Sturm, Ruger & Company, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 2, 2022; comparisons are with the periods ended July 3, 2021. The company designs, manufactures, and sells firearms, primarily in the U.S. Firearms accounted for approximately 99% of sales; exports were 7% of first-half sales.
Financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $140.7 million | $200.1 million | $307.2 million | $384.4 million |
| Gross profit / margin | $43.6 million / 31.0% | $78.8 million / 39.4% | $101.7 million / 33.1% | $151.3 million / 39.4% |
| Operating income | $25.2 million | $59.7 million | $63.9 million | $111.6 million |
| Net income | $20.8 million | $44.4 million | $51.0 million | $82.6 million |
| Diluted EPS | $1.17 | $2.50 | $2.87 | $4.66 |
| EBITDA, non-GAAP | $32.6 million | $67.5 million | $79.0 million | $127.4 million |
| EBITDA margin, non-GAAP | 23.2% | 33.8% | 25.7% | 33.1% |
First-half operating cash flow was $32.4 million, versus $76.2 million a year earlier. Capital expenditures were $14.3 million, compared with $11.5 million. Cash and cash equivalents were $43.5 million at July 2; short-term investments were $165.0 million, for combined cash and investments of $208.5 million. The company had no borrowings under its $40 million revolving credit facility and reported no debt. Working capital was $279.6 million after the LIFO reserve, and the current ratio was 6.1 to 1.
Changes and operating trends
- Q2 sales fell 29.7% year over year and first-half sales fell 20.1%. Management attributed the declines to demand easing from the unusually high levels experienced from 2020 through most of 2021.
- Estimated distributor-to-retailer sell-through declined 31% in the first half; adjusted NICS background checks declined 17%. First-half production was down 15% year over year.
- Gross margin contracted by 8.4 percentage points in Q2 and 6.3 points in the first half. Management cited lower volume and unfavorable fixed-cost deleveraging, weaker labor efficiencies, and inflation in materials, commodities, services, energy, fuel, and transportation; increased pricing partly offset cost pressure.
- At Q2 end, company finished-goods inventory had increased by 49,300 units during the quarter and distributor inventory by 28,200 units. Combined company and distributor inventory was 372,500 units, versus 63,200 a year earlier. The company cautions that these figures exclude retailer inventory and may not capture goods in transit.
- New products introduced in the prior two years generated $33.8 million, or 11% of first-half firearm sales.
- The effective tax rate declined to 20.5% for Q2 and 22.3% for the first half, from 26.4% and 26.7%, respectively, primarily due to R&D tax credits.
Outlook, risks, and other notable items
- No revenue or earnings guidance was provided. Management expects approximately $25 million of 2022 capital expenditures, principally for new-product tooling and fixtures and manufacturing-equipment upgrades; actual spending may vary. The company expects to fund operations and investment from operating cash and existing cash.
- Management reported limited deliveries of some raw materials during the first half and warned that prolonged inflation or insufficient supply could disrupt production and materially harm results or financial condition.
- Management said COVID-19 had not significantly adversely affected the business during the first half, but future effects remain uncertain. It also noted that demand is seasonal and distributor orders often weaken in Q3.
- The board authorized a dividend of $0.47 per share on August 3, 2022, payable August 31 to holders of record August 17. The company says its variable dividend practice targets approximately 40% of net income; future payments depend on performance, cash, and funding needs.
- Three lawsuits were pending at July 2: one traditional product-liability case, the City of Gary municipal case, and Mexico’s lawsuit against firearms manufacturers. The court had not ruled on motions to dismiss in the Mexico case. Management said a material adverse effect on financial position was not probable and was unlikely, while litigation could materially affect results in a particular period. Certain government or municipal claims are excluded from the described product-liability insurance coverage; a reasonably possible loss range was not estimable.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material change in risk factors from its 2021 Form 10-K.
Investor verification checklist
- Check subsequent quarterly results for whether demand, distributor inventories, production, and margins stabilized or continued to weaken.
- Verify whether raw-material availability and inflation affected production costs, shipment volumes, and the planned $25 million capital-spending program.
- Monitor the pending municipal and product-liability litigation, insurance coverage, and any new loss estimates or accruals.
- Confirm future dividend decisions against earnings, cash generation, and management’s stated variable-dividend practice.
- Review year-end LIFO inventory valuation: interim LIFO amounts rely on management estimates and are subject to final year-end valuation.