Sturm, Ruger & Company, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 26, 2020. The company designs, manufactures, and sells firearms primarily in the U.S.; firearms generated about 99% of sales.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $145.7M | $95.0M | $399.6M | $305.4M |
| Gross profit / margin | $51.2M / 35.1% | $19.9M / 20.9% | $127.2M / 31.8% | $74.8M / 24.5% |
| Operating income | $32.9M | $5.6M | $77.0M | $29.5M |
| Net income | $24.8M | $4.8M | $58.7M | $24.1M |
| Diluted EPS | $1.39 | $0.27 | $3.31 | $1.37 |
| Operating cash flow | Not separately provided for quarter | $82.0M | $8.9M |
Q3 sales increased 53.4% year over year; nine-month sales rose 30.9%. Firearms sales were $145.2M for Q3 and $397.3M for nine months. Castings sales were $0.5M and $2.3M, respectively. Firearms unit shipments rose 31.2% in Q3 and 30.5% for nine months. New products introduced in the prior two years contributed $87.9M, or 24% of nine-month firearm sales.
Cash and short-term investments totaled $133.6M at quarter-end, including $104.0M of short-term investments. The company had no debt and no balance outstanding on its $40M revolver. Working capital was $145.6M after the LIFO reserve; the current ratio was 3.2:1. Nine-month capital expenditures were $8.0M. Dividends paid were $104.1M, including a $5-per-share special dividend. No shares were repurchased in the period.
Material changes and operating trends
- Net income increased 413.9% for Q3 and 143.7% for nine months. Higher sales and production improved fixed-cost absorption; management also cited reduced promotional activity as a factor in lower cost of products sold as a percentage of sales.
- Gross margin expanded substantially year over year. Selling, general and administrative expense increased 28.0% in Q3 and 10.9% for nine months, primarily due to higher sales and compensation costs.
- Estimated distributor-to-retailer sell-through rose 50% for the first nine months, while adjusted NICS checks increased 68%. Management attributed stronger demand in part to COVID-19, public safety concerns, protests and civil unrest, and political discussion concerning law enforcement.
- Quarter-end backlog reached $410.1M, versus $44.7M a year earlier. Backlog and distributor sell-through are management metrics, not guaranteed future sales; sell-through estimates rely on distributor data and exclude retailer inventory.
- Inventory quantities declined during the first nine months. A LIFO liquidation may occur if the reduction persists through year-end; management said its earnings impact could be material, though it would not materially affect financial position.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected 2020 capital expenditures of approximately $20M, primarily for new-product tooling and manufacturing upgrades, funded from operations and cash.
- The company reported no significant adverse business impact from COVID-19 through the period, but warned that renewed restrictions, effects on employees or suppliers, and uncertain demand and economic conditions could affect operations and financial results. COVID-related employee safety measures were expected to cost about $3.5M in 2020.
- On September 29, 2020, after quarter-end, the company’s offer to acquire certain Marlin firearms manufacturing assets for $30M cash was approved; closing was expected in Q4 2020. The credit facility was amended September 30, extending its termination date to September 30, 2021 and modifying a financial covenant.
- The board authorized a 56-cent-per-share dividend payable November 27, 2020. Future dividends remain subject to business and funding needs.
- The company disclosed five lawsuits and other claims, including product-liability, trademark, and municipal litigation. Management considered a material adverse effect on financial position unlikely, but said litigation could materially affect results in a particular period; a reasonably possible loss range was not provided.
- Raw-material availability, supplier disruption, price inflation and tariffs could interrupt production or raise costs. The company also noted distributor concentration and self-insurance exposure. A $1M revolver draw in Q1 was made while a covenant was not met, repaid within the quarter, and subsequently waived; the company reported covenant compliance at September 26.
Key facts for investors to verify
- Whether elevated firearm demand and the unusually large backlog convert into shipments and sales, and whether demand remains sustainable.
- The year-end inventory valuation and any LIFO liquidation impact on reported earnings.
- Closing and integration costs for the $30M Marlin asset purchase, and resulting effects on cash, production capacity, and margins.
- Cash needs after the large special dividend, planned capital spending, and acquisition; and the company’s ability to maintain future dividends.
- Developments in litigation, COVID-19 and supplier risks, and any changes in the revolver’s covenants or availability.