Sturm, Ruger & Company, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018 unless otherwise noted. The company designs, manufactures, and sells firearms, primarily in the United States; firearms accounted for about 99% of sales.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $114.0 million | $131.2 million | Down 13.1% |
| Gross profit / margin | $32.6 million / 28.6% | $35.8 million / 27.3% | Profit down $3.2 million; margin up 1.3 percentage points |
| Operating income | $16.5 million | $18.6 million | Down $2.1 million |
| Net income | $13.0 million | $14.3 million | Down 8.6% |
| Diluted EPS | $0.74 | $0.81 | Down $0.07 |
| EBITDA (non-GAAP) | $24.2 million | $27.1 million | Down 10.6% |
| Operating cash flow | $(10.3) million | $45.3 million | Cash used versus cash provided |
| Capital expenditures | $2.7 million | $1.4 million | Up $1.3 million |
Firearms sales were $112.9 million, down 13.1%; castings sales were $1.1 million, down 13.3%. Firearm unit shipments declined 26.9%. New products contributed $20.9 million, or 20% of firearm sales. The effective tax rate was 25.1%, versus 24.5%.
Liquidity, debt, and balance sheet
At March 30, 2019, cash and short-term investments totaled $134.9 million ($35.4 million cash and $99.5 million short-term investments). Working capital was $171.2 million after the LIFO reserve, and the current ratio was 4.1 to 1. The company reported no debt and had an unused $40 million revolving credit facility, expiring August 31, 2019. Total assets were $331.7 million and stockholders’ equity was $273.9 million.
Operating cash flow fell sharply year over year, which management attributed mainly to inventory growth, a decline in customer contract liabilities, and other balance-sheet movements. Inventory rose to $36.5 million net of reserves from $31.4 million at year-end; company and distributor firearm inventories together increased 27,000 units during the quarter.
Material changes and management commentary
- Estimated distributor-to-retailer sell-through fell 32% year over year, while adjusted NICS background checks declined 8%. Distributor ending inventory was 274,700 units, and company inventory was 132,300 units.
- Gross margin improved despite lower sales. Management cited a 5% price increase effective January 1, 2019 and lower underlying product costs as contributors. Higher product-liability expense and LIFO expense partly offset the improvement.
- ASC 606 revenue timing materially affects year-over-year comparability: the standard increased Q1 2019 sales by $3.5 million and decreased Q1 2018 sales by $2.4 million. The company expected $4.0 million of customer contract liabilities at quarter-end to be recognized in Q2 2019.
- The company adopted the new lease standard on January 1, 2019, recognizing $2.7 million in right-of-use assets and lease liabilities, with no reported impact on income or cash flow statements.
Outlook, risks, and contingencies
Management expected approximately $25 million of 2019 capital expenditures, primarily for new-product tooling and manufacturing upgrades; actual spending may vary. No earnings or sales guidance was provided. The board authorized a $0.29-per-share dividend on May 7, 2019, payable May 31, 2019. Future dividends depend on performance, cash, and funding needs.
Management highlighted risks from uncertain firearm demand, raw-material availability and potential tariff-driven cost inflation, litigation, and future firearms-control or environmental regulation. The company self-insures significant portions of product liability, workers’ compensation, and other coverage. As of March 30, it was a defendant in seven lawsuits; management said litigation was unlikely to materially affect financial position, but could materially affect results in a particular period. The City of Gary case remained on appeal. The filing reported no material change in risk factors from the 2018 Form 10-K.
Important facts for investors to verify
- Whether sell-through, distributor inventories, and order trends stabilize after the sharp year-over-year demand decline.
- How much of reported sales and margin comparisons reflect ASC 606 timing versus underlying demand and pricing.
- Whether inventory growth and negative operating cash flow reverse in subsequent quarters.
- Progress and spending against the approximately $25 million capital expenditure plan, and renewal or replacement of the credit facility due to expire August 31, 2019.
- Developments in product-liability and other litigation, including the City of Gary appeal, and any resulting changes to accruals or insurance exposure.