Sturm, Ruger & Company, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The company designs, manufactures, and sells firearms, primarily in the United States through independent wholesale distributors. Firearms generated about 99% of sales; castings and MIM parts about 1%. The filing also reports fourth-quarter results.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $410.5 million | $495.6 million |
| Gross profit / margin | $99.5 million / 24.3% | $134.4 million / 27.1% |
| Operating income / margin | $39.4 million / 9.6% | $67.0 million / 13.5% |
| Net income | $32.3 million | $50.9 million |
| Diluted earnings per share | $1.82 | $2.88 |
| Cash provided by operating activities | $49.6 million | $119.8 million |
| Capital expenditures | $20.3 million | $10.5 million |
Firearms sales were $406.3 million, down 17.2%; castings sales were $4.2 million, down 16.9%. Firearms shipments fell 19%, and estimated distributor sell-through to retailers declined 18%. Adjusted NICS background checks rose 1%, although the filing notes that excluding Alabama and Minnesota they fell 1%.
Fourth quarter: Sales were $105.1 million versus $121.1 million in Q4 2018; gross profit was $24.8 million versus $33.8 million; net income was $8.2 million versus $12.3 million. Gross margin was 23.6%, compared with 27.9%.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $35.4 million and short-term U.S. Treasury investments were $129.5 million. Working capital was $188.1 million and the current ratio was 4.1 to 1. The company had no debt and its $40 million unsecured revolving credit facility was unused; it was scheduled to expire September 30, 2020. The company paid $14.3 million in dividends during 2019 and repurchased 44,500 shares for $2.0 million. Approximately $86.7 million remained authorized for repurchases.
Changes, outlook and risks
- Annual sales fell 17.2% and net income fell 36.6% versus 2018. Management attributed weaker demand relative to industry indicators partly to aggressive competitor promotions, distributor failures and liquidations, the loss of smaller distributors, used-firearm sales, and cautious retailer purchasing.
- Gross margin declined 2.8 percentage points. Lower sales and production reduced fixed-cost absorption; promotional accounting under ASC 606 also affected reported margins. The filing says ASC 606 reduced gross margin by about 3 percentage points in both 2019 and 2018.
- Management expected 2020 capital expenditures of approximately $20 million, principally for new-product tooling and modernization. It estimated a 2020 effective tax rate of approximately 24.8%. No specific sales or earnings guidance is provided. The board authorized a $0.18-per-share dividend on February 14, 2020.
- New products generated $102.0 million, or 26% of firearms sales, down from $145.6 million, or 30%, in 2018. The year-end backlog increased to 187,900 units from 153,000.
- Customer and distribution concentration is material: the three largest distributors represented 63% of firearms sales in 2019. Two domestic distributors filed for bankruptcy protection since 2018, and three smaller distributors discontinued firearms distribution during 2019.
- Litigation, firearms legislation, product-liability claims, distributor financial health, demand volatility, raw-material availability and pricing, facility disruption, and cybersecurity are identified risks. The company disclosed five lawsuits at year-end, including the City of Gary matter, which returned to trial court after appellate proceedings. Management considered a material adverse effect on financial position unlikely, while noting litigation could materially affect results or cash flows in a particular period.
Investor verification priorities
- Track end-market demand, distributor and retailer inventory, backlog conversion, and the effects of distributor losses on shipments and collections.
- Assess margin recovery, including fixed-cost absorption, promotions, and ASC 606 contract-liability effects.
- Review cash generation against planned capital spending, dividends, and potential share repurchases; confirm the status of the credit facility after its stated September 2020 expiry.
- Monitor the City of Gary litigation and other product-liability matters, as well as regulatory developments and any product recalls or safety bulletins.