Sturm, Ruger & Company, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 28, 2015; comparisons are with the three months ended March 29, 2014, unless noted. The company designs, manufactures, and sells firearms, principally to U.S. customers through independent distributors. Firearms accounted for nearly all sales; castings were approximately 1% and exports approximately 4%.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $137.0 million | $169.9 million |
| Gross profit / margin | $41.4 million / 30.2% | $61.1 million / 36.0% |
| Operating income | $23.8 million | $38.0 million |
| Net income | $15.5 million | $24.3 million |
| Diluted EPS | $0.81 | $1.22 |
| Operating cash flow | $32.8 million | $15.7 million |
| Capital expenditures | $4.3 million | $9.6 million |
Sales fell 19.4%, net income fell 36.3%, and EBITDA fell 29.7% to $33.2 million. Firearms sales declined 19.9% to $135.6 million; firearms unit shipments fell 24.8%. Castings sales rose to $1.4 million from $0.7 million, while the castings segment reported a $1.5 million pretax loss versus a $0.5 million loss.
Gross margin declined 5.8 percentage points. Management attributed the deterioration primarily to lower volume and fixed-cost deleverage, including depreciation and indirect labor, and a mix shift away from higher-margin firearms accessories. Selling and general and administrative expenses declined 24.0% to $17.6 million, reflecting lower volume-driven selling and distribution costs and lower performance-based compensation.
Financial position and liquidity
At March 28, 2015, cash was $30.8 million, working capital was $70.6 million after the $41.0 million LIFO reserve, and the current ratio was 2.1 to 1. The company had no debt; its $40 million revolving credit facility was unused and scheduled to expire June 15, 2015. Net inventory declined to $29.3 million from $44.7 million at year-end 2014. Stockholders’ equity was $195.4 million.
Operating cash flow improved year over year, mainly from lower inventory and reduced incentive-compensation payments, partly offset by lower earnings and higher receivables. Investing used $4.2 million; financing used $6.6 million, including $3.2 million in dividends and $2.8 million for repurchases of 82,100 shares.
Demand, outlook, and notable items
- Management said demand weakened because of lower consumer demand, elevated retailer and distributor inventories, and fewer recent product introductions. Estimated distributor-to-retailer sell-through declined 14% year over year, while adjusted NICS background checks increased 2%.
- New products represented $22.8 million, or 17%, of firearm sales. Net orders were down 11% year over year but up 55% from Q4 2014. Ending backlog was 580,000 units, approximately four months of shipments, versus 1.35 million units a year earlier.
- Production fell 38% year over year. Company finished-goods inventory declined by 53,100 units and distributor inventory by 64,700 units during the quarter.
- The company expected approximately $30 million of 2015 capital expenditures, funded from operations and cash. The filing gives no earnings or sales guidance. Management cautioned that interim results may not indicate full-year performance.
- Because inventory quantities fell in Q1, a LIFO liquidation could occur if the reduction persists through year-end; management said its effect on results could be material, though it could not be precisely quantified.
- Machinery and equipment useful lives had been shortened from 10 to 7 years effective December 2013. The change increased Q1 2015 depreciation by $0.8 million; management estimated an approximately $3 million increase for 2015 on equipment held at year-end 2014.
- The board authorized a $0.32-per-share dividend on May 5, 2015, payable May 29 to shareholders of record May 15. The company had terminated and fully funded its defined-benefit pension plans in Q4 2014; no future contributions to those plans were expected.
Risks and contingencies
Management identified market demand, sales levels, raw-material availability and pricing, litigation, future firearms-control and environmental legislation, and the need for financing as factors that could cause actual results to differ from forward-looking statements. The company reported product-liability and municipal litigation matters; the long-running City of Gary case had no recent activity. Management said litigation was unlikely to materially affect financial position but could materially affect results in a particular period. The company also noted that aggregate claimed damages exceed product-liability accruals and applicable insurance coverage. It self-insures significant portions of product liability, workers’ compensation, medical, and other risks.
Important facts for investors to verify
- Whether sell-through, distributor inventories, and backlog continued to normalize after the sharp year-over-year demand decline.
- Whether lower production and inventory levels affect margins, cash generation, or result in a material LIFO liquidation.
- Whether the planned $30 million capital program, dividend, and repurchases remain supportable from operating cash and available liquidity.
- Renewal or replacement of the $40 million credit facility before its June 15, 2015 expiration.
- Developments in product-liability and municipal litigation, including potential exposure beyond recorded accruals and insurance.