Sturm, Ruger & Company, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 28, 2014. Unaudited interim results; amounts below are in millions unless stated otherwise. The company designs, manufactures, and sells firearms primarily through independent U.S. distributors. Firearms represented 99.6% of sales; exports were approximately 5%.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $153.7 | $179.5 | $323.5 | $335.4 |
| Gross profit / margin | $50.4 / 32.8% | $70.7 / 39.4% | $111.5 / 34.5% | $132.0 / 39.4% |
| Operating income | $33.0 | $50.8 | $71.0 | $87.9 |
| Net income | $22.3 | $32.3 | $46.6 | $56.0 |
| Diluted EPS | $1.12 | $1.63 | $2.34 | $2.83 |
| Operating cash flow | Not presented quarterly | $35.6 | $69.8 |
- First-half operating cash flow was reduced by inventory and other-asset increases and decreases in accounts payable and employee compensation. Capital expenditures were $22.8 million and dividends paid were $20.0 million.
- At June 28, cash was $47.4 million; working capital was $84.7 million after the LIFO reserve, and the current ratio was 2.3:1. The company had no debt and its $40 million revolving credit facility was unused; it expires June 15, 2015.
- Total assets were $283.7 million and stockholders’ equity was $207.1 million. Cash declined $7.6 million from year-end 2013.
Material changes and operating trends
- Q2 sales fell 14.4% year over year and first-half sales fell 3.5%; first-half net income declined 16.8%. First-half firearms sales decreased 2.4%, while castings sales fell 73.8%, following the company’s 2013 decision to prioritize internal casting needs and end many external customer relationships.
- Management cited an industry-wide demand slowdown, competitor discounting, and a lack of recent major product introductions. Adjusted NICS checks fell 12% in Q2 and 18% in the first half. Estimated company sell-through declined 31% in Q2 and 11% in the first half.
- First-half orders received declined 66% year over year; ending backlog was approximately 986,000 units, versus 2.04 million a year earlier. First-half distributor-to-retailer sell-through was nevertheless the company’s second-highest on record, and new products accounted for $57.1 million, or 18%, of first-half firearm sales.
- Gross margin contracted as sales volume and accessory mix weakened and depreciation increased. Selling, general and administrative expenses decreased, primarily with lower volume-driven promotional spending. The 2013 change in machinery useful-life estimates increased depreciation by $4 million in the first half; management estimated an approximately $8 million increase for 2014 on equipment held at year-end 2013.
- Company finished-goods inventory rose by 75,400 units in the first half, while distributor inventory increased by 120,800 units. Net balance-sheet inventory rose to $40.4 million from $23.3 million at year-end.
Outlook, risks and notable items
- No specific revenue or earnings forecast is provided. Management expected approximately $40 million of 2014 capital expenditures for new-product tooling and manufacturing upgrades, funded from operations and existing cash. It said production and staffing were being adjusted to demand, and capital projects had been curtailed or delayed.
- The board authorized a 45-cent-per-share dividend payable August 29, 2014, and increased the share-repurchase authorization from $25 million to $100 million on July 29, 2014.
- The company was preparing to fund and terminate its frozen defined-benefit pension plans, potentially in late 2014 or early 2015. Management warned settlement could materially affect results in the period and could materially affect financial position; timing and cost were uncertain.
- Management reported approximately four lawsuits, including product-liability, municipal, and commercial matters. It said a material adverse effect on financial position was unlikely, but litigation could materially affect results in a particular period. A reasonably possible loss range was not provided. Product-liability coverage has stated limits and exclusions.
- Other risks include demand volatility, firearms legislation, raw-material availability and prices, and forward-looking estimates. The filing reported no material change in previously disclosed risk factors. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand, distributor inventories, new orders, and the sharply lower backlog stabilize or continue to weaken.
- Whether inventory rebuilding and production adjustments affect future cash generation, margins, and LIFO valuation.
- The timing, funding requirements, and accounting impact of pension-plan settlement and termination.
- Potential outcomes and insurance coverage for litigation, given the absence of a stated reasonably possible loss range.
- Execution and funding of planned capital expenditures, dividends, and the expanded repurchase authorization.