Sturm, Ruger & Company, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended July 2, 2011; comparisons are with the periods ended July 3, 2010. Unaudited interim results. The company designs, manufactures, and sells firearms, with a smaller investment-castings business; approximately 99% of sales were firearms and exports were about 5%.
Financial results
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $79.6 million | $64.4 million | $155.1 million | $132.7 million |
| Gross profit | $28.5 million | $21.7 million | $52.5 million | $44.9 million |
| Gross margin | 35.8% | 33.8% | 33.8% | 33.8% |
| Operating income | $17.1 million | $12.6 million | $29.5 million | $25.5 million |
| Net income | $10.8 million | $8.2 million | $18.8 million | $16.5 million |
| Diluted EPS | $0.56 | $0.42 | $0.99 | $0.85 |
Firearms sales drove growth: Q2 firearms sales rose 23.3% and first-half sales rose 16.8%; shipments increased 24.0% and 14.8%, respectively. The effective tax rate was about 37%, versus 36% in the comparable periods. Q2 selling and administrative expenses increased, reflecting higher promotion and advertising, equity compensation, and IT-system costs.
Cash flow, balance sheet, and capital
- First-half operating cash flow was $32.4 million, compared with $19.1 million a year earlier. Capital expenditures were $7.7 million; investing cash use was $19.7 million and financing cash use was $5.8 million. Cash increased by $6.9 million to $12.0 million.
- Cash, cash equivalents, and short-term investments totaled $76.5 million at July 2. Current assets were $118.3 million and current liabilities $36.8 million; management reported a 3.2-to-1 current ratio and $81.4 million working capital after the LIFO reserve.
- The company had no debt. Its $25 million credit facility was unused and scheduled to expire December 12, 2011. Short-term investments consist principally of U.S. Treasury instruments maturing within one year.
- First-half dividends paid were $2.8 million. The company repurchased 133,400 shares for $2.0 million at an average $14.94 per share; $8.0 million remained authorized. It also made a $969,000 investment for a 12% interest in a pepper-spray company.
Material changes, outlook, and risks
- Management cited stronger handgun demand, new products, and increased capacity. New products represented $26.7 million, or 34% of Q2 sales, and $47.6 million, or 31% of first-half sales. Estimated distributor-to-retailer sell-through increased 24% in Q2 and 17% in the first half; adjusted NICS checks rose 13% in both periods.
- Orders received were $81.4 million in Q2 and $134.7 million in Q1; ending backlog was $97.4 million at Q2-end. Company finished-goods inventory remained below desired levels. Management said replenishing it could raise its FIFO value by as much as $15 million, partly offset by lower receivables if demand slows. Distributor inventory levels and replenishment remain uncertain.
- Management expected approximately $15 million of capital expenditures in 2011 and planned to fund operations and investment from operating cash and existing cash and short-term investments. A new ERP system was expected to be implemented by January 2012. The filing provides no earnings or revenue guidance; management cautioned that first-half results are not indicative of full-year results.
- Inventory quantities declined in the first half. If the reduction persists through year-end, a LIFO liquidation could materially affect operating results, though management did not expect a material effect on financial position; the amount was not yet quantifiable.
- Product-liability claims and litigation remain contingencies. Management said an adverse effect on financial position was unlikely, but results in a particular period could be materially affected. Claimed aggregate amounts exceeded product-liability accruals and applicable insurance coverage; a reasonably possible loss range was not estimable. The City of Gary litigation and a securities class action remained ongoing. One previously reported case, Southport Post Road, was resolved in the company’s favor during the quarter.
- Other disclosed exposures include possible raw-material price increases or supply interruptions, future defined-benefit pension contributions, and distributor concentration. The company reported no material change in risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Whether demand, backlog, and new-product sales convert into shipments and sustainable margins, particularly as firearms orders can be seasonal.
- How year-end inventory levels affect cash flow and whether any LIFO liquidation materially changes reported earnings.
- Progress and spending on the planned inventory build, 2011 capital expenditures, and ERP implementation.
- Developments in pending litigation, product-liability costs, and any changes in accruals or insurance coverage.
- Renewal or replacement of the unused credit facility before its December 12, 2011 expiration, and the company’s ability to sustain variable dividends and repurchases.