Sturm, Ruger & Company, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended April 2, 2016; comparisons are with the three months ended March 28, 2015 unless noted. The company designs, manufactures, and sells firearms, primarily in the United States; firearms accounted for about 99% of sales.
Financial results
| Metric | Q1 2016 | Prior year | Change |
|---|---|---|---|
| Net sales | $173.1 million | $137.0 million | +26.4% |
| Gross profit / margin | $59.1 million / 34.1% | $41.4 million / 30.2% | Margin +3.9 percentage points |
| Operating income | $36.2 million | $23.8 million | +52.1% |
| Net income | $23.3 million | $15.5 million | +50.2% |
| Diluted EPS | $1.21 | $0.81 | +49.4% |
| Cash from operations | $29.4 million | $32.8 million | Down $3.4 million |
| Capital expenditures | $6.3 million | $4.3 million | Up $2.0 million |
Firearms sales rose 26.5% to $171.5 million; shipments increased 22.4%. Castings sales were $1.6 million. The effective tax rate was 36.0% in both periods. Management-reported EBITDA, a non-GAAP measure, was $44.8 million versus $33.2 million.
Liquidity, balance sheet, and capital allocation
- Cash was $80.5 million at April 2, up from $69.2 million at year-end. Working capital was $123.9 million after the LIFO reserve; the current ratio was 2.6:1.
- The company reported no debt. Its $40 million revolving credit facility was unused and scheduled to expire June 15, 2016.
- Quarter-end total assets were $325.4 million and stockholders’ equity was $239.7 million. Net inventory was $32.3 million, down from $37.1 million at year-end.
- Dividends paid totaled $6.6 million. On April 29, the board declared a 48-cent-per-share dividend, payable May 27 to holders of record May 13. No shares were repurchased in the quarter; $73.2 million remained authorized.
Material changes and management commentary
- Management attributed stronger estimated distributor-to-retailer sell-through, up 17%, to higher industry demand, new products, and increased production capacity. Adjusted NICS background checks rose 18% year over year.
- New products introduced in the prior two years generated $50.3 million, or 29%, of firearm sales. Production increased 36% year over year; distributor and company inventories both declined during the quarter.
- Orders received rose to $296.1 million from $114.8 million a year earlier, and ending backlog increased to $276.1 million from $185.1 million. The company says it generally plans production using sell-through and inventory levels, rather than orders or backlog.
- Gross margin improved mainly through manufacturing volume leverage and productivity. SG&A increased 30.2% to $22.9 million, primarily from sales promotions and higher distribution costs. Product-liability expense was $0.8 million, compared with a $0.2 million benefit in the prior-year quarter.
- Operating cash flow was lower year over year, which management attributed principally to a smaller inventory reduction than in the prior-year period and increased variable incentive compensation payments.
Outlook, risks, and contingencies
- Management expected approximately $25 million of 2016 capital expenditures for new-product tooling and equipment and manufacturing upgrades, funded from operations and cash. No earnings or sales guidance was provided.
- Management cautioned that first-quarter results may not indicate full-year results; firearm demand is seasonal, with orders for many models typically stronger in Q1 and weaker in Q3.
- Risks cited include shifts in firearm demand, raw-material availability and prices, potential legislative changes, and litigation. The company self-insures significant portions of certain liability and workers’ compensation exposures.
- At quarter-end, the company reported four lawsuits and awareness of other claims, including two traditional product-liability cases, a patent suit, and the City of Gary municipal case. Management considered the allegations unfounded and did not believe litigation was probable to materially affect financial position, but said it could materially affect results in a particular period. Claimed damages in aggregate exceeded product-liability accruals and applicable insurance coverage; a reasonably possible loss range was not provided.
- A new case was instituted during the quarter: Sandra Rice-Lum v. Sturm, Ruger & Company, Inc. The company said risk factors had not materially changed from its 2015 Form 10-K.
Important facts for investors to verify
- Whether strong orders and backlog convert into shipments and sales, given the company’s stated production-planning approach and seasonality.
- Whether demand, distributor inventory levels, and new-product sales remain supportive of production and margins.
- Actual 2016 capital spending versus the approximately $25 million expectation, and the renewal or replacement of the credit facility expiring June 15, 2016.
- Developments in product-liability, patent, and municipal litigation, including potential exposure beyond recorded accruals and insurance.
- The impact of year-end LIFO valuation; management said any 2016 LIFO liquidation, if it occurred, was not expected to be material.