Sturm, Ruger & Company, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended July 3, 2021; comparisons are to the periods ended June 27, 2020. The company designs, manufactures, and sells firearms, primarily in the U.S.; firearms accounted for approximately 99% of sales.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $200.1 million, up 53.6% | $384.4 million, up 51.4% |
| Gross profit / margin | $78.8 million / 39.4% | $151.3 million / 39.4% |
| Operating income | $59.7 million | $111.6 million |
| Net income | $44.4 million, up 138.7% | $82.6 million, up 143.4% |
| Diluted EPS | $2.50 | $4.66 |
| EBITDA (non-GAAP) | $67.5 million, up 114.1% | $127.4 million, up 115.9% |
Six-month operating cash flow was $76.2 million, versus $78.1 million a year earlier. Capital expenditures were $11.4 million. Cash and short-term investments totaled $173.6 million at quarter-end; the company had no debt and no borrowings on its $40 million revolver. Working capital was $207.9 million and the current ratio was 3.7:1. Dividends paid during the first half totaled $27.6 million.
Changes and operating trends
- Firearms sales increased 54.1% for the quarter and 51.9% for the half year; firearm shipments rose 47.0% and 40.5%, respectively. Castings sales declined.
- Gross margin improved from 30.8% to 39.4% for the quarter and from 30.0% to 39.4% for the half year. Management attributed the increase to higher volume and fixed-cost absorption, fewer promotions, and improved labor efficiency.
- Distributor-to-retailer sell-through increased 13% in the first half, while adjusted NICS checks decreased 5%. New products introduced in the prior two years generated $77.9 million, or 22%, of first-half firearm sales.
- First-half production increased 51% year over year. Ending unit backlog was 1.64 million, versus 767,200 a year earlier; company and distributor inventories remained significantly below pre-pandemic levels.
- Cash generation was affected by higher receivables and payment of 2020 incentive compensation. The company also paid $22.8 million in income taxes during the first half.
Outlook, risks, and notable items
- No revenue or earnings guidance was provided. Management expects approximately $20 million in 2021 capital expenditures, funded from operating cash and existing cash; actual spending may vary.
- Shipments of Marlin rifles, following the 2020 acquisition of substantially all Marlin manufacturing assets for $28.3 million, were anticipated to begin in Q4 2021.
- Management said COVID-19 had not significantly adversely affected operations in the first half, but demand sustainability and future pandemic effects remain uncertain. COVID-related health and safety measures are expected to cost approximately $1.5 million in 2021.
- Risks include volatile consumer demand, possible renewed pandemic restrictions, limited raw-material supply or prolonged input-cost inflation, and regulatory changes. Management noted the company self-insures significant amounts of certain risks.
- As of July 3, the company was a defendant in four lawsuits and was aware of other claims, including product-liability matters, a trademark dispute, and the City of Gary municipal litigation. Management said an overall material adverse effect on financial position was unlikely, but litigation could materially affect results in a particular period.
- On July 30, the board authorized a $1.00-per-share dividend, payable August 27 to shareholders of record August 16. Future dividends depend on performance, liquidity, and funding needs.
Investor facts to verify
- Whether elevated firearm demand, backlog, and new-product sales translate into sustained shipments and margins.
- Whether Marlin production and anticipated Q4 shipments proceed as planned, and the related investment and costs.
- Cash-flow conversion, inventory and receivables trends, and the impact of raw-material availability and costs.
- Developments in the disclosed lawsuits and any effects on accruals, insurance coverage, or results.
- Future dividend decisions and the status or renewal of the $40 million credit facility, scheduled to expire September 30, 2021.