Sturm, Ruger & Company Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2019. The company designs, manufactures, and sells firearms, principally through independent wholesale distributors; firearms generated approximately 99% of sales.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $96.3 million | $128.4 million | $210.4 million | $259.6 million |
| Gross profit / margin | $22.3 million / 23.2% | $36.6 million / 28.5% | $54.9 million / 26.1% | $72.4 million / 27.9% |
| Operating income | $7.5 million | $19.4 million | $23.9 million | $38.0 million |
| Net income | $6.2 million | $15.2 million | $19.3 million | $29.5 million |
| Diluted EPS | $0.35 | $0.86 | $1.09 | $1.68 |
| Operating cash flow | Not separately provided | Not separately provided | $(6.4) million | $81.0 million |
First-half capital expenditures were $3.9 million. Cash and short-term investments totaled $131.8 million at June 29, 2019; the company reported no debt. Working capital was $177.5 million after the LIFO reserve, and the current ratio was 5.1 to 1. Its $40 million revolving credit facility was undrawn and scheduled to expire August 31, 2019. Cash dividends paid in the first half were $10.0 million.
Material changes and operating trends
- Compared with the prior-year periods, Q2 sales fell 25.0%, gross profit fell $14.3 million, and net income fell 59.0%. For the first half, sales declined 19.0% and net income declined 34.6%.
- Firearms shipments declined 30.0% in Q2 and 28.4% in the first half. Management estimated distributor-to-retailer sell-through fell 26% in the first half, versus a 5% decline in adjusted NICS checks.
- Management attributed weaker sell-through to competitors’ promotions and extended payment terms, fewer new-product shipments than in the prior-year period, increased used-firearm sales, cautious retailer purchasing, and the bankruptcy of a formerly significant distributor in June 2019. Distributor inventory data for Q2 excludes any inventory remaining at that bankrupt distributor.
- Management reduced production 20% from Q1. Company and reported distributor inventories decreased by 18,400 units in Q2, although combined ending inventories were 388,600 units versus 337,400 a year earlier.
- New products introduced in the prior two years accounted for $43 million, or 22%, of first-half firearm sales. A 5% price increase on most products took effect January 1, 2019.
- Gross margin pressure reflected lower sales and production and resulting fixed-cost deleverage, partly offset by the price increase. Selling and administrative expenses declined 13.9% in Q2, primarily due to lower sales-promotion expenses.
Liquidity, outlook, and risks
First-half operating cash flow turned negative, compared with strong positive cash flow a year earlier. Management cited lower net income, inventory growth versus a substantial prior-year inventory reduction, lower customer contract liabilities, and other balance-sheet movements. The filing gives no revenue or earnings guidance. Management expected approximately $15 million of 2019 capital spending, principally for new-product tooling and manufacturing upgrades, funded from operations and existing cash; actual spending could vary.
Management said raw materials were available in adequate quantities or on order, but warned that prolonged price inflation, including from tariffs, or supply shortages could disrupt manufacturing and materially adversely affect results. Other risks include uncertain firearm demand, pending litigation, regulatory changes, and self-insurance exposure.
- Litigation: The company reported five lawsuits. In the City of Gary case, the Indiana Court of Appeals affirmed dismissal of design and warning claims but reinstated negligent sale/distribution and related public-nuisance claims; defendants petitioned the Indiana Supreme Court to transfer the case. Management said litigation was not expected to materially harm financial position, but could materially affect results in a particular period.
- Unusual items: First-half cost of sales included a $0.2 million reduction for estimated remaining product-safety-bulletin costs. The company adopted lease accounting in 2019 and reported $2.6 million of right-of-use assets and lease liabilities, with no stated income-statement impact.
- Dividends: After quarter-end, the board authorized a $0.14-per-share dividend payable August 30, 2019, subject to the stated record date.
Important facts for investors to verify
- Whether firearm sell-through, orders, and distributor inventories stabilize, particularly given the missing inventory data for the bankrupt distributor.
- Whether production reductions and inventory levels support margins and operating cash flow recovery.
- Renewal or replacement of the $40 million credit facility scheduled to expire August 31, 2019.
- Developments in the City of Gary appeal and other product-liability matters, including potential exposure beyond recorded accruals and insurance.
- How tariffs, raw-material availability, and planned capital expenditures affect costs, manufacturing, and liquidity.