Sturm, Ruger & Company, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; comparable period ended March 28, 2020. The company designs, manufactures, and sells firearms primarily to U.S. customers. Firearms represented about 99% of sales. Results are unaudited.
Financial performance
Amounts in millions, except per-share data and percentages.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $184.4 | $123.6 | +49.1% |
| Gross profit / margin | $72.6 / 39.4% | $36.0 / 29.1% | Margin +10.3 pts |
| Operating income | $52.0 | $20.2 | +157.7% |
| Net income | $38.2 | $15.3 | +149.0% |
| Net margin | 20.7% | 12.4% | +8.3 pts |
| Diluted EPS | $2.16 | $0.87 | +148.3% |
| EBITDA (non-GAAP) | $59.9 | $27.5 | +118.0% |
| Operating cash flow | $27.8 | $31.1 | Down $3.3 |
| Capital expenditures | $5.5 | $4.1 | Up $1.4 |
Firearms sales rose 49.6% to $183.6 million; shipments increased 34.1%. Castings sales declined 11.4% to $0.8 million. Management attributed stronger gross margin primarily to higher sales and production leveraging fixed costs, fewer promotions, and improved labor efficiencies. SG&A increased 30.1% to $20.6 million, mainly from sales and incentive compensation, but declined as a share of sales to 11.2% from 12.8%.
Liquidity, balance sheet, and capital allocation
- Cash and short-term investments totaled $146.1 million at quarter-end, including $122.0 million in short-term U.S. Treasury instruments. The company reported no debt and no borrowings under its $40 million revolving facility, which expires September 30, 2021.
- Current assets were $252.2 million and current liabilities $73.0 million; reported current ratio was 3.5 to 1. Working capital after the LIFO reserve was $179.2 million.
- Operating cash flow was lower year over year, primarily due to higher receivables and payment of annual incentive compensation; lower inventory in the prior-year period also affected the comparison.
- Dividends paid were $12.5 million, or $0.71 per share. After quarter-end, the board authorized an $0.86-per-share dividend, payable May 28, 2021. The company reported $86.7 million remaining under its share repurchase authorization and no share repurchases in the quarter.
- Management expects about $20 million of 2021 capital expenditures, primarily for new-product tooling and manufacturing upgrades; spending may vary. The company expects to fund operations and investment with cash and operating funds.
Demand, outlook, and notable developments
- Estimated distributor-to-retailer sell-through increased 9% year over year; adjusted NICS checks rose 13%. New products introduced within the prior two years accounted for $34.8 million, or 21%, of firearm sales.
- Production increased 49% year over year. Ending backlog reached $612.3 million, compared with $142.7 million a year earlier; backlog is not the company’s primary production-planning measure. Company and distributor inventory totaled 71,000 units, down from 224,400 a year earlier.
- Management said elevated consumer demand may relate partly to COVID-19 and cannot predict its sustainability. It reported no significant adverse operating impact from pandemic-related restrictions in Q1, but noted future restrictions and effects on supply, demand, and operations remain uncertain.
- The company acquired substantially all Marlin Firearms assets for approximately $28.3 million in November 2020. Marlin rifle shipments were anticipated to begin in Q4 2021.
- Management expects remaining 2021 COVID-related employee health and safety actions to cost approximately $1.5 million. Certain advertising, sponsorship, trade-show, and travel expense reductions or deferrals were about $0.9 million in Q1.
Risks, contingencies, and unusual items
- Inventory quantities declined during Q1. If the reduction persists through year-end, a LIFO liquidation could materially affect results for the period, though management does not expect a material effect on financial position; the impact was not quantified.
- Raw-material availability and price fluctuations could interrupt manufacturing or adversely affect results. The company also self-insures significant portions of certain risks, including product liability and workers’ compensation.
- The company disclosed five lawsuits and other claims, including product-liability matters, a trademark dispute, and the City of Gary municipal litigation. Management stated litigation was not probable or expected to materially harm financial position, but could materially affect results in a particular period. A range of reasonably possible losses could not be estimated.
- The $40 million credit facility includes a minimum-EBITDA covenant when drawn. The company reported compliance at quarter-end. It had drawn $1 million while noncompliant in Q1 2020, repaid it that quarter, and later received a waiver.
- The effective tax rate was 27.1%, compared with 26.3% a year earlier. The filing cautions that interim results may not indicate full-year performance and provides no full-year earnings or sales guidance.
Most important facts for investors to verify
- Whether elevated firearm demand, backlog, and sell-through persist, and how distributor and retailer inventory levels develop.
- Whether the anticipated Q4 2021 start of Marlin rifle shipments and the planned capital spending proceed as expected.
- Year-end inventory quantities and any resulting LIFO liquidation effect.
- Developments and potential financial exposure in the disclosed lawsuits, particularly the City of Gary and trademark cases.
- Cash generation, dividend capacity, and continued compliance with the credit facility if it is renewed or drawn.