Business context and reporting period
Sturm, Ruger & Company, Inc. filed this unaudited Form 10-Q for the quarter ended September 28, 2019. It designs, manufactures, and sells firearms, primarily through independent wholesale distributors in the United States. Firearms accounted for approximately 99% of sales; exports were approximately 5%.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2018 periods.
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $95.0 | $114.9 | $305.4 | $374.5 |
| Gross profit / margin | $19.9 / 20.9% | $28.1 / 24.4% | $74.8 / 24.5% | $100.5 / 26.8% |
| Operating income | $5.6 | $12.0 | $29.5 | $49.9 |
| Net income | $4.8 | $9.2 | $24.1 | $38.7 |
| Diluted EPS | $0.27 | $0.52 | $1.37 | $2.19 |
| Operating cash flow | Not provided by quarter in the filing text | $8.9 | $95.6 | |
| EBITDA (non-GAAP) | $13.3 | $20.5 | $52.8 | $75.8 |
Q3 sales fell 17.4% and nine-month sales fell 18.5%; firearm unit shipments declined 15.0% and 24.2%, respectively. Selling and administrative expenses decreased 11.4% in Q3 and 10.5% for the nine months, largely from lower sales-promotion expense. The effective tax rate was 24.4% for Q3 and 25.2% year to date.
Liquidity, cash flow, and capital
At September 28, 2019, cash was $22.8 million and short-term investments were $114.5 million, totaling $137.3 million. Working capital was $181.2 million after the LIFO reserve, and the current ratio was 4.7 to 1. The company had no debt and its $40 million revolving credit facility was unused. Nine-month operating cash flow was $8.9 million, down from $95.6 million, reflecting lower earnings and less favorable working-capital movements, including increases in receivables and inventory and decreases in customer contract liabilities and employee compensation accruals. Capital expenditures were $9.2 million year to date; the company expected approximately $15 million for full-year 2019, subject to business conditions. It paid $12.4 million in dividends and repurchased 44,500 shares for $2.0 million during the nine months.
Material changes, outlook, and risks
- Demand and operations: Estimated distributor-to-retailer sell-through fell 24% in the first nine months, while adjusted NICS checks declined 1%. Management cited competitor promotions and extended terms, fewer new-product launches than in 2018, used-firearm sales, cautious retailer buying, and the bankruptcy and inventory liquidation of a significant distributor. The company reduced Q3 production 4% from Q2 and continued a hiring freeze, relied on attrition, reduced overtime, and added shutdown days. New products represented $70.6 million, or 23%, of nine-month firearm sales.
- Margins and unusual items: Lower sales and production increased fixed-cost deleveraging and reduced gross margin. A 5% price increase on most products took effect January 1, 2019. Inventory overhead-rate adjustments reduced cost of sales by $2.3 million in Q3 and $3.5 million year to date; management said overhead spending efficiency had declined. A $0.2 million reduction in estimated costs for the 2018 Ruger American Pistol safety bulletin benefited year-to-date cost of sales.
- Outlook: No revenue or earnings forecast was provided. The filing cautions that interim results may not indicate full-year performance. Management expects to finance operations and planned capital spending with operating funds and cash. The board authorized an 11-cent-per-share dividend, payable November 27, 2019.
- Risks and contingencies: Management warned that prolonged raw-material price inflation, including possible tariff effects, or supply shortages could disrupt manufacturing. Two domestic distributors had filed for bankruptcy since 2018; three smaller distributors planned to exit, leaving 13 active domestic distributors. The company self-insures significant portions of product liability and other coverage. At quarter-end, five lawsuits were reported; management said litigation was unlikely to materially harm financial position but could materially affect results or cash flows in a particular period. After quarter-end, the Primus class-action complaint was dismissed with prejudice on October 9, 2019; the plaintiff appealed. The City of Gary municipal case remained subject to a pending transfer petition.
Most important facts for investors to verify
- Whether distributor sell-through, retailer purchasing, and company/distributor inventory levels improve; distributor inventory data excludes a bankrupt distributor and retailer inventory is unavailable.
- Whether reduced production and weaker volume continue to pressure gross margin and operating cash flow.
- Actual full-year capital spending, dividend decisions, and cash generation relative to management’s stated plans.
- Developments in distributor bankruptcies and exits, raw-material availability and costs, and the pending litigation and product-liability exposure.