Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Smith & Wesson Holding Corporation Earnings Conference Call. My name is Keith and I will be your operator for today. (Operator Instructions) And as a reminder today's conference is being recorded for replay purposes. And with that I would now like to turn the conference over to your host, Ms. Elizabeth Sharp, Vice President of Investor Relations. 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 and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding sales, margins, expenses and earnings for future periods, our product development and strategies and liquidity, and anticipated cash needs and availability. 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. Before I turn the call over our President and CEO, James Debney, I have a few important items to note with regards to our comments on today's call. First, I want to remind everyone that backlog is always cancellable until shipped. Second, we reference non-GAAP adjusted EBITDA on this call. Note that the reconciliation of non-GAAP adjusted EBITDA to GAAP net income can be found in our 10-Q and 8-K documents, both of which were filed and posted to our website this afternoon. And lastly, you should note that this call references only our continuing operations in terms of both net income and EPS. For the results of our discontinued operations, the sale of which was completed last quarter, please refer to our 10-Q for the period ending October 31. Now I will turn the call over to James.

Good afternoon. Thank you for joining us and for your interest in our company. With me on the call today is Jeff Buchanan, our Chief Financial Officer. Later in the call, Jeff, will provide a recap of our financial performance and an updated outlook. We are delighted to repot that we delivered another strong quarter, the third in a row now. These results continue to demonstrate a positive impact of our focus on and our commitment to, the core firearm business. Strong demand for our portfolio of established and new products combined with continuing strength in the consumer market for firearms, and our expanded production capacity, allowed us to deliver strong operational and financial performance. With that let me provide some of the highlights from second quarter and I will provide further details later in the call. It was another quarter of record revenue. This reflects excellent execution on the part of our operations team and our internal suppliers in bringing additional capacity online. This is especially notable given our annual two-week shutdown that occurred in the second quarter. We achieved a tremendous increase in gross margin by strategically growing our business. The outcome of this included favorable sales mix, the effect of increased production volumes, and improved efficiencies and costs. We also delivered solid growth in net income and earnings per share. Our recent addition to the M&P pistol family, the M&P Shield, a slim, lightweight firearm designed for concealed carry, remained in very high demand by both consumers and professionals and backlog for this product continued to grow. We continued to innovate with the launch of a new addition to the M&P pistol family, a competition optics-ready model called the M&P C.O.R.E, a Smith & Wesson Performance Center product that offers professional and high-end consumer a pistol that accepts a number of red dot sighting options. In response to the increasing number of women entering the shooting sports and in support of our industry, we became the presenting sponsor of the NRA Women’s Network, an organization that caters to this growing consumer segment in the marketplace. And lastly, we commenced the process to create a more concentrated and efficient distributor network aimed and enhancing or already very strong customer partnership. With that, I will ask Jeff to review the financial results.

Thanks, James. Revenue for the quarter was a record $136.6 million. This is an increase over the prior year of $44.3 million or 48% and above the high end of our original guidance. Note that this is also a sequential increase in our revenue despite the fact that in Q2 we have 14% in pure manufacturing days than in Q1 because of our annual August shutdown. Thus, we have made good progress on increasing our capacity. The gross margins were 35.5% as compared with 26.7% last year. The increase of nearly 9 percentage points was helped by a favorable production mix that included the increased volumes of our strategically important M&P line, resulting in continued improvement in manufacturing absorption. We are also seeing benefits from the utilization of our cost savings initiatives. Our operating expenses in the quarter were $21.9 million or 16% of revenue versus last year’s $21.2 million or 22.9% of revenue. Thus, despite increased profit sharing and incentive expenses, we minimized the increases to operating cost in Q2 through a companywide cost saving efforts as well as the timing and phasing of certain selling and marketing expenses. We estimate, however, that operating expenses could rise sequentially as much as 10% in Q3 for at least three reasons. A ramp up in the advertising as we focus on market share gain, new product launch costs, and our attendance to many industry shows occurring in January. Our operating income percentage for the quarter was 19.5% versus 3.7% last year, reflecting our increased production volume, higher gross margins and lower operating expense percentage. Net income in Q2 was $16.4 million. Diluted EPS of $0.24 compared with last year’s net income of just under $1 million, which was a diluted EPS of $0.01. Non-GAAP adjusted EBITDA was $32 million compared with…

Thank you, Jeff. As I stated earlier, the second quarter demonstrated continuing strength in our core firearm business and in the overall U.S. consumer market for firearms measured by adjusted NICS background checks and by ongoing high levels in our backlog. Now let me provide some insights into our growth and Smith &Wesson. And here please note that we exclude Walther from this discussion. As we have said in the past, we are modifying our relationship with Walther to focus solely on our reciprocal manufacturing agreement beginning in fiscal 2014. As a result you have seen and will continue to see sequential declines in the Walther volumes. This is built into our plans and our financial guidance going forward. With that let's get back to Smith & Wesson. Smith & Wesson firearm unit sales into the consumer channel increased 48% for our second quarter on a year-over-year basis. This compares favorably to unit growth of adjusted mix of 20%, leading us to believe that we not only kept pace with the rapid expansion of the market in Q1, but we took market share. In terms of dollars, total sales in our domestic consumer channel during the second quarter were $111 million, which is 49% higher than last year. With over 90% of our net sales derived from the consumer market today, it is clear that our strategy to deliver products that addresses consumer needs, wants and desires, is delivering excellent results. This is especially apparent in the strong sales growth of our M&P products. Turning to our professional and international channel where our efforts to satisfy the requirements of these users translates into higher performance products for our consumer channel as well. Second quarter revenue was $15.3 million, an increase of 44.5% over the comparable quarter last year. This growth…

Thank you, James. For the third quarter we estimate net sales of between $126 million and $131 million. This would represent year-over-year revenue growth of around 30%. As we have noted before, backlog continues to outstrip our capacity and our estimate takes into account planned holiday shutdowns, the start of the winding down of the Walther business, and hurricane sandy’s impact to some of our suppliers in November. EPS for the quarter, taking into account the increased sales and marketing expenses I discussed earlier, is estimated between the range of $0.19 to $0.21. For the full year, we are raising our guidance. Based on our scheduled capacity increases and the continued demand for our products, we now estimate net sales between $550 million and $560 million. And with our gross margins expected to exceed 36% for the remainder of the year, our operating margin is expected to approach 20%. We now estimate our diluted EPS for the year will be between $1 and $1.05. We continue to estimate the full year tax rate at 37% and our fiscal year-end share count at $67 million. James?

Thanks, Jeff. And with that, operator, I would like to open up the call for any questions from our analysts.

(Operator Instructions) And your first question is from the line of Cai von Rumohr with Cowen & Company. Please go ahead. Cai von Rumohr - Cowen & Company: Great quarter, guys. James, thanks for your color on Black Friday and Saturday. Could you give us a little more sense, clearly, November was a fabulous month in terms of where distributor and dealer inventory levels are now. And are you seeing any sort of slowdown after Black Friday or Saturday, or anything abnormal?

Well, I mean what I can say is that in the quarter, and I have really got to stay in the quarter, was that in terms of inventory there were no exceptional changes at all. Things are fairly stable in that respect. I think people, I mean our distributors and retailers were fairly well positioned to services retail, consumer buying activity going forward except obviously with the -- you know the obvious deficiencies with the certain super hot products such our M&P Shield. Cai von Rumohr - Cowen & Company: Okay. And based on from your guidance for the third quarter when a 10% uptick in operating expenses, and then it would seem to imply that gross margins have to be relatively close to where they were in October and yet usually this is a quarter in which you have Christmas shutdowns. Can you give us a little bit more color on gross margins? Is that correct and what’s driving that number?

Yeah, as I said, we expect our gross margins to be above 36% now for the rest of the year. So what is driving it is the things that I mentioned, which is the higher absorption, good product mix, cost saving efforts. Those are the main drivers. Cai von Rumohr - Cowen & Company: Okay. So just to clarify, when you say about 36% for the rest of the year, does that mean both Q3 and Q4 or for the second half as a whole?

It means for, like both years and I should -- I mean for both the quarters. And I point out that we have about the same number of shut downs days in Q3 as we do in Q2. And then we had a couple of extra days of productivity loss because of hurricane days on suppliers. And in Q2 we were 35.5, so we just again accrue the product mix and continued efforts on the cost savings side of the table. We believe that we will be above 36% for the next few quarters. Cai von Rumohr - Cowen & Company: Terrific. And then last one. Operating expenses, you mentioned the 10% uptick Q3 over Q2, last year you were up like $1.5 million Q4 over Q3. Is there any obvious pattern in terms of Q4 versus Q3 in terms of op expenses?

On Q4 versus Q3, I think those would probably drop a little bit. The Q3 tends to be the peak because of all of the shows. We launched a lot of our new products. Last year, we actually launched our new -- our Shield in Q4. This year the product that James alluded to is going to be launched in Q3. So it kind of depends on product launches but Q3 is always, at least higher than the first half of the year because of the shows. Cai von Rumohr - Cowen & Company: Okay. And one last one, I can't resist. Your longer-term goal was to get to an operating margin of 20% to 22%. It looks like you are there. Do we change the goals or is that as good as it gets?

Well, it says 20% to 22%. So I still have two percentage points to go.

Your next question is from the line of Reed Anderson with Northland Securities. Please go ahead.

Good afternoon and let me also add my congratulations. Couple of questions. First of all, James, could you give a little more of the detail -- you give kind of the color sometimes of handguns, modern sporting rifles. Can we get a little bit of that detail?

In terms of growth, you mean Reed?

Well, growth or just the dollars, however you want to give it. It's nice to have to kind of see how the mix broke out a little bit.

Yeah, I mean it’s all in the 10-Q in terms of the detail. But if you want, I will read it off right now....

Just, yeah, like handguns and modern sporting. I guess you could just give those, that would be great.

Okay, sure. So handguns on $71.8 million. Modern sporting rifles were $31.4 million. The quarter-over-quarter increase in handguns was 34.5% and the quarter-over-quarter increase in MSRs was almost 120%.

Thank you for that. I will look the rest up. So I guess a couple of questions. One is, on the sales piece, and given what we have seen in November with NICS and I'm sure that some people have speculated about the impact you will have. But I guess one thing I'm sensing, James, from being out there and purchasing product and seeing consumers is, I actually feel like there's actually some headroom for pricing here. We went through this period a year ago and whatever, we kind of rationalize your pricing. You said that and then demand picked up and people really got into the product side of it. It seems in my mind we have got a little bit of a tailwind now. And I'm just curious if you agree with that? And if that’s something we might see play out in some of the new product coming in the next six to 12 months?

I would agree, you know, with the market expansion that we have experienced. We have had somewhat of a tailwind. But I think you have to take a step back and look at consumer purchasing behavior. They are very selective with the product that they are seeking to buy. And new product introductions remain key to our future revenues as the smart and intelligent marketing of our existing high value product portfolio. In terms of pricing, it’s difficult to speculate that but one thing I will say is that it’s a highly competitive environment. It’s pretty crowded space whether you talk about handguns or long guns. Many good brands occupying those spaces. So we just keep a very very close eye on competitor pricing and how we stack up against that at retail because as you quite rightly pointed out, we made a huge investment in our strategic price repositioning of certain key strategic products some years ago.

All right. That's fine. And I guess, another question I have related to that and your comment talking about kind of ramping up marketing, you are going to have a little more co-op. It sounds like that’s obviously third quarter. Just maybe a little more color there, James? Is it going to be -- you had some success I think with the Shield doing kind of what you typically wouldn’t have done in the past, social or however you want to look at it. How is the quality or the delivery, or however you want to look at it, changing or evolving for you today to get to the customer?

I think something that we recognized and we have been leveraging is what you can do in store with the retailer. Both in just terms of the physical space that they have but with the sales associate as well. So a good example has been our ongoing a Armorers training and the On-The-Hip program, where we offer a certified M&P pistol armorer to buy our pistol at a highly discounted price. So we feel that worked very hard and helped us connect with the consumer much more strongly than before. And we are looking at ways that we can enhance that activity with those sales associates and we have some good idea. But also, we are going away from more of your traditional, let’s say print media towards how do we use social media. And back to the store, the independent dealer, how do we help them merchandize there stores as well. So combined together, all raises consumer awareness of our products, in particular our M&P brand and platform.

That’s helpful. Thank you. And then just one last one. On the backlog, you gave good color and I think that makes a lot of sense. But essentially, I guess the message is that you are starting to see some normalization, if you will, from your customers. They understand now you can deliver a little bit better. Scheduling is there, maybe their visibility is better. So we are going to kind of see that normalize. I guess the question is, still though backlog typically is going to bottom in the third quarter and peak in the fourth quarter. Any reason to think that relationship doesn’t still hold?

I don’t really see any reasons but it really is speculation. Once backlog gets to such a high level it’s really difficult to predict where it will go next. I have had many conversations with our distribution partners and they openly say, I don’t need to order anymore, do I? What's the point of ordering anymore, I have a significant amount on order already. So we closely monitor that. We work with them very very closely. Look at the mix that they have on order to make sure that they are well set for future shipments. So going back to what we think, I don’t know where it will go but what I will say is we are entering show season. There will be a SHOT launching new products. We will be with our distributor partners at that dealer shows where we will be facilitating the order intake process with the dealers to the distributor. So there will be a lot of activity around incoming orders. I have no doubt about that. How that will translate to our backlog number, I really don’t know yet. It’s a wait and see.

Your next question is from the line of Jim Barrett with CL King & Associates. Please go ahead. Jim Barrett - CL King & Associates: James, could you -- with annual sales of 550 to 560 expected this year with your planned CapEx expenditures, can you give us a sense of how much additional capacity the firm will be. We'll have -- and I assume some of this capital spending will not automatically stop at year-end. Should we assume that it continues at these levels through calendar ‘13?

What I can say, it’s difficult to give you -- obviously, to talk about our capacity increases in detail. And let's not forget the way that we are laying down our capacity is both internal which requires capital investment from us, but external by working with certain strategic suppliers. So we can really move between the two, the internal and the external, to really flex how much capital we need to invest going forward to me, the levels of production that we feel we need. Certainly we will continue to use capital to retire assets, increase our flexibility, increase our base capacity for sure. More importantly to facilitate and support the new product launches that we have planned over the next 36 months. Jim Barrett - CL King & Associates: Okay. And then, Jeff, this may be a question for you. Given your share repurchase announcement, assuming the share price stays in the current range, there is no change in market trends, there is no unanticipated calls on your cash. Should we assume that share repurchase is completed by year-end?

You know I am not going to really like comment on the pricing. The share repurchase goes until actually June 30. And it kind of depends on a variety of things that happen from day to day including the availability of our debt, the pricing of the stock, and as we do a continuous analysis of our basically working capital and -- easy for me to say, our strategic needs of the course of the next couple of years. But it certainly is an option and I intend to be in the market over the course of the stock buyback period.

(Operator Instructions) And your next question is from the line of Scott Hamann with KeyBanc Capital Markets. Please go ahead.

Just a few questions here. Number one, can you give us the retail POS breakdown of the tactical rifles versus the handguns for the quarter?

We can't give you POS, we can talk about our outgoing sales.

Well, you gave it to us last quarter just for those segments. The 48 broken down by those categories.

Right. So as I had mentioned earlier -- did you ask for the share or did you ask for the, like the dollars?

No, your retail unit sales.

We don't give retail unit sales. I don't know we've ever given retail unit sales. And we actually don’t give unit sales of our product, we give dollars sales. And we give consumer unit sales versus LE and professional.

Right. That’s what I am talking about. The 48 that you compared to the 20 NICS.

Right. We haven’t ever broken that.

Okay. And then just secondly, can you talk about the sequential increase in throughput that you had during the second quarter from the first quarter?

Are you talking about in capacity, I mean....

I think it speaks for itself, Scott, what we managed to achieve given the two week shutdown in Q2. So if you just look in terms of days available to manufacture product.

It’s 14% down.

Okay. And then just in terms of some of the capacity that’s coming on, I mean I think you had last quarter talked about having kind of flat expectations for this quarter over first quarter and then third quarter over second quarter. Is that kind of still the same dynamic or do you expect to see little bit more modest increase sequentially?

Well, as you know, our forecast for Q3 was 126 million to 131 million, so that means it would be like down a few percentage points. But I think we mentioned that the reduction of the ongoing Walther business, hurricane sandy and a few other things that were still in essence producing at full capacity in Q3.

Sure. Coming off the hunting season for example, Scott, as well.

Right.

Everything on a go forward basis is, as Jeff says, is built into our guidance.

Okay. And then, I know you talked a little bit about inventory levels and we know that people were taking product ahead of the election the fall season. I am just curious, based on your discussions with some of the retailers and distributors, how they are thinking about inventory and ordering going into calendar year ‘13?

They are looking forward to the normal show season. It takes place on an annual basis. There is nothing different about the way they are operating their business or the way we are operating our business.

So they are fairly upbeat regarding expectations for retail demand and where they are with inventory?

I think that they are the same pretty much as they have been. I mean, I'm sure you talk to them as well, Scott. I mean you can hear it directly.

Right. And just a question on the ordering. How have orders been trending for you guys in the last several months. I am just trying to run some numbers here relative to the backlog and I am just curious, I think you had talked last time kind of coming out of the election period about an element of cancellation in orders and I am wondering what percentage of that sequential decline in backlog may have been a function of cancellation of orders, if any.

Are you talking about the election back in ’08?

Correct.

Okay. I myself was obviously not here then so really cannot comment. I would just be speculating. So let's keep it to....

Okay. What percentage of the sequential decline in backlog this quarter was tied to order cancellations?

I am not aware of any cancellations.

Okay. And then just a final question for Jeff. What level of buyback is contemplated in your updated fiscal year ’13 guidance?

Well, none.

Okay.

I mean if I bought back like all of the shares, you know that would be a 2% to 4% anti-dilutive impact.

Right. But you said you're going to be in the market in response to the last question but you are saying that none of that, I mean that 2% to 4% accretion is not in the current $1 to $1.05?

That’s correct. This is based on the 67 million shares.

Your next question is a follow up from the line of Cai von Rumohr with Cowen & Company. Please go ahead. Cai von Rumohr - Cowen & Company: So, James, you mentioned a new product at SHOT show. Is this likely to be significant on the order of Shield and if so, are you going to expect to be able to ship this beginning in February-March so that it would impact the fourth quarter?

It’s difficult for me to give you any color on that Cai because the marketing team would kill me. So I mean what I can say is that we have demonstrated how to handle significant product launches, so I think you can safely assume the same level of effort, energy and work will go into this product launch as we did with the Shield. Cai von Rumohr - Cowen & Company: Okay. But I mean the fact that you called it out, I assume it’s more than just another version of the 1911 or something like that. Is that a fair assumption?

It’s very exciting. Cai von Rumohr - Cowen & Company: Okay. And, housekeeping, can you give us a rough sense as to where you expect your depreciation and amortization for the year and maybe a range on free cash flow?

Yeah. Depreciation and amortization this year has been running around $4 million a quarter. Historically, it has been 14 to 15. I think last time I said it’s going to move up into the 15 to 17 range. So right now we are on track for 16. We could do -- the fourth quarter could have a bit more as we have our methodology, a lot of the depreciation falls in that quarter because we have a half-year on convention. So 16, 17 in this fiscal year. Cai von Rumohr - Cowen & Company: Okay. And cash flow range in that for the year, free cash flow?

Free cash flow, you know we haven’t commented on. About the only thing I can say is repeat that our cash has continued to increase since the beginning of this quarter. So we are fairly confident about our cash position which is one of the reasons that we started with the stock buyback. Cai von Rumohr - Cowen & Company: And maybe give us a little color, I think last year you had mentioned the profit share which is in your Op expenses. And that basically it tends to peak out at a certain level so that if you go over a certain level, do you get more profit falls to the bottom line? Can you give us some color on that?

Yeah. It’s because -- so the profit sharing, it does peak out at a certain level based on -- so it’s a percentage of the employee’s compensation or it’s 15% of operating income. So as our employee base grows, then it becomes less of a percentage of operating income because it’s peaking out for each employee. So the answer is, we are. We have maxed out on that and we will continue. Then that is a percentage of our revenue will decline. Cai von Rumohr - Cowen & Company: Okay. But it was a fact during the first and second quarter?

Well, yes, it has been a factor.

(Operator Instructions) And you have a follow up from the line of Scott Hamann with KeyBanc Capital Markets. Please go ahead.

Just a quick one, Jeff, in terms of the different -- you highlighted mix as being a benefit to gross margin here over the last several quarters. And I know you don't like to talk about specific margins by category, but is there any way you could kind of give us a ranking in terms of gross margin profitability among some of the larger product categories?

You know we have never given a ranking of like products in the categories. If you remember, a few quarters ago I gave a ranking of channels, and that Walther was the lowest. So I guess Walther was the lowest as we continue to decline on the Walther business that would positively impact margins. The product mix, it can be interpreted in a couple of different ways. It could be as a favorable mix, it could also be a higher volume in a product getting better absorption. So unfortunately it is too much of competitive information.

Okay. And then just on this warranty expense reversal you had in the quarter, when was that originally accrued? I can’ remember.

It just was about a year ago.

Okay. Was that in your -- was this reversal in your guidance before this quarter? Is that anticipated, I guess?

Yes.

Okay. And then just, did I hear you right, the CapEx was going up about $5 million from where you had talked about last quarter?

That’s correct.

And what is that -- is that tied to any particular initiative, or kind of....?

It’s just our CapEx is focused on -- you know about half of it is capacity increases. We are doing an ERP implementation. So it’s probably more of a fine point on when we are actually spending the dollar.

And that’s all the time we have for questions today, I would like to turn the call back over to management for some closing remarks.

Thank you, operator, and thanks everyone for joining us today. We look forward to seeing some of you at the Wedbush Conference in New York City next week on December 12. We wish you all a safe and happy holiday season and we look forward to speaking with you next quarter. Thank you.

Ladies and gentlemen that will conclude today's conference. Thank you very much for joining us and you many now disconnect. Have a great day everyone.