Sturm, Ruger & Company, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. The company designs, manufactures and sells firearms, primarily in the United States; firearms generated approximately 99% of 2013 sales.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $688.3 million | $491.8 million | +39.9% |
| Gross profit / margin | $258.6 million / 37.6% | $179.0 million / 36.4% | Margin +1.2 percentage points |
| Operating income / margin | $174.9 million / 25.4% | $111.1 million / 22.6% | Margin +2.8 percentage points |
| Net income | $111.3 million | $70.6 million | +57.6% |
| Diluted EPS | $5.58 | $3.60 | +55.0% |
| Cash from operations | $119.7 million | $87.2 million | +$32.5 million |
| Capital expenditures | $54.6 million | $27.3 million | +$27.3 million |
At year-end, cash and cash equivalents were $55.1 million, working capital was $69.5 million and the current ratio was 1.8:1. The company reported no debt; its unused $40 million credit facility was due to expire June 15, 2014. Operating cash flow less capital expenditures was approximately $65.1 million, calculated from the reported figures.
Fourth-quarter sales were $181.9 million versus $141.8 million a year earlier; net income was $26.6 million versus $19.8 million. Fourth-quarter gross margin was 35.0%, compared with 34.9%.
Changes, demand and management commentary
- Firearms sales rose 39.9%; unit shipments increased 31.9%. Management attributed demand to new products, new gun owners, the political environment and improved product availability. Estimated distributor-to-retailer sell-through rose 18%, while adjusted NICS checks rose 7%.
- New products contributed $195.8 million, or 29% of firearm sales, versus $182.0 million, or 38%, in 2012. Orders received fell to $636.0 million from the exceptional 2012 level of $796.7 million; year-end backlog was $440.6 million, up from $427.1 million.
- Production increased 33%. Company finished-goods inventory remained below management’s desired level; replenishment could increase its FIFO value by as much as $30 million. Distributor inventories rose but also remained below the company’s stated optimal level.
- Gross-margin improvement reflected higher volume, manufacturing-overhead leverage and productivity gains, partly offset by direct-material costs. SG&A increased in dollars to $84.1 million but declined to 12.2% of sales from 13.7%.
- Capital spending was $54.6 million in 2013. Management expected approximately $35 million of 2014 capital expenditures for tooling, capacity and equipment upgrades, funded from operations and cash.
Outlook, risks and unusual items
- The filing gives no specific sales or earnings guidance. Management’s 2014 capital-spending estimate and inventory-replenishment objective are not earnings guidance.
- Firearms demand is exposed to changing legislation, market cycles and sudden demand declines. The company also cited competition, raw-material availability and prices, manufacturing-site disruption, key-personnel retention and possible healthcare-cost increases. California microstamping requirements effective in 2013 were expected to reduce sales of certain products there.
- The company disclosed product, municipal and commercial litigation and other claims. Management considered a material adverse effect on financial position unlikely, but acknowledged litigation could materially affect results in a particular period. Claimed amounts exceed product-liability accruals and applicable insurance coverage; product-liability expense was $1.3 million in 2013.
- The company changed the estimated useful life of machinery and equipment from 10 to 7 years, increasing 2013 depreciation by $0.7 million. It estimated further increases of approximately $7 million in 2014 and $3 million in 2015.
- The frozen defined-benefit pension plans were overfunded by $0.5 million at year-end, versus underfunded by $19.6 million in 2012. Management was preparing for possible plan termination in late 2014 or early 2015; settlement could materially affect the period’s results and financial position.
- Two investment impairments were recorded: $0.9 million for a crossbow-company investment in 2013, following a $1.1 million impairment of another investment in 2012. The company paid $41.1 million in dividends in 2013; 2012 dividends totaled $111.5 million, including a special dividend. Subsequent to year-end, the board authorized a 54-cent-per-share dividend and expanded the repurchase program to $25 million.
Most important facts for investors to verify
- Whether end-market demand, orders and backlog support continued production and sales after the 2012 demand surge.
- Whether capacity investment and inventory rebuilding improve fulfillment without weakening margins or cash generation.
- The cash, earnings and timing effects of pension-plan settlement, including the stated potential depreciation increases.
- Developments in firearms legislation, product-liability and other litigation, and the company’s exposure beyond recorded accruals and insurance.
- Renewal or replacement of the $40 million credit facility, and the sustainability of dividends and repurchases alongside planned capital spending.