Sturm, Ruger & Company, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. The company designs, manufactures, and sells firearms, principally in the U.S.; firearms generated about 99% of sales, with exports about 3% of firearms sales.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $664.3 million | $551.1 million |
| Gross profit / margin | $219.6 million / 33.0% | $172.2 million / 31.2% |
| Operating income / margin | $134.4 million / 20.2% | $94.5 million / 17.2% |
| Net income | $87.5 million | $62.1 million |
| Diluted EPS | $4.59 | $3.21 |
| Cash from operations | $104.8 million | $112.6 million |
| Capital expenditures | $35.2 million | $28.7 million |
- Sales rose 20.5%; firearms sales increased 20.8%, while castings sales declined 5.6% to $5.9 million. Firearms shipments increased 18.3%.
- Margin expansion reflected higher volume and improved productivity. SG&A increased to $85.1 million, but declined as a share of sales to 12.8% from 14.1%.
- Cash and cash equivalents were $87.1 million; working capital was $142.7 million and the current ratio 2.8:1. The company reported no debt; its unused $40 million revolving credit facility expired June 15, 2017.
- Stockholders’ equity was $265.9 million. Dividends paid totaled $32.8 million, or $1.73 per share. The company repurchased 283,343 shares for $14.0 million during 2016.
- For Q4 2016, sales were $161.8 million, gross profit $53.5 million (33.1% margin), net income $20.8 million, and diluted EPS $1.10. Q4 2015 sales were $152.4 million and net income $17.1 million.
Changes, demand and management outlook
- Estimated distributor-to-retailer sell-through increased 12% in 2016; adjusted NICS checks increased 10%. Management attributed demand to seasonal and election-related strength, new products, increased production of popular models, and improved rimfire ammunition availability.
- New products generated $192.6 million, or 29% of firearms sales, versus $115.4 million, or 21%, in 2015. Orders received increased 49%; year-end backlog rose to 621,400 units from 430,300.
- Production increased 23.5%. Company firearm inventory rose 70,000 units to 157,400; distributor inventory increased 48,300 units to 319,300. Sell-through and backlog figures are management estimates and do not capture retail inventory.
- Operating cash flow declined despite higher earnings, principally because inventory increased. The company budgeted approximately $40 million of 2017 capital expenditures, largely for new-product tooling and modernization, expecting to fund investment from cash and operations; actual spending may vary.
- The board authorized a 44-cent-per-share dividend in February 2017. From January 1 through February 17, 2017, the company repurchased 633,600 shares for $31.5 million; $27.5 million of authorization remained at February 17.
- CEO Michael Fifer planned to retire effective May 9, 2017, with President and COO Christopher Killoy expected to succeed him.
Risks, contingencies and unusual items
- Demand is sensitive to market conditions and firearms policy; management cautioned that historical performance may not predict future results. Regulation, legislation, and litigation could constrain sales or increase costs.
- Four distributors accounted for 65% of 2016 sales, and the company cited distributor financial health and receivables collection as risks. It also faces raw-material cost and availability, manufacturing disruption, cybersecurity, and key-personnel risks.
- At year-end, the company was defendant in five lawsuits, including three traditional product-liability cases, patent litigation, and the long-running City of Gary municipal case. Management said material impact on financial position was unlikely, but litigation could materially affect results in a particular period. Product-liability expense increased to $2.1 million from $0.9 million.
- The company self-insures significant portions of product liability and other coverage. It reported no contingent-liability accrual on the balance sheet; its product-liability reserve was $1.8 million at year-end.
- 2016 promotional payments to the NRA were $8.4 million, primarily for promotional campaigns; a company director also served on the NRA board. The 2014 defined-benefit pension termination charge of approximately $41 million was a prior-period unusual item, not a 2016 charge.
Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether 2016 demand, new-product contribution, orders, and backlog translate into sustained end-market sales rather than channel inventory growth.
- Distributor concentration, receivables quality, and the reliability and limitations of management’s sell-through estimates.
- Cash conversion and inventory levels, especially given lower operating cash flow and higher company inventory in 2016.
- Developments in product, patent, and municipal litigation; the adequacy of reserves and insurance, including self-insured exposures.
- Execution and funding of the 2017 capital plan, credit-facility renewal, and the sustainability of variable dividends and share repurchases.