Sturm, Ruger & Company, Inc. — FY 2012 Form 10-K
Business and period: U.S.-based designer and manufacturer of firearms, with a smaller investment-castings business. The filing covers the fiscal year ended December 31, 2012; fourth-quarter figures are also summarized below. Firearms generated about 99% of sales.
Financial performance and position
- FY 2012 revenue: $491.8 million, up 49.6% from $328.8 million in 2011. Firearms sales were $484.9 million (+49.7%); castings sales were $6.9 million (+50.0%).
- Profitability: Gross profit was $179.0 million and gross margin 36.4%, versus $111.8 million and 34.0% in 2011. Operating income was $111.1 million (22.6% margin), versus $62.4 million (19.0%). Net income was $70.6 million, up from $40.0 million; diluted EPS was $3.60, versus $2.09.
- Cash flow: Operating cash flow was $87.2 million, compared with $57.4 million in 2011. Capital expenditures were $27.3 million, versus $22.1 million.
- Liquidity and debt: Cash and cash equivalents were $31.0 million at year-end, down from $81.1 million. Working capital was $37.4 million (2011: $96.6 million) and the current ratio was 1.6:1 (3.0:1). The company reported no debt; its $25 million revolving facility was unused at year-end. In February 2013, availability was increased to $40 million and the facility extended to June 15, 2014.
- Other balance-sheet metrics: Total assets were $174.5 million and stockholders’ equity was $95.0 million. The frozen defined-benefit pension plans were underfunded by $19.6 million.
- Quarter ended December 31, 2012: Net sales were approximately $141.8 million, versus $93.2 million in Q4 2011; gross profit was $49.5 million and gross margin 34.9%, versus $30.2 million and 32.4%. Net income was $19.8 million versus $10.5 million, and diluted EPS was $1.00 versus $0.54.
Material changes versus 2011
- Strong demand and higher shipments drove annual sales growth; firearm unit shipments rose 51%, while total unit production increased 52%.
- New products represented $182.0 million, or 38%, of firearm sales, compared with $98.6 million, or 30%, in 2011. Management cited product introductions, new buyers, the political environment, and improved availability as demand drivers.
- Orders received rose to $796.7 million from $385.9 million, and year-end backlog increased to $427.1 million from $98.2 million. Backorders reached 1.51 million units, versus 337,400.
- Gross-margin improvement reflected higher volume, manufacturing-overhead leverage, and productivity gains from lean methods, partly offset by higher direct-material costs. SG&A increased in dollars but declined to 13.7% of sales from 15.1%.
- Cash and working capital declined substantially, principally in the context of $111.5 million of dividends paid, including a $4.50-per-share special dividend totaling $86.7 million. No shares were repurchased in 2012.
Outlook, risks, contingencies, and unusual items
- Management expected 2013 capital expenditures of approximately $30 million for tooling, new-product introductions, added capacity, and equipment modernization, to be funded from operations and cash or short-term investments. No revenue or earnings guidance was provided.
- Management aimed to rebuild finished-goods inventory; doing so could increase its FIFO value by as much as $15 million and could take more than a year. Management also warned that continued growth may require additional manufacturing space.
- Key risks include demand volatility, firearms legislation and regulation, product-liability and other litigation, raw-material availability and cost, disruption at either principal manufacturing facility, ERP-system performance, and self-insured medical and other claims. The company noted that its inventory and distributor stock were below levels it considered optimal.
- At year-end, the company faced approximately two lawsuits and knew of other claims. Management considered a material adverse effect on financial position remote, but said litigation could materially affect results in a particular period. The City of Gary municipal case remained pending with no recent activity; the Howard Cook case was dismissed with prejudice during Q4.
- The company recorded a $1.1 million impairment on a pepper-spray investment. It also reported $0.2 million of product-liability expense in 2012, compared with $1.6 million in 2011.
- The board authorized a 40.4-cent-per-share dividend in February 2013. The independent auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the exceptionally high order intake and backlog convert to shipments and sales, and whether demand persists beyond the reported surge.
- Whether production capacity and inventory rebuilding can meet demand without reducing margins or disrupting operations.
- How the large 2012 dividend affects liquidity, future distributions, and planned capital spending.
- Developments in firearms legislation, litigation, and the company’s product-liability accruals and insurance exposure.
- Execution of the $30 million 2013 capital plan and the amended $40 million credit facility; the filing provides no 2013 earnings guidance.