Sturm, Ruger & Company, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 29, 2013; comparisons are with the periods ended June 30, 2012. Unaudited interim results. The company designs, manufactures and sells firearms primarily in the U.S.; firearms accounted for about 98% of sales, castings about 2%, and exports about 2%.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $179.5 million | $119.6 million | $335.4 million | $231.9 million |
| Gross profit / margin | $70.7 million / 39.4% | $45.1 million / 37.7% | $132.0 million / 39.4% | $86.9 million / 37.5% |
| Operating income | $50.8 million | $28.3 million | $87.9 million | $52.7 million |
| Net income | $32.3 million | $18.0 million | $56.0 million | $33.5 million |
| Diluted EPS | $1.63 | $0.91 | $2.83 | $1.71 |
- Q2 sales rose 50.1% and net income 79.3%; first-half sales rose 44.6% and net income 67.3% year over year. First-half firearms sales were $330.2 million, up 44.3%; shipments increased 34.3%.
- Gross margin expanded year over year, which management attributed principally to higher volume and favorable product mix, including more higher-margin accessories. Selling and general and administrative expenses increased, reflecting higher freight, compensation and promotional costs.
- First-half cash from operations was $69.8 million, versus $37.5 million a year earlier. Capital expenditures were $18.8 million; cash dividends paid were $17.3 million. Cash at June 29 was $64.8 million, up from $31.0 million at year-end 2012.
- At June 29, current assets were $146.4 million and current liabilities $82.4 million; working capital was $63.8 million and the current ratio 1.8:1. The company reported no debt and had an unused $40 million revolving credit facility expiring June 15, 2014.
- Management expected 2013 capital expenditures of about $35 million, funded with operating cash and existing cash. The company also planned approximately $3 million in 2013 defined-benefit pension contributions. No earnings or revenue forecast was provided.
Operating trends, changes and outlook
- Management said first-half demand remained very strong, attributing it mainly to the political environment, alongside new products, new shooters and increased capacity. The LC380 and SR45, introduced in the first half, contributed $102.7 million, or 31%, of first-half firearm sales.
- Estimated distributor-to-retailer sell-through increased 37% in Q2 and 23% in the first half year over year. Adjusted NICS background checks increased 16% and 33%, respectively; the filing cautions these indicators are not direct measures of sales.
- Order backlog reached 2.0 million units at June 29, double the 1.0 million units a year earlier. The company had limited incoming distributor orders in Q1 to manage backlog; first-half net orders nevertheless increased 7% year over year. Company and distributor inventories remained below levels management considered optimal. Replenishing finished goods could increase FIFO inventory value by as much as $15 million.
- First-half production increased 35%. The company announced plans for a third manufacturing facility in Mayodan, North Carolina, with acquisition expected to be finalized in Q3 2013. It also began prioritizing internal casting needs and expected to substantially complete the termination of many outside casting customers by year-end, reducing external casting sales.
- Management warned that interim results may not indicate full-year results. Demand, firearm sales, raw-material availability and prices, litigation, legislation, financing needs and accounting estimates could cause actual results to differ from forward-looking statements. Firearm distributor orders are typically seasonally stronger in Q1 and weaker in Q3.
Risks, contingencies and unusual items
- A July 25, 2013 storm caused part of the Prescott, Arizona facility roof to collapse, resulting in water damage and a temporary production shutdown. Production resumed July 29 after temporary repairs; the company estimated building and equipment repairs plus lost production would cost less than $5 million.
- Three lawsuits were pending at quarter-end: two traditional product-liability cases and one long-running municipal case brought by the City of Gary. Management considered a material adverse effect on financial position remote, but said litigation could materially affect results in a particular period. Claimed aggregate amounts exceed accruals and applicable insurance; 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 reported no material change in risk factors from its 2012 Form 10-K.
- On July 30, the board authorized a $0.65-per-share dividend, payable August 30 to shareholders of record August 16. This was authorized after the reporting date.
Important facts for investors to verify
- Whether strong demand and the 2.0 million-unit backlog translate into shipments and sales, given distributor ordering limits and the gap between backlog and channel inventory.
- Whether production expansion, the planned North Carolina facility and inventory replenishment proceed on schedule and within the stated capital and cost expectations.
- The impact of prioritizing internal castings on external casting revenue, and whether product mix and gross-margin improvement persist.
- Actual costs and production effects from the Prescott roof collapse, along with developments in product-liability and municipal litigation beyond recorded accruals and insurance coverage.
- Cash generation, dividend sustainability, and pension funding requirements; future dividends remain dependent on performance, cash needs and other factors.