Sturm, Ruger & Company, Inc. — Q2 2020 Form 10-Q
Business context and period. The company designs, manufactures, and sells firearms, primarily to U.S. customers through independent distributors; firearms accounted for approximately 99% of sales. The unaudited quarter and six-month periods ended June 27, 2020, are compared with periods ended June 29, 2019.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $130.3 million | $96.3 million | $253.9 million | $210.4 million |
| Gross profit / margin | $40.1 million / 30.8% | $22.3 million / 23.2% | $76.1 million / 30.0% | $54.9 million / 26.1% |
| Operating income | $24.0 million | $7.5 million | $44.2 million | $23.9 million |
| Net income | $18.6 million | $6.2 million | $33.9 million | $19.3 million |
| Diluted EPS | $1.05 | $0.35 | $1.91 | $1.09 |
| Operating cash flow | Not provided separately for the quarter | $78.1 million | $(6.4) million |
Q2 sales grew 35.2% and first-half sales grew 20.7%; net income rose 198.3% and 76.1%, respectively. Firearms shipments increased 37.1% in Q2 and 30.1% in the first half. Margin improvement reflected higher sales and production, fixed-cost leverage, and fewer promotions. A $0.9 million reduction in estimated product safety bulletin and recall costs also benefited first-half gross profit. Castings sales declined 37.3% in Q2 and 30.0% in the first half.
First-half EBITDA, a company-defined non-GAAP measure, was $59.0 million versus $39.5 million. The company cautions that EBITDA may not be comparable with similarly titled measures used by other companies.
Financial position and liquidity
At June 27, 2020, cash was $17.7 million and short-term investments were $208.9 million, totaling $226.6 million. Working capital was $218.6 million after the LIFO reserve, and the current ratio was 3.9 to 1. The company had no debt and no balance drawn on its $40 million revolving credit facility. The facility was scheduled to expire September 30, 2020.
Net inventory fell to $12.1 million from $28.3 million at year-end 2019. First-half operating cash flow improved to $78.1 million from cash used of $6.4 million, helped by lower inventory and increases in payables and employee compensation liabilities. Capital expenditures were $5.9 million; the company expected approximately $20 million for full-year 2020. Dividends paid in the first half were $9.3 million.
Outlook, commentary, and risks
- Demand and backlog: Estimated distributor-to-retailer sell-through rose 47% in the first half, while NSSF-adjusted NICS checks rose 65%. Orders and ending backlog increased sharply; reported Q2 ending backlog was $255.6 million. These indicators are not direct measures of final retail demand, and the company does not use orders or backlog as its primary production-planning metrics.
- COVID-19: The company reported no significant adverse business impact through the first half and kept facilities open, but said the pandemic’s future effects on operations, demand, suppliers, and financial results could not be predicted. Safety measures and paid leave were expected to cost about $3 million in 2020; approximately $1.6 million had been recognized in the first half. The company also reported about $1.0 million of expense reductions or deferrals, mostly in Q2.
- Inventory and LIFO: Inventory quantities declined in the first half. If the reduction remains through year-end, a LIFO liquidation could materially affect results for the period, though management did not expect a material effect on financial position; the amount was not quantifiable at filing.
- Credit facility covenant: The company drew $1 million in Q1 while out of compliance with a minimum-EBITDA covenant, repaid the draw before quarter-end, and received a lender waiver on June 30, after the reporting date.
- Dividends: After quarter-end, the board authorized a $0.42-per-share quarterly dividend and a $5.00-per-share special dividend, payable August 28, 2020, to shareholders of record August 14. Future dividends remain dependent on performance, liquidity, and funding needs.
- Legal and operating risks: Four lawsuits were disclosed, including product-liability, trademark, and municipal litigation. Management said litigation was unlikely to materially harm financial position but could materially affect results in a particular period; a reasonably possible loss range was not provided. The company also cited raw-material availability and cost, supplier disruption, distributor changes, regulation, and COVID-19 uncertainty as risks.
Important facts for investors to verify
- Whether elevated consumer demand, distributor sell-through, and backlog persist, and how they translate into shipments and retail sales.
- Year-end inventory levels and any resulting LIFO liquidation impact on earnings.
- Renewal or replacement of the $40 million credit facility before its stated September 30, 2020 expiration, and the status of covenant compliance.
- Actual COVID-19 costs, production constraints, supplier conditions, and progress against the approximately $20 million capital expenditure expectation.
- Payment and funding effects of the post-quarter dividends, and developments in the disclosed lawsuits and related contingencies.