Sturm, Ruger & Company, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended April 2, 2022; comparisons are with the three months ended April 3, 2021. The company designs, manufactures, and sells firearms primarily in the United States; firearms generated about 99% of sales.
Financial results
| Metric | Q1 2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $166.6 million | $184.4 million | Down 9.7% |
| Gross profit / margin | $58.1 million / 34.9% | $72.6 million / 39.4% | Profit down 19.9%; margin down 4.5 percentage points |
| Operating income | $38.7 million | $52.0 million | Down 25.5% |
| Net income | $30.2 million | $38.2 million | Down 20.8% |
| Diluted EPS | $1.70 | $2.16 | Down 21.3% |
| EBITDA (non-GAAP) | $46.3 million; 27.8% margin | $59.9 million; 32.5% margin | EBITDA down 22.7% |
| Operating cash flow | $18.8 million | $27.8 million | Down $9.0 million |
Cash and short-term investments totaled $211.6 million at quarter-end, including $170.0 million in short-term investments. The company reported no debt and no borrowings on its new $40 million unsecured revolving credit facility. Working capital was $270.1 million after the LIFO reserve; the current ratio was 5.1 to 1. Cash was $41.6 million, versus $21.0 million at year-end 2021. Capital expenditures were $10.9 million, and dividends paid were $15.2 million ($0.86 per share). The April 29 board authorization set a further $0.68-per-share dividend, payable May 31.
Material changes and operating context
- Management attributed lower sales to the easing of exceptional firearm demand that began in 2020 and continued through much of 2021. Estimated distributor-to-retailer sell-through fell 21%, while adjusted NICS checks fell 23% year over year.
- Gross margin contracted because lower sales and production caused fixed-cost deleveraging and weaker labor efficiencies, while inflation in materials, commodities, services, energy, fuel, and transportation raised costs. Pricing increases partly offset inflation.
- Production declined 4% year over year. Company finished-goods inventory rose by 29,800 units, and distributor inventory rose by 80,400 units during the quarter. Ending backlog was 1,094,600 units, down from 1,767,200 a year earlier.
- New products introduced within the prior two years contributed $21.4 million, or 13% of firearm sales.
- Operating cash flow was lower primarily because of reduced net income. Receivables and inventories used cash, while income taxes payable and certain other balance changes provided offsets.
Outlook, risks, and contingencies
- Management expected approximately $25 million of 2022 capital expenditures, principally for new-product tooling and manufacturing upgrades; actual spending may vary. It planned to fund operations and capital spending from operating cash and existing cash.
- Raw-material delivery constraints affected manufacturing in the quarter. Management warned that prolonged cost inflation or inadequate material availability could disrupt production and materially adversely affect results or financial condition.
- The company said COVID-19 had not significantly adversely affected its business in Q1, but future effects remained uncertain. It also noted that quarterly results are seasonal and may not indicate full-year performance.
- Three lawsuits were outstanding at April 2: one traditional product-liability case and two municipal cases, including the City of Gary litigation and the Mexican government’s suit. The company said an adverse litigation outcome was not probable and unlikely to materially affect financial position, but could materially affect results in a particular period. It could not estimate a reasonably possible loss range; certain claims may exceed accruals and insurance coverage.
- The company reported no material change in risk factors, no newly instituted lawsuit during the quarter, and dismissal with prejudice of the Fortner case. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether firearm demand and distributor inventory levels continue to normalize, and how backlog converts into shipments.
- Whether pricing and productivity can offset ongoing input-cost inflation and supply constraints, supporting recovery in gross margin.
- Progress and cash requirements for the planned capital program, dividends, and the company’s cash and investment balance.
- Developments in the City of Gary and Mexican government litigation, including potential exposure not captured by current accruals or coverage.
- The filing reports interim results only; management cautions that Q1 performance may not predict full-year 2022 results.