Sturm, Ruger & Company, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 27, 2015; comparisons are to the periods ended June 28, 2014. The company designs, manufactures, and sells firearms, primarily in the U.S. through independent distributors. Castings accounted for about 1% of sales and exports about 4%.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $140.9 million | $153.7 million | $277.8 million | $323.5 million |
| Gross profit / margin | $48.5 million / 34.4% | $50.4 million / 32.8% | $89.9 million / 32.4% | $111.5 million / 34.5% |
| Operating income | $26.7 million | $33.0 million | $50.5 million | $71.0 million |
| Net income | $17.6 million | $22.3 million | $33.1 million | $46.6 million |
| Diluted EPS | $0.91 | $1.12 | $1.71 | $2.34 |
| EBITDA (non-GAAP) | $36.2 million | $42.1 million | $69.4 million | $89.4 million |
- First-half sales declined 14.1%; firearms sales fell 14.7%, with firearms unit shipments down 19.5%. Casting sales increased from a small base.
- First-half net income declined 29.0%; EBITDA declined 22.3%. Q2 gross margin improved year over year, while first-half gross margin contracted.
- Operating cash flow was $80.9 million in the first half, versus $35.6 million a year earlier. Capital expenditures were $16.3 million, and cash increased to $61.1 million from $8.9 million at year-end.
- At June 27, working capital was $86.3 million after the LIFO reserve, and the current ratio was 2.2 to 1. The company had no debt; its $40 million revolving facility was unused and expires June 15, 2016.
- Cash dividends paid in the first half were $9.2 million. The board subsequently authorized a $0.36-per-share dividend, payable August 28, 2015. The company also repurchased 82,100 shares for $2.8 million; $73.2 million remained authorized.
Changes, management commentary, and outlook
- Management estimated distributor-to-retailer sell-through fell 9% in the first half, while adjusted NICS background checks rose 3%. Management attributed weaker demand to retailers restocking more conservatively after weak 2014 consumer demand, and noted reduced confidence in adjusted NICS as a demand proxy.
- New products, including the AR-556 and LC9s, generated $47.7 million, or 17%, of first-half firearm sales. The company reported a second-quarter backlog of $123.8 million, approximately three months of shipments at the quarter’s unit volume, and said it believed this was more realistic than elevated prior-year backlog.
- Production was down 26% in the first half year over year, although Q2 production increased 32% from Q1. Company and distributor inventories both rose during Q2.
- Q2 selling and administrative expenses increased, mainly due to summer promotions and the “2 Million Gun Challenge to Benefit the NRA”; first-half expenses decreased modestly, chiefly from lower performance-based compensation and IT costs.
- The company expected approximately $30 million of 2015 capital expenditures for new-product tooling and manufacturing upgrades, funded from operations and cash. No full-year earnings or sales guidance was provided.
- First-half operating cash flow benefited from inventory reductions and lower incentive-compensation payments, partly offset by lower earnings and higher receivables. The pension plans were fully funded and terminated in 2014, with no future contributions expected.
Risks, contingencies, and unusual items
- Two lawsuits were disclosed: one traditional product-liability case and the long-running City of Gary municipal case, for which a status conference was scheduled for July 27, 2015. Management viewed a material adverse effect on financial position as unlikely, but litigation could materially affect results in a particular period; a reasonably possible loss range was not available.
- The company self-insures significant portions of product liability, workers’ compensation, medical, and other coverage. Aggregate claims exceed product-liability accruals and applicable insurance coverage, according to the filing.
- Raw-material availability and price fluctuations could disrupt manufacturing or adversely affect results. The company reported adequate materials on hand or on order but cautioned that prolonged inflation or shortages could be material.
- Interim LIFO estimates may change at year-end. Inventory quantities had declined in the first half; management said any 2015 LIFO liquidation, if it occurred, was not expected to have a material effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2014 Form 10-K.
Key facts for investors to verify
- Whether sell-through, distributor inventories, and backlog indicate a durable recovery or continued cautious restocking.
- How lower production and sales volumes affect fixed-cost absorption, margins, and inventory levels in subsequent quarters.
- Whether the $30 million capital-spending plan and dividend/repurchase activity remain supportable from operating cash flow.
- Developments in the City of Gary matter and product-liability claims, including any changes in exposure, accruals, or insurance coverage.
- Year-end LIFO valuation and the company’s ability to secure raw materials at acceptable prices.