Sturm, Ruger & Company, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Ruger designs, manufactures, and sells firearms, primarily to U.S. customers through independent wholesale distributors. Firearms represented about 99% of 2015 sales; castings and metal-injection-molded parts made up most of the remainder. Exports were about 4% of firearms sales. Four distributors accounted for 59% of 2015 sales, making distributor relationships and order patterns important.
Financial and operating results
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $551.1 million | $544.5 million |
| Gross profit / margin | $172.2 million / 31.2% | $169.2 million / 31.1% |
| Operating income | $94.5 million | $56.3 million |
| Net income | $62.1 million | $38.6 million |
| Diluted earnings per share | $3.21 | $1.95 |
| Cash from operating activities | $112.6 million | $55.6 million |
| Capital expenditures | $28.7 million | $45.6 million |
- Firearms sales rose 0.5% to $544.9 million, while firearms shipments declined 3%. Castings sales increased to $6.2 million from $2.2 million.
- Cash and cash equivalents were $69.2 million at year-end, versus $8.9 million a year earlier. Working capital was $107.3 million and the current ratio was 2.3:1.
- The company reported no debt. Its unused $40 million revolving credit facility was due to expire June 15, 2016. Stockholders’ equity was $227.7 million.
- Dividends paid totaled $20.6 million, or $1.10 per share, in 2015. The board subsequently authorized a $0.35-per-share dividend.
Fourth quarter: Sales were $152.4 million, gross profit was $48.2 million, gross margin was 31.7%, net income was $17.1 million, and diluted EPS was $0.88. In fourth-quarter 2014, sales were $122.6 million, gross margin was 27.7%, and the company recorded a net loss of $14.8 million, including the pension-plan termination charge.
Changes versus prior periods
- Management described demand as rebounding after the 2014 decline. Estimated distributor-to-retailer sell-through rose 7%, and adjusted NICS checks rose 9% year over year. These are indicators, not direct audited measures of retail sales.
- New products contributed $115.4 million, or 21% of firearms sales, compared with $89.4 million, or 16%, in 2014. Net orders received increased 62%, but year-end backlog fell to 430,300 units from 651,400.
- Production declined 8% and shipments declined 3%; company and distributor inventories also fell. Management said supply remained insufficient for certain high-demand models.
- Net income and operating income improved substantially from 2014. The comparison is affected by the $41.0 million pension-plan settlement charge recorded in 2014; the plans were fully funded and terminated that year.
- Gross margin edged up from 31.1% to 31.2%. Management attributed underlying cost improvement mainly to productivity, partly offset by less favorable product mix. SG&A increased to $77.7 million, primarily with higher promotional spending.
Outlook, risks and unusual items
- No quantified sales or earnings guidance for 2016 is provided. Management expected 2016 capital expenditures of approximately $25 million for new-product tooling and equipment modernization, funded from operations and cash; actual spending could vary.
- Demand is sensitive to consumer and firearms-market conditions, product introductions, channel inventories, competitor pricing, and seasonal ordering. The company’s distributor sell-through estimates rely on distributor data and omit retailer inventory changes.
- Material risks include changes to firearms regulation, product-liability or other litigation, raw-material availability and prices, disruption at manufacturing facilities, customer concentration, and employee medical-benefit costs. Most production and sales are domestic.
- At year-end, the company was a defendant in three lawsuits and was aware of other claims, including a product-liability case, a patent-infringement suit concerning features of certain rifles, and longstanding municipal litigation brought by the City of Gary. Management considered material harm to financial position unlikely, while acknowledging litigation could materially affect results in a particular period.
- Product-liability expense was $0.9 million in 2015. The filing reports a $0.744 million reserve in its roll-forward and current and long-term balance-sheet accruals totaling $0.744 million; the filing’s related disclosures should be read together. The company self-insures significant portions of certain risks.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether demand, order growth, and new-product contributions persisted, and whether the shrinking backlog reflects fulfillment or softer future orders.
- Channel inventory and sell-through trends, including the limitations of management’s distributor-derived estimates.
- Renewal or replacement of the $40 million credit facility scheduled to expire in June 2016.
- Developments in the patent and municipal litigation, and any change in product-liability accruals or exposure.
- Actual 2016 capital spending, dividend decisions, and the effect of regulation, raw-material costs, and customer concentration on results.