Business context and reporting period
Sturm, Ruger & Company, Inc. filed this unaudited Form 10-Q for the quarter ended October 1, 2016. The company designs, manufactures, and sells firearms, primarily to U.S. customers through independent distributors. Firearms accounted for approximately 99% of sales; exports were approximately 3%.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2015 period.
| Metric | Three months ended Oct. 1, 2016 | Three months ended Sept. 26, 2015 | Nine months ended Oct. 1, 2016 | Nine months ended Sept. 26, 2015 |
|---|---|---|---|---|
| Net sales | $161.4 | $120.9 | $502.5 | $398.7 |
| Gross profit / margin | $50.3 / 31.1% | $34.0 / 28.1% | $166.1 / 33.0% | $123.9 / 31.1% |
| Operating income | $30.1 | $18.0 | $102.8 | $68.4 |
| Net income | $19.9 | $12.0 | $66.6 | $45.0 |
| Diluted EPS | $1.03 | $0.62 | $3.48 | $2.33 |
| Operating cash flow | Not separately reported | Not separately reported | $85.4 | $94.9 |
- Quarterly sales increased 33.6% and nine-month sales increased 26.0%. Firearms sales rose 34.2% and 26.3%, respectively; castings sales declined 13.9% for the quarter and 0.5% year to date.
- Gross margin improved by 3.0 percentage points for the quarter and 1.9 points for the nine-month period. Management attributed the improvement principally to higher sales volume and fixed-overhead leverage.
- Nine-month EBITDA, a non-GAAP measure, was $128.9 million, up 33.6% from $96.5 million.
- Cash was $101.4 million at quarter-end, versus $69.2 million at December 31, 2015. Working capital was $145.9 million and the current ratio was 2.7 to 1.
- The company had no debt and no borrowings under its $40 million revolving credit facility, which expires June 15, 2017. The facility was unused and the company reported covenant compliance.
- Nine-month capital expenditures were $23.0 million. The company expected approximately $30 million of capital expenditures for 2016, funded from operating cash and existing cash.
- Nine-month dividends paid were $25.0 million ($1.32 per share). A further $0.41-per-share dividend was authorized after quarter-end, payable November 25, 2016.
Material changes and operating trends
- Estimated distributor-to-retailer sell-through increased 19% in the first nine months, while adjusted NICS background checks rose 16%. Management cited stronger-than-normal seasonal demand, political campaigns, demand for new products, improved rimfire ammunition availability, and increased production.
- New products represented $160.8 million, or 32%, of nine-month firearm sales. Products introduced in September included Mark IV pistols, the LCP II pistol, and compact American pistols. Management expected the new-product sales percentage to decline in the next quarter as certain products aged out of its two-year classification.
- Firearms shipments increased 28.6% for the quarter and 21.3% year to date. Production increased 20% for both periods. Company finished-goods inventory rose 20,000 units and distributor inventory rose 54,100 units in the quarter.
- Nine-month operating cash flow fell to $85.4 million from $94.9 million, primarily reflecting inventory growth and other working-capital movements, despite higher net income.
- Quarterly selling, general and administrative expense included a $5.0 million expense for the NRA-ILA $5 Million Matching Challenge. Nine-month expense also included $1.6 million related to the 2 Million Gun Challenge to Benefit the NRA.
Outlook, risks and contingencies
- The filing does not provide a formal revenue or earnings forecast. Management cautioned that interim results may not indicate full-year performance; demand and firearm sales levels remain important uncertainties.
- Management noted seasonal demand patterns, with distributor orders often stronger in the first quarter and weaker in the third. The company plans production using estimated sell-through and inventory levels, not primarily orders or backlog.
- Potential risks include changes in firearm demand, raw-material availability and prices, litigation outcomes, future firearms-control or environmental legislation, and the need for financing. Management said available raw materials and current arrangements were adequate, but prolonged price inflation or shortages could disrupt manufacturing.
- As of October 1, the company was a defendant in four lawsuits and was aware of other claims, including two personal-injury product cases, a patent-infringement case, and the City of Gary municipal case. Management viewed the claims as unfounded and said litigation was unlikely to materially affect financial position, but could materially affect results in a particular period. Aggregate claimed amounts exceed product-liability accruals and applicable insurance coverage; management said a reasonably possible loss range could not be estimated.
- The company self-insures significant portions of product liability, workers’ compensation, medical, and other coverage. It also reported routine governmental proceedings relating to workplace safety, firearms tracking, and environmental matters, which it did not expect to have a material adverse effect.
Important facts for investors to verify
- Whether elevated demand and distributor sell-through persist, and how company and distributor inventories develop relative to sales.
- How margins and cash generation respond to production levels, inventory investment, and seasonal demand.
- The effect of the $5.0 million NRA-ILA challenge expense and other promotional commitments on future operating costs.
- Developments in the product-liability, patent, and municipal lawsuits, including potential exposure beyond accruals and insurance.
- Actual full-year capital spending and dividend decisions; the filing’s $30 million capital-spending figure is an expectation, not a guarantee.