that flexibility. And it's -- it's one of these things that's going to be, we're going to have to how thing play out in the hunting channel, too. That's going to be a key driver, I think, over the next six months.

Yes. I mean if hunting has -- as we go into the back half of the economy if it continues to play havoc on the business and the, the other factors cause the hunting season to be a slower season again, then we're going to have to make some adjustment. That's why I'm trying to be very cautious. There's factors that are in the economy and in inventory that's out there that has to work its way through.

Yes. Thanks. I'll stop there. Let somebody else in. Thank you.

Thanks.

Great talking to you.

Your next question comes from the line of Chris Krueger from Northland Securities. You may proceed, sir.

Great. Good afternoon, guys.

Hi Chris, how you doing?

Good. Just a couple quick questions. In your press release you indicated there were two large international orders sort of hung up in Congress. Can you indicate roughly the size of these orders and the potential timing of this?

The -- they're two separate orders for two separate countries. We really don't want to divulge how big they are. But we're expecting to hear over the next couple of weeks on one of them. And the second one we're hoping we hear from in the quarter.

These things get pretty slow when they get in Congress. Remember there's a -- there's a threshold of the $1 million is when they get kicked back up to Congress. And they're just slow when that happens.

Would it be something that -- that would be announced, or is it just if it's $1 million or $2 million, is that something that's too low for --

What we try to announce to you guys, Chris, is something that is -- is meaningful. For either strategic purposes or moves the dial somehow or other. And I really don't want to comment on these at this time.

I'm not trying to mislead you to think that these are like enormous $50 million contracts. That's not the case. But, we -- we don't try to give this stuff out when it's still pending because of competitive purposes.

Okay. I think you went over the election-related thoughts. Any -- any thoughts on what the retailers and distributors are saying about the tax stimulus checks, if that's having a positive impact in the near term?

I've been reading a -- and you guys probably have, too, on some of the positives -- I guess retail numbers came out better today than, than people thought for the month of May, total retail numbers, and the stimulus package is part of what they're -- what they're claiming.

Apparently the last time from what I understand, the last time there was a stimulus -- the rebate checks came out, it did have an effect on -- on gun sales. But, that's -- that's like the question I was answering for Cai on the electric. It's pretty hard to measure that.

Right. Okay. Last question. One of the big box retailers indicated an increase in the sale of used weapons.

And I think it's an initiative that they're pushing through. Just wondering if you have any thoughts on that, if that's unique to that particular retailer or if you're seeing that out there, too? And maybe that's part of the long gun --

You are seeing some of that, Chris. And that's certainly due to the economy. But I can tell you the retailer you're talking to, at least from our perspective, is having from some pretty good Smith & Wesson handgun sales also.

So they're -- they're on guns at least they're performing well on everything. I don't know about everything else within the store. Bow guns they're performing fairly well.

Okay. Very good. That's all I got.

Thanks, Chris.

I would now like to turn the call back over to Mr. Michael Golden for closing remarks.

Okay. Thank you, operator. And thanks to everyone for joining us. And we'll see you next quarter.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.