Sturm, Ruger & Company, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019. The company designs, manufactures and sells firearms, primarily to U.S. wholesale distributors; firearms generated approximately 99% of sales.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $123.6 million | $114.0 million | +8.4% |
| Gross profit / margin | $36.0 million / 29.1% | $32.6 million / 28.6% | Margin +0.5 percentage points |
| Operating income | $20.2 million | $16.5 million | Higher |
| Net income | $15.3 million | $13.0 million | +17.7% |
| Diluted EPS | $0.87 | $0.74 | Higher |
| Operating cash flow | $31.1 million | $(10.3) million | Improved |
| Capital expenditures | $4.1 million | $2.7 million | Higher |
Firearms sales increased 8.7% to $122.8 million; shipments rose 23.9%. Castings sales declined 21.0% to $0.9 million. Selling, general and administrative expenses declined 1.9% to $15.8 million. The effective tax rate increased to 26.3% from 25.1%. EBITDA, a non-GAAP measure, was $27.5 million versus $24.2 million.
Liquidity and balance sheet
At quarter-end, cash was $38.0 million and short-term investments were $149.6 million, totaling $187.6 million. The company had no debt, an unused $40 million revolving credit facility, working capital of $202.1 million and a current ratio of 4.2 to 1. Net inventory was $18.3 million, down from $28.3 million at year-end 2019. Operating cash flow benefited in part from the inventory reduction.
The company paid dividends of $3.0 million, or $0.18 per share, in the quarter. On May 1, 2020, the board declared a $0.35-per-share dividend, payable June 1 to holders of record May 18. The company expects approximately $20 million of 2020 capital expenditures, principally for new-product tooling and manufacturing upgrades, funded from operations and cash.
Business developments, outlook and risks
- Estimated distributor-to-retailer sell-through increased 37% year over year, while NSSF-adjusted NICS checks rose 42%. New products contributed $23.0 million, or 20%, of firearm sales. The company reported a sharp increase in consumer demand late in the quarter but said its duration and the ultimate effect of COVID-19 are uncertain.
- The company said COVID-19 had not significantly affected first-quarter business, though its adverse effects increased in April. Facilities remained open with limited production restrictions; management cautioned that production could be more significantly affected in Q2. Employee safety and support measures were expected to cost approximately $2.5 million in 2020, including $0.4 million recognized in Q1.
- Inventory quantities fell during the quarter. If the reduction persists through year-end, a LIFO inventory liquidation could materially affect results for the period; management said the financial-position impact would not be material, but the amount cannot yet be quantified.
- Risks include COVID-19 effects on employees, suppliers, customers and demand; raw-material availability and pricing; reliance on independent distributors; and changes in firearms regulation. The company had 14 active domestic distributors and noted distributor bankruptcies and discontinued operations in recent years.
- As of March 28, the company disclosed four lawsuits and certain other claims, including product-liability, trademark and municipal litigation. Management considered a material adverse effect on financial position not probable or likely, but litigation could materially affect results or cash flows in a particular period. The filing states that a range of reasonably possible losses cannot be estimated.
Most important facts for investors to verify
- Whether the elevated consumer demand and distributor orders persist, and how they translate into shipments, pricing and margins.
- Whether COVID-19 disrupts production, suppliers or customer demand, and whether the estimated $2.5 million response costs change.
- Whether reduced inventory levels result in a year-end LIFO liquidation and a material period impact.
- Progress and potential financial effects of disclosed litigation, particularly the municipal and trademark cases.
- Actual 2020 capital spending, dividend decisions and renewal of the revolving credit facility, which was due to terminate September 30, 2020.