Business context and reporting period
Sturm, Ruger & Company, Inc. designs, manufactures, and sells firearms, primarily in the United States through independent wholesale distributors. This Form 10-K covers the fiscal year ended December 31, 2014; the fourth-quarter figures below are for the three months ended December 31, 2014. Firearms generated virtually all sales; castings sales were less than 1%. Exports were approximately 4% of firearms sales.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $544.5 million | $688.3 million |
| Gross profit / margin | $169.2 million / 31.1% | $258.6 million / 37.6% |
| Operating income / margin | $56.3 million / 10.4% | $174.9 million / 25.4% |
| Net income | $38.6 million | $111.3 million |
| Diluted EPS | $1.95 | $5.58 |
| Cash from operations | $55.6 million | $119.7 million |
| Capital expenditures | $45.6 million | $54.6 million |
| Cash and cash equivalents at year-end | $8.9 million | $55.1 million |
| Working capital / current ratio | $57.8 million / 2.0 | $69.5 million / 1.8 |
FY 2014 cash from operations less capital expenditures was approximately $10.0 million, a derived figure. The company reported no debt and had an unused $40 million revolving credit facility expiring June 15, 2015. Total stockholders’ equity was $185.5 million; total assets were $254.4 million.
Fourth-quarter sales were $122.6 million versus $181.9 million in Q4 2013. Gross margin fell to 27.7% from 35.0%. The quarter recorded a net loss of $14.8 million, including a $41.0 million pension plan termination charge.
Material changes versus the prior comparable period
- Annual sales declined 20.9%; firearm sales fell 20.1% and firearm unit shipments decreased 19.9%. Castings sales declined 77.3% to $2.2 million.
- Management attributed weaker second-half demand to lower consumer demand, high retail inventories, competitor discounting, and fewer significant new product introductions. Estimated distributor-to-retailer sell-through fell 20%; adjusted NICS checks fell 12%.
- Gross margin decreased 6.5 percentage points. Management cited lower volume and fixed-cost deleverage, a shift away from higher-margin accessories, and higher depreciation. Accessories sales declined to $23.9 million from $59.3 million.
- Net orders received fell 55% to $286.8 million. Year-end backlog decreased to 651,400 units from 1.52 million; company and distributor inventory together rose to 430,900 units from 232,800.
- Cash from operations decreased by $64.1 million. Cash fell by $46.2 million during the year, reflecting operations, investment, dividends, and share repurchases.
Outlook, management commentary, risks, and unusual items
- Management expected 2015 capital expenditures of approximately $30 million, funded from operating cash and current cash. It did not provide sales, earnings, or margin guidance.
- The company introduced the AR-556 rifle and LC9s pistol in 2014; new products represented $89.4 million, or 16%, of firearm sales, compared with $195.8 million, or 29%, in 2013. Management planned capital spending for new-product tooling and equipment modernization.
- The frozen defined-benefit plans were terminated and settled in 2014. The settlement generated a $41.0 million income-statement charge and a $7.5 million cash contribution; management said no further plan contributions would be required.
- Management cited demand volatility, distributor and retail inventory levels, firearm legislation, litigation, raw-material availability and prices, manufacturing-site disruptions, and self-insured medical and product-liability costs as risks. It warned that litigation could materially affect results in a particular period, though management considered a material adverse effect on financial position unlikely.
- Four customers represented 57% of total sales in 2014, creating customer concentration exposure. The company repurchased 680,813 shares for $24.0 million at an average $35.22 per share; $76.0 million remained authorized. The company paid $1.62 per share in dividends during 2014 and declared a 17-cent-per-share dividend for March 2015.
- Management changed machinery and equipment useful-life estimates from 10 to 7 years, increasing 2014 depreciation by approximately $7.1 million; it estimated an additional approximately $3 million in 2015 for equipment on hand at year-end 2013.
- At year-end, the company disclosed approximately three lawsuits and other claims. It reported no contingent-liability accrual on the balance sheet; asserted amounts, where specified, exceeded accruals and applicable insurance coverage. Management said a reasonably possible loss range could not be estimated.
Most important facts for investors to verify
- Whether demand, distributor orders, sell-through, and elevated channel inventories improved after the substantial 2014 downturn.
- Whether margins can recover as production levels, product mix, discounting, and higher depreciation affect unit economics.
- The effect of the $41.0 million pension charge on reported earnings versus ongoing operating performance; reported EBITDA was $126.3 million and excludes the pension termination expense, so compare it with GAAP results.
- Cash generation after capital spending, dividends, and repurchases, and the renewal or replacement of the $40 million credit facility expiring in June 2015.
- Developments in product-liability, municipal, and commercial litigation, and the adequacy of reserves and insurance in light of management’s inability to estimate a reasonably possible loss range.
- Dependence on a small number of wholesale customers and the effect of future firearms legislation, regulation, and raw-material constraints.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.