Sturm, Ruger & Company, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 29, 2012; comparisons are with the periods ended October 1, 2011. The company designs, manufactures, and sells firearms, principally in the U.S. Firearms generated about 99% of sales; exports were about 3%.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Net sales | $118.2 million | $80.5 million | $350.1 million | $235.6 million |
| Gross profit | $42.6 million | $29.1 million | $129.5 million | $81.6 million |
| Gross margin | 36.0% | 36.2% | 37.0% | 34.6% |
| Operating income | $27.2 million | $16.9 million | $80.0 million | $46.4 million |
| Net income | $17.3 million | $10.7 million | $50.8 million | $29.5 million |
| Diluted EPS | $0.88 | $0.56 | $2.58 | $1.55 |
- Quarterly sales increased 46.8% and nine-month sales increased 48.6%; nine-month net income rose 72.4%. Firearms shipments increased 53.9% for the quarter and 52.1% for the nine-month period.
- Nine-month operating cash flow was $61.8 million, versus $43.0 million a year earlier. Capital expenditures were $20.3 million; cash and cash equivalents ended the period at $75.1 million.
- Cash, cash equivalents, and short-term investments totaled $105.1 million. Working capital was $118.3 million after the LIFO reserve, and the current ratio was 3.2 to 1.
- The company reported no debt. Its $25 million credit facility was unused and expires June 15, 2013. Total assets were $247.8 million and stockholders’ equity was $174.0 million at quarter-end.
Operating trends and material changes
- Management attributed strong demand to new product introductions and favorable industry and political conditions. New products accounted for $130.3 million, or 38%, of nine-month firearm sales.
- Orders received rose 89% in Q3 and 93% in the first nine months versus the prior-year periods. Ending backlog was $249.7 million, compared with $69.8 million a year earlier.
- Q3 gross margin eased to 36.0% from 36.2%; nine-month margin expanded to 37.0% from 34.6%. Management cited higher volume, manufacturing leverage, and lean-process productivity as factors supporting the nine-month improvement, partly offset by higher direct material costs.
- Q3 and nine-month selling, general, and administrative expenses increased, reflecting promotional spending, equity and performance-based compensation, ERP implementation, and higher freight costs.
- Production capacity was expanded through investment; capital expenditures over the twelve months ended September 29, 2012 were about $30 million. The company expects 2012 capital spending of approximately $25 million.
Outlook, risks, and unusual items
- The filing gives no specific earnings or sales guidance and cautions that nine-month results may not indicate full-year performance. Management’s stated plans include finished-goods inventory replenishment, which could add as much as $15 million to its FIFO value, and approximately $25 million of 2012 capital spending.
- Management identified the ability to keep pace with strong retail demand as a risk: capacity constraints could impair revenue, customer acceptance, or sales to competitors. It also cited potential raw-material price increases or shortages as risks to production and results.
- Product liability exposure includes two individual-injury suits and a long-running municipal case. Management assessed a material adverse effect on financial position as remotely likely, but said litigation could materially affect results in a particular period; a reasonably possible loss range was not available. Insurance generally excludes certain post-July 2000 municipal claims.
- A previously reported securities class-action lawsuit was settled for $3 million with court approval on August 20, 2012. No new suits were formally instituted during Q3.
- The company declared a 38.2-cent-per-share dividend after quarter-end, payable November 26, 2012. Dividends vary with earnings; the company said its intended payout was approximately 40% of net income. Nine-month dividends paid were $17.5 million.
- The ERP system rollout continued, with remaining manufacturing facilities converted during the first nine months. Management said controls were effective and no quarter changes had materially affected, or were reasonably likely to materially affect, internal control over financial reporting; it noted implementation could change processes and related controls.
Important facts for investors to verify
- Whether demand, order growth, and the substantial backlog convert into shipments and cash flow, given that company and distributor inventory levels remained below management’s stated optimal levels.
- Whether production capacity, new-product performance, and raw-material availability can support demand without materially increasing costs or delaying deliveries.
- The timing and potential financial impact of product-liability and municipal litigation, including the uninsured exposure for certain municipal claims.
- Actual capital spending, inventory replenishment, and dividend sustainability; dividends are variable and subject to cash needs and future performance.
- Any process or control effects from the ERP implementation and the company’s ability to complete the transition effectively.