Business context and reporting period
Sturm, Ruger & Company, Inc. designs, manufactures, and sells firearms, primarily through independent U.S. wholesale distributors. Firearms accounted for approximately 99% of sales; castings contributed less than 1%. This unaudited Form 10-Q covers the three and six months ended July 1, 2017, compared with the periods ended July 2, 2016.
Financial performance
Amounts below are in millions of dollars, except per-share data.
| Metric | Three months ended July 1, 2017 | Three months ended July 2, 2016 | Six months ended July 1, 2017 | Six months ended July 2, 2016 |
|---|---|---|---|---|
| Net sales | $131.9 | $167.9 | $299.2 | $341.1 |
| Gross profit / margin | $34.9 / 26.5% | $56.7 / 33.8% | $90.7 / 30.3% | $115.8 / 34.0% |
| Operating income | $15.3 | $36.5 | $49.2 | $72.7 |
| Net income | $10.2 | $23.5 | $32.4 | $46.8 |
| Diluted EPS | $0.57 | $1.22 | $1.79 | $2.44 |
| EBITDA (non-GAAP) | $25.0 | $45.1 | $68.6 | $89.9 |
For the six months, operating cash flow was $39.9 million, down from $66.1 million; capital expenditures were $10.9 million. Cash declined to $44.0 million at July 1, 2017, from $87.1 million at year-end. Working capital was $97.8 million, including the $44.0 million LIFO reserve, and the current ratio was 2.7:1. The company had no debt and its $40 million revolving credit facility was unused. Total assets were $284.1 million and stockholders’ equity was $227.6 million.
Material changes versus prior comparable periods
- Second-quarter sales fell 21.5%; first-half sales fell 12.3%. Firearms shipments declined 14.3% and 6.6%, respectively.
- Net income declined 56.6% for the quarter and 30.7% for the half. Gross margin contracted by 7.3 percentage points in the quarter and 3.7 points for the half, primarily as lower volume reduced fixed-cost absorption.
- First-half estimated distributor-to-retailer sell-through decreased 13%, while adjusted NICS checks decreased 7%. Management attributed softer demand to unusually strong 2016 demand, retailer inventory and cash management, and competitors’ discounting and rebates.
- New products, including Mark IV pistols, the LCP II, and Precision Rifle, represented $84.9 million, or 29%, of first-half firearm sales.
- During the first half, the company repurchased 1,074,285 shares for $53.5 million (average $49.73 per share); $100 million remained authorized. Cash dividends paid were $16.3 million.
Outlook, risks and unusual items
- No earnings or sales guidance was provided. Management expected approximately $35 million of 2017 capital expenditures for product-introduction tooling and manufacturing upgrades, funded from operations and cash; actual spending could vary.
- Management reported that inventory quantities had declined during the first half. If the reduction persists through year-end, a LIFO liquidation could materially affect results, although management did not quantify the potential impact.
- A June 2017 recall of Mark IV pistols manufactured before June 1, 2017, due to potential unintentional discharge if the safety was not used correctly, resulted in a $2.5 million expense, described as the expected total recall cost.
- Four lawsuits were pending: two product-liability matters, one patent case, and the City of Gary municipal case. Management considered the claims unfounded and did not expect litigation to materially harm financial position, but acknowledged a possible material impact on results in a particular period. The Gary case motion hearing was set for September 15, 2017.
- Management cited potential raw-material availability and price pressures, and exposure to self-insured and deductible losses. The company reported no material change in risk factors from its 2016 annual report.
- On August 1, 2017, the board authorized a dividend of $0.23 per share, payable August 31 to shareholders of record August 15. Future dividends depend on cash, performance, and funding needs.
Most important facts for investors to verify
- Whether demand, distributor inventories, order backlog, and pricing trends stabilize after the reported sell-through and sales declines.
- The financial and operational effects of the Mark IV recall, including whether costs remain within the $2.5 million estimate.
- Year-end inventory levels and any LIFO liquidation impact on earnings.
- Cash generation and capital-spending needs alongside repurchases and dividend payments.
- Developments in the patent and municipal litigation and any resulting costs or exposure.