Sturm, Ruger & Company, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended April 2, 2011; compared with the three months ended April 3, 2010. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted. The company designs, manufactures, and sells firearms primarily in the U.S.; firearms accounted for about 99% of quarterly sales. Management cautioned that interim results are not indicative of full-year results.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $75.4 | $68.3 | Up 10.5% |
| Gross profit / margin | $24.0 / 31.8% | $23.1 / 33.9% | Profit up; margin down 2.1 percentage points |
| Operating income | $12.5 | $12.9 | Down 3.4% |
| Net income | $7.9 | $8.3 | Down 4.4% |
| Diluted EPS | $0.42 | $0.43 | Down $0.01 |
| Operating cash flow | $20.7 | $9.9 | Up $10.8 |
Firearms sales increased 10.7% to $74.4 million; shipments rose 6.2%. Casting sales were approximately $1.0 million, essentially unchanged. Gross margin pressure reflected unfavorable product mix, lower overhead and labor absorption into inventory, and higher product-liability costs. Selling and administrative expenses rose to $11.5 million, primarily due to increased promotion and advertising. The effective tax rate increased to 37.0% from 36.0%.
Financial position and liquidity
- Cash and cash equivalents were $5.4 million and short-term investments were $67.0 million, totaling $72.4 million.
- Current assets were $112.6 million and current liabilities were $37.5 million. The company reported working capital of $75.1 million and a 3.0-to-1 current ratio.
- The company had no debt. Its $25 million credit facility was unused, with a stated expiration date of December 12, 2011.
- Operating cash flow of $20.7 million primarily reflected reduced inventory and receivables. Investing activities used $18.8 million, including net purchases of short-term investments and $4.3 million of capital expenditures. Financing activities used $1.7 million, including $2.0 million of share repurchases and $0.9 million of dividends.
Material changes, outlook, and risks
- Demand indicators strengthened: estimated distributor-to-retailer sell-through rose 12% year over year, and adjusted NICS background checks rose 13%. New products, including the LC9 pistol and Gunsite Scout rifle, represented $20.8 million, or 29%, of sales.
- Orders received increased to $134.7 million from $81.8 million a year earlier; ending backlog rose to $92.9 million from $71.8 million. These figures are net of federal excise tax. Backlog and sell-through estimates depend partly on distributor-provided data and are not direct measures of retail sales.
- Management planned to level-load production and build finished-goods inventory during expected slower periods. It said replenishing inventory could increase its FIFO value by as much as $15 million. Full-year 2011 capital expenditures were expected to be approximately $15 million.
- Inventory quantities declined in the quarter. If the reduction continues through year-end, a LIFO liquidation could materially affect results for the period, although management did not quantify the potential effect; it expected no material effect on financial position.
- Management cited possible raw-material price increases or shortages as risks to production and results. It also noted that distributors might replenish inventories more slowly than desired.
- The company reported approximately four lawsuits and certain other claims. Product-liability claims exceed accruals and applicable insurance coverage in aggregate; management said litigation was unlikely to materially harm financial position but could materially affect results in a particular period. A securities class action remained ongoing after a motion to dismiss was granted in part and denied in part. The filing stated that no reliable range of reasonably possible loss could be estimated.
- Defined-benefit pension plans were frozen; minimum 2011 contributions were approximately $2.5 million, with $0.5 million contributed in Q1. The company also planned approximately $1.5 million of remaining 2011 contributions to its 401(k) plan.
- The company repurchased 133,400 shares at an average $14.94 per share, leaving $8.0 million authorized. The quarterly dividend was $0.05 per share, versus $0.06 a year earlier; future dividends depend on results, cash needs, and other factors.
Important facts for investors to verify
- Whether the strong orders and backlog convert to shipments and sales, and whether distributor sell-through and inventory data remain representative of end-market demand.
- Whether inventory rebuilding, product mix, and any year-end LIFO liquidation affect margins and cash generation.
- Progress toward planned 2011 capital spending and inventory targets, and the resulting impact on liquidity.
- Developments in the pending litigation, product-liability exposure, and pension funding requirements.
- The status and renewal terms of the unused credit facility, which was scheduled to expire in December 2011.