Sturm, Ruger & Company, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparisons are with the three months ended April 2, 2022 unless noted. Amounts are in U.S. dollars.
Business context
The company designs, manufactures, and sells firearms, primarily through independent distributors in the U.S. Firearms generated nearly all sales; castings accounted for less than 1%. Management says distributor orders are typically stronger in the first quarter, partly because of the timing of distributor shows.
Financial performance
| Metric | Q1 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Total net sales | $149.5 million | $166.6 million | Down 10.3% |
| Gross profit / margin | $38.5 million / 25.8% | $58.1 million / 34.9% | Margin down 9.1 percentage points |
| Operating income | $17.0 million | $38.7 million | Down |
| Net income | $14.4 million | $30.2 million | Down 52.5% |
| Diluted earnings per share | $0.81 | $1.70 | Down |
| Operating cash flow | $5.3 million | $18.8 million | Down |
Gross margin pressure reflected lower sales and production, fixed-cost deleverage and weaker labor efficiencies, a shift toward lower-margin products, promotional costs, and inflation in materials and other inputs. Increased pricing partly offset these pressures. Selling, general and administrative expenses rose 10.8% to $21.5 million, partly as trade shows, travel, and advertising resumed.
Adjusted EBITDA, a non-GAAP measure, was $23.8 million, or 16.0% of sales, versus $46.3 million, or 27.8%, a year earlier. The effective tax rate was 22.4%, compared with 23.5%.
Demand and operating indicators
- Estimated distributor-to-retailer sell-through fell 5% year over year; adjusted NICS background checks fell 1%.
- Production declined 27% year over year to 381,000 firearms; shipments fell to 384,900 units from 491,500.
- Ending unit backlog was 670,400, down from 1,094,600 a year earlier. Ending backlog value was $327.3 million, versus $420.5 million.
- Sales of selected major new products were $30.0 million, or 21% of firearm sales.
Liquidity, debt, and capital allocation
At April 1, 2023, cash and short-term investments totaled $130.1 million, down from $224.3 million at year-end, primarily reflecting dividend payments. Working capital was $202.4 million after the LIFO reserve, and the current ratio was 4.3 to 1. The company had no debt; its $40 million revolving credit facility was unused, and it reported compliance with its covenants.
Cash provided by investing activities was $35.5 million, including net maturities of short-term investments. Capital expenditures were $1.7 million versus $10.9 million in the prior-year quarter. Management expected 2023 capital expenditures of approximately $20 million, while noting actual spending could vary significantly.
Cash dividends paid were $95.8 million, including $88.3 million for a special dividend declared in 2022. The company says its practice is to pay approximately 40% of net income, so quarterly dividends vary. On April 28, the board authorized a dividend of $0.32 per share, payable May 31, 2023.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management says quarterly results may not indicate full-year results.
- Inventory quantities declined during the quarter. If the reduction persists through year-end, a LIFO liquidation could materially affect results, though management did not quantify the potential impact.
- Limited deliveries of raw materials and persistent input-cost inflation could constrain production and adversely affect results.
- The company reported eight lawsuits and certain other claims, including municipal, negligence, data-breach, and unfair-trade-practices matters. Management said litigation is not expected to materially adversely affect financial position, but could materially affect results in a particular period. The company could not estimate a range of reasonably possible losses.
- Management reported no significant adverse business impact from COVID-19 during the quarter. It also stated disclosure controls were effective and there were no material changes in internal control over financial reporting.
- Management identified market demand, sales levels, litigation, regulatory changes, raw-material availability, and other forward-looking uncertainties as factors that could cause actual results to differ from expectations.
Important facts for investors to verify
- Whether demand, sell-through, backlog, and distributor inventories stabilize or continue to weaken.
- Whether lower production, product mix, promotional spending, and input costs continue to pressure margins.
- The year-end inventory level and any resulting LIFO liquidation impact.
- Cash generation after dividends and the timing and amount of planned capital expenditures.
- Developments in pending litigation and any resulting financial exposure.