Sturm, Ruger & Company, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Unless stated otherwise, amounts below are in U.S. dollars; financial-statement amounts are in millions.
Business context
Ruger designs, manufactures, and sells firearms, primarily in the United States through independent wholesale distributors. Firearms generated about 99% of 2011 sales; investment castings generated about 1%. Exports were approximately 5% of firearms sales. New-product launches and improved product availability were key demand drivers.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $328.8 | $255.2 | +28.8% |
| Gross profit / margin | $111.8 / 34.0% | $84.0 / 32.9% | Margin +1.1 points |
| Operating income / margin | $62.4 / 19.0% | $43.4 / 17.0% | +43.8% income |
| Net income | $40.0 | $28.3 | +41.6% |
| Diluted EPS | $2.09 | $1.46 | +43.2% |
| Cash from operations | $57.4 | $32.5 | +$24.9 |
Fourth-quarter 2011 sales were $93.2 million, gross profit $30.2 million (32.4% margin), net income $10.5 million, and diluted EPS $0.54. In Q4 2010, the corresponding figures were $64.1 million, $20.5 million (32.0%), $5.7 million, and $0.30.
At year-end, cash and cash equivalents were $81.1 million, with no short-term investments; working capital was $96.6 million and the current ratio was 3.0:1. The company had no debt and its $25 million revolving credit facility was unused. Capital expenditures were $22.1 million; dividends paid were $8.2 million. The defined-benefit pension plans were underfunded by $19.1 million, compared with $9.4 million a year earlier.
Material changes and operating developments
- Firearms sales rose 28.8%, with unit shipments up 24.4%; casting sales increased 30.9% to $4.6 million.
- Management attributed higher demand to new products, mature-product demand, and increased production capacity. New products represented $98.6 million, or 30% of sales. Adjusted NICS checks rose 14%; estimated distributor-to-retailer sell-through rose 20%.
- Orders received increased to $385.9 million from $229.4 million. Year-end order backlog was $98.2 million versus $34.9 million. Units on backorder rose to 337,400 from 106,800.
- Gross margin improvement reflected higher volume and lean-manufacturing productivity, partly offset by higher input costs. SG&A rose to $49.7 million, although it declined as a percentage of sales to 15.1% from 15.7%.
- Product-liability expense was $1.6 million, versus negligible expense in 2010. The effective tax rate rose to 37.0% from 36.0%.
Outlook, risks, contingencies, and unusual items
- Management planned approximately $20 million of 2012 capital expenditures, funded from operations and existing cash and investments. It expected to replenish finished-goods inventory; doing so could increase its FIFO value by as much as $15 million and could take more than a year.
- The ERP system rollout was expected to be completed by the end of 2012. Implementation problems could disrupt manufacturing, purchasing, reporting, invoicing, or compliance.
- On February 14, 2012, the board authorized a dividend of $0.212 per share. Future dividends remain subject to company needs and performance.
- Risks include volatile firearms demand, regulation or legislation, raw-material availability and pricing, facility disruption, litigation, self-insured exposures, and healthcare-cost changes. Four lawsuits were reported as pending at year-end; management said litigation could materially affect results in a particular period, though it did not expect a material adverse effect on financial position. Claimed amounts exceeded product-liability accruals and applicable insurance coverage, and a reasonably possible loss range was not estimable.
- Other notable items: pension-plan underfunding increased materially; the company made a $969,000 investment for a 12% interest in a pepper-spray company; and it repurchased 133,400 shares for approximately $2.0 million.
Most important facts for investors to verify
- Whether elevated orders and backlog convert into shipments and end-customer sales without a subsequent inventory correction. The filing gives backlog of $98.2 million at December 31 and approximately $138 million as of February 1, 2012.
- Whether production capacity, product availability, and new-product demand sustain margins and growth; new-product launches may not repeat their 2011 contribution.
- Progress and costs of the ERP rollout, planned capital spending, and finished-goods inventory rebuilding.
- Developments in product-liability and securities litigation, insurance coverage, and the unfunded pension obligation and required contributions.
- Distributor and customer concentration: the four largest customers represented 53% of 2011 sales. Also assess exposure to firearms legislation, raw-material costs, and the company’s self-insured medical and other risks.