Sturm, Ruger & Company, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period ended April 1, 2017. Amounts are in U.S. dollars. The company primarily designs, manufactures, and sells firearms through independent distributors; firearms represented about 99% of sales.
Financial results
| Metric | Q1 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $131.2 million | $167.4 million | Down 21.6% |
| Gross profit / margin | $35.8 million / 27.3% | $55.8 million / 33.3% | Margin down 6.0 percentage points |
| Operating income | $18.6 million | $33.9 million | Down 45.1% |
| Net income | $14.3 million | $22.2 million | Down 35.8% |
| Diluted EPS | $0.81 | $1.21 | Down $0.40 |
| EBITDA, company-defined non-GAAP | $27.1 million | $43.6 million | Down 38% |
| Cash provided by operations | $45.3 million | $18.9 million | Up $26.4 million |
Firearms sales were $129.9 million, down 21.9%; castings sales were $1.3 million, up 28.9%. Firearms shipments declined 15.5%. The effective tax rate fell to 24.5% from 35.0%, principally reflecting the lower federal corporate tax rate; management said this added $0.11 to EPS.
Liquidity, cash flow and capital
- Cash was $102.7 million at quarter-end, versus $63.5 million at December 31, 2017. Working capital was $128.9 million and the current ratio was 3.0 to 1.
- Operating cash flow of $45.3 million reflected, in part, a $13.2 million cash benefit from lower inventories and a $7.1 million increase in customer contract liabilities. Capital expenditures were $1.4 million; cash dividends paid were $4.0 million. No shares were repurchased during the quarter.
- The company reported no debt. Its unused $40 million revolving credit facility was scheduled to expire June 15, 2018. Approximately $88.7 million remained authorized for share repurchases.
Changes, outlook and notable items
- Estimated distributor-to-retailer sell-through fell 5% year over year; adjusted NICS checks rose 1%. Management attributed the sell-through decline to softer consumer demand early in the quarter, partly offset by improvement later. New products accounted for $37.2 million, or 29%, of firearm sales.
- Production was reduced 27% year over year. Company finished-goods inventory declined by 51,900 units and distributor inventory by 69,000 units during the quarter; total company and distributor inventory ended at 303,300 units.
- Adoption of ASC 606 reduced Q1 firearm sales by a net $2.4 million, reduced gross margin by approximately 3%, and reduced EPS by about $0.04. The quarter-end customer contract liability was $9.3 million; the company estimated its revenue would be recognized in Q2 and Q3 2018. The adoption also shifted certain promotional expenses from selling expense to cost of products sold.
- Management expected approximately $15 million of 2018 capital expenditures, primarily for new-product tooling and manufacturing upgrades; actual spending could vary. No specific sales or earnings guidance was provided. The board later declared a $0.32-per-share dividend, payable June 1, 2018.
- Management warned that a LIFO inventory liquidation could materially affect 2018 operating results if the quarter’s inventory reduction persisted through year-end, though it expected no material effect on financial position. Other risks cited include demand, raw-material availability and pricing, litigation, and potential changes in firearms-control or environmental legislation.
- Three lawsuits were disclosed. The City of Gary municipal case was dismissed in January 2018, and the City appealed. Management said litigation was unlikely to materially affect financial position but could materially affect results in a particular period. The company also reported a product-liability suit and a Florida consumer class action; it disputed the claims.
Most important facts for investors to verify
- Whether distributor sell-through and inventory trends continue to improve, and how they translate into shipments and revenue.
- Whether the $9.3 million contract liability is recognized as revenue in the estimated Q2–Q3 period, and the continuing effects of ASC 606 on reported margins.
- Whether inventory reductions trigger a LIFO liquidation and a material earnings impact.
- The status and potential costs of the City of Gary appeal and other litigation, plus the credit facility’s status after its stated June 15, 2018 expiration.
- Actual 2018 capital spending and dividends compared with management’s stated plans.