Sturm, Ruger & Company, Inc. — 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; quarterly figures below are for Q4. Ruger designs, manufactures, and sells firearms, primarily in the United States through independent wholesale distributors. Firearms generated about 99% of sales; castings about 1%. Exports were approximately 4% of firearms sales.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $495.6 million | $522.3 million |
| Gross profit / margin | $134.4 million / 27.1% | $154.0 million / 29.5% |
| Operating income / margin | $67.0 million / 13.5% | $76.3 million / 14.6% |
| Net income | $50.9 million | $52.1 million |
| Diluted EPS | $2.88 | $2.91 |
| Cash from operating activities | $119.8 million | $101.2 million |
| Capital expenditures | $10.5 million | $33.6 million |
| Cash and short-term investments at year-end | $38.5 million and $114.3 million | $63.5 million and none reported |
| Working capital / current ratio | About $161.0 million / 3.3 to 1 | $114.1 million / 3.2 to 1 |
| Debt | None; $40 million revolver unused | None reported |
Q4 2018 sales were $121.1 million, gross profit $33.8 million, and net income $12.3 million; diluted EPS was $0.69. Q4 2017 sales were $118.2 million, gross profit $33.1 million, net income $10.4 million, and diluted EPS $0.59. Quarterly gross margin was 27.9% versus 28.0%.
Cash from operations rose year over year, while the reported decrease in cash and cash equivalents reflected, in part, $114.3 million invested in short-term U.S. Treasury instruments. The company paid $19.2 million in dividends in 2018. Its dividend policy targets approximately 40% of earnings, but payments vary with earnings and other factors.
Material changes versus prior periods
- Annual sales declined 5.1%; firearm sales fell 5.2% and shipments declined 1.9%. Net income fell about 2.3%, while the effective tax rate declined to 25.9% from 32.8%, primarily following the federal corporate tax-rate reduction.
- Gross margin contracted 2.4 percentage points. The company cited the ASC 606 adoption, lower overhead absorption benefits than in 2017, and higher product-liability expense among the factors affecting comparison. Selling, general and administrative expense fell to $67.4 million from $77.6 million, partly because ASC 606 moved $12.1 million of promotional costs from selling expense to cost of products sold.
- ASC 606 adoption reduced opening retained earnings by $2.2 million. For 2018, the company reported a net $0.5 million reduction in firearms sales from contract-liability movements; the accounting change reduced gross margin by about 3 percentage points and EPS by approximately $0.01 versus the comparable prior-year period.
- Orders received increased 11% to $430.0 million, but year-end backlog fell to 153,000 units from 254,900. Estimated distributor-to-retailer sell-through was essentially unchanged; adjusted NICS checks declined 6%. New products contributed $145.6 million, or 30% of firearm sales.
- The company made no share repurchases in 2018, compared with $64.8 million in 2017. Approximately $88.7 million remained authorized at year-end.
Outlook, risks and unusual items
- Management expected 2019 capital expenditures of approximately $25 million, primarily for new-product tooling and equipment modernization; actual spending could vary. The company planned to fund operations and investment with operating cash and existing cash.
- Management estimated a 2019 effective tax rate of approximately 25.1%. The board authorized a 28-cent-per-share dividend in February 2019, payable to shareholders of record March 15.
- Product safety costs included a $1.0 million 2018 expense for a safety bulletin covering certain Ruger American 9mm pistols. The company recorded $2.5 million in 2017 for the Mark IV recall. Product-liability expense was $1.5 million in 2018 versus $0.4 million in 2017.
- At year-end the company was a defendant in five lawsuits and was aware of other claims. Management said litigation was unlikely to materially harm financial position, but could affect results or cash flows in an individual period. The City of Gary case remained on appeal; the filing also describes product-liability and other litigation.
- Key risks include changes in firearms regulation, litigation and insurance limits, fluctuating firearm demand, distributor financial health and customer concentration, manufacturing-site disruptions, cybersecurity, and raw-material availability or cost. Three distributors accounted for 57% of firearm sales in 2018.
- The company expected to adopt the new lease standard in Q1 2019 and estimated right-of-use assets and lease liabilities of less than $5 million. The filing provides no formal sales or earnings guidance.
Important facts for investors to verify
- Whether demand, distributor sell-through, orders, and backlog support production and revenue after the sharp multi-year decline from 2016 levels; distributor sell-through is an estimate with stated data limitations.
- How margins develop after the ASC 606 promotional-cost reclassification and whether the disclosed 2018 safety-bulletin and product-liability costs remain within estimates.
- Distributor exposure and receivable concentration, including the financial condition of the three largest customers and the collectability of receivables.
- Developments in pending litigation, applicable insurance coverage, and firearms legislation that could affect sales or liability exposure.
- Execution and funding of the 2019 capital-spending plan, dividend decisions, and renewal or replacement of the $40 million credit facility, which was due to expire August 31, 2019.