Sturm, Ruger & Company, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. The company designs, manufactures, and sells firearms, predominantly in the United States; firearms generated about 99% of sales and castings about 1%.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | $522.3 million | $664.3 million | Down 21.4% |
| Gross profit / margin | $154.0 million / 29.5% | $219.6 million / 33.0% | Margin down 3.5 percentage points |
| Operating income / margin | $76.3 million / 14.6% | $134.4 million / 20.2% | Down 43.2% |
| Net income | $52.1 million | $87.5 million | Down 40.4% |
| Diluted EPS | $2.91 | $4.59 | Down 36.6% |
| Operating cash flow | $101.2 million | $104.8 million | Down $3.6 million |
| Capital expenditures | $33.6 million | $35.2 million | Down $1.6 million |
Fourth-quarter 2017 sales were $118.2 million versus $161.8 million a year earlier; gross profit was $33.1 million versus $53.5 million, and net income was $10.4 million versus $20.8 million. Diluted EPS was $0.59 versus $1.10.
At year-end, cash and cash equivalents were $63.5 million, working capital was $114.1 million, and the current ratio was 3.2:1. The company had no debt and its $40 million revolving credit facility was unused. Cash declined $23.6 million during 2017. Operating cash flow less capital expenditures was approximately $67.6 million.
Stockholders’ equity was $230.1 million, down from $265.9 million. The company repurchased 1,319,708 shares during 2017 for $64.8 million and paid $23.9 million in dividends. Annual dividends were $1.36 per share, compared with $1.73 in 2016.
Changes and operating drivers
- Firearms sales fell 21.4%; shipments declined 19.0%. Rifle sales were $243.0 million, pistol sales $176.2 million, and revolver sales $74.6 million.
- Management estimated distributor-to-retailer sell-through declined 17%, while adjusted NICS background checks declined 11%. Management cited weaker consumer demand after unusually strong 2016 demand, retailer inventory reduction, competitor discounting and rebates, and excess industry capacity.
- Orders received declined 44% to $386.2 million. Year-end backlog fell to 254,900 units from 621,400; firearm production declined 24%.
- Lower volume reduced absorption of fixed manufacturing costs and contributed to gross-margin compression. Cost of products sold also included $2.6 million of LIFO expense and $2.5 million for a product recall. Selling, general and administrative expense fell to $77.6 million, but rose to 14.9% of sales from 12.8% as revenue contracted.
- New products contributed $137.8 million, or 27% of firearm sales, versus $192.6 million, or 29%, in 2016. Several products introduced in December had minimal effect on 2017 results.
- Cash from operations remained substantial, supported in part by a $14.5 million inventory-related cash inflow and lower receivables; financing outflows included share repurchases and dividends.
Outlook, risks and unusual items
- Management expected 2018 capital expenditures of approximately $15 million, mainly for new-product tooling and fixtures and manufacturing-equipment upgrades. It expected to fund spending from operations and existing cash; actual spending could vary significantly.
- The company expected its 2018 effective tax rate to be approximately 24.5%, principally reflecting the lower federal corporate tax rate. A February 2018 dividend of $0.23 per share was authorized; future dividends remain subject to business and cash needs.
- Adoption of the new revenue-recognition standard in 2018 was expected to create an approximately $7 million contract liability on January 1, 2018 for certain promotions involving no-charge firearms. The company did not expect a material overall effect on consolidated results, cash flows, or financial position, though particular-period results could be affected.
- The June 2017 Mark IV pistol recall addressed a potential for unintended discharge if the safety was not used correctly. The company recorded $2.5 million, its estimate of total recall cost.
- At year-end the company disclosed four lawsuits across product liability, patent, non-product, and municipal matters. The City of Gary lawsuit was dismissed in January 2018, and the city appealed in February. The Florida putative class action alleges warranty and deceptive-practices issues concerning 10/22 Target Rifles. Management said litigation was not likely to materially affect financial position, but could materially affect results or cash flows in a particular period; the company stated it could not estimate a range of reasonably possible losses.
- Other key risks include firearms demand and regulation, distributor financial health and customer concentration, product liability and insurance limitations, raw-material availability and prices, manufacturing-site disruption, cybersecurity, and environmental and workplace regulation. Four customers each represented 12%–21% of total sales in 2017.
Most important facts for investors to verify
- Whether firearm demand, distributor orders, backlog, and retailer inventories stabilize or continue to weaken; sell-through is a company estimate based on distributor data and excludes retailer inventory.
- Whether the 2017 margin decline reflects temporary under-absorption and discounting or persists, and whether new products can offset lower industry demand.
- The realized cost and financial effects of the Mark IV recall and pending litigation, including developments in the Gary appeal and Florida class action.
- Execution of the 2018 capital-spending plan, revenue-standard transition, and expected tax-rate reduction.
- Cash allocation and resilience: substantial 2017 repurchases and dividends occurred as earnings and year-end cash declined; the filing reports no debt and an unused credit line expiring June 15, 2018.