Sturm, Ruger & Company, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended October 1, 2011; financial statements are unaudited. The company designs, manufactures, and sells firearms, primarily to U.S. customers. Firearms represented approximately 99% of sales; exports were approximately 5%.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $80.5 million | $58.4 million | $235.6 million | $191.1 million |
| Gross profit / margin | $29.1 million / 36.2% | $18.6 million / 31.8% | $81.6 million / 34.6% | $63.5 million / 33.2% |
| Operating income | $16.9 million | $9.3 million | $46.4 million | $34.8 million |
| Net income | $10.7 million | $6.0 million | $29.5 million | $22.5 million |
| Diluted EPS | $0.56 | $0.31 | $1.55 | $1.17 |
Sales increased 37.9% in Q3 and 23.3% year to date. Firearms shipments rose 35.4% and 21.1%, respectively. Management attributed stronger demand partly to new products, which contributed $26.2 million (33%) of Q3 sales and $75.0 million (32%) of nine-month sales. Improved manufacturing productivity and volume leverage supported margin expansion; modestly higher input costs partly offset these benefits. The effective tax rate was 37% in 2011 versus 36% in the comparable periods.
Cash, liquidity, debt, and capital
- Nine-month operating cash flow was $43.0 million, versus $23.5 million a year earlier. Capital expenditures were $12.2 million; investing cash flow was positive $14.4 million, including net maturities of short-term investments.
- Cash and cash equivalents were $53.3 million at October 1, 2011, and short-term investments were $26.0 million, totaling $79.3 million. Working capital was $87.8 million and the current ratio was 3.3 to 1.
- The company reported no debt. Its $25 million credit facility was unused and scheduled to expire December 12, 2011. The filing says the company was in compliance with its covenants.
- Dividends paid were $5.5 million year to date; dividends were $0.142 per share in Q3 and $0.289 per share year to date. The company repurchased 133,400 shares for $2.0 million, leaving $8.0 million authorized.
Material changes, outlook, and risks
- Distributor sell-through estimates increased 23% in Q3 and 19% year to date; adjusted NICS checks rose 12% and 13%. These are demand proxies, not direct measures of retail sales. Q3 orders were $49.6 million and ending backlog was $69.8 million, down from Q2’s $81.4 million of orders and $97.4 million backlog.
- Management planned to spend $15–$18 million on 2011 capital expenditures. It expected to raise finished-goods inventory, potentially by as much as $15 million at FIFO value, to improve product availability. The ERP rollout was expected to be completed in the first quarter of 2012.
- Year-to-date inventory quantities declined. If the reduction persisted through year-end, a LIFO liquidation could materially affect results, though management did not expect a material effect on financial position. Interim LIFO figures are estimates.
- Product liability accruals were $1.5 million in total current and noncurrent liabilities. The company faced approximately three lawsuits and other claims, including the City of Gary litigation and an ongoing securities class action; a new Texas lawsuit was filed during the quarter. Management said litigation was unlikely to materially affect financial position but could materially affect results in a particular period. It could not estimate a reasonably possible loss range.
- Other risks cited include dependence on a select group of distributors, raw-material availability and price changes, changing firearm demand and legislation, and pension funding needs. The filing reported no material changes to the prior annual report’s risk factors. Management cautioned that nine-month results are not indicative of full-year results.
Important facts for investors to verify
- Whether demand, orders, backlog, and distributor inventories support continued shipments and the planned inventory rebuild.
- The year-end LIFO valuation and any effect from inventory liquidation.
- Completion, cost, and control implications of the ERP implementation, as well as final 2011 capital expenditures.
- Developments in product-liability and securities litigation, insurance coverage, and any resulting expense or cash payments.
- Renewal or replacement of the credit facility scheduled to expire December 12, 2011, and the cash available for dividends, repurchases, and pension contributions.