Sturm, Ruger & Company, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 2, 2021; comparisons are to the periods ended September 26, 2020. Figures are in U.S. dollars unless noted. The company designs, manufactures, and sells firearms primarily in the United States; firearms account for about 99% of sales.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $178.2 million | $145.7 million | $562.7 million | $399.6 million |
| Gross profit / margin | $64.8 million / 36.4% | $51.2 million / 35.1% | $216.1 million / 38.4% | $127.2 million / 31.8% |
| Operating income | $46.7 million | $32.9 million | $158.4 million | $77.0 million |
| Net income | $35.2 million | $24.8 million | $117.8 million | $58.7 million |
| Diluted EPS | $1.98 | $1.39 | $6.64 | $3.31 |
| Operating cash flow | Not separately reported for the quarter | $117.0 million | $82.0 million |
Nine-month firearms sales rose 41.1%; castings sales were $2.1 million, down 6.9%. The effective tax rate was 26.7% in 2021, versus 24.7% for Q3 and 25.2% for nine months in 2020. Management-reported EBITDA, a non-GAAP measure, was $55.4 million for Q3 and $182.8 million for nine months, increases of 38.1% and 88.4%, respectively.
Liquidity, debt, and capital allocation
- At October 2, cash and short-term investments totaled $192.7 million ($27.7 million cash and $165.0 million short-term investments). Working capital was $228.5 million after the LIFO reserve; the current ratio was 3.8 to 1.
- The company reported no debt. Its $40 million revolving credit facility terminated September 30, 2021. Operating lease liabilities totaled $1.8 million.
- Nine-month capital expenditures were $15.6 million. Management expected approximately $20 million for full-year 2021, primarily for new-product tooling and equipment modernization.
- Dividends paid in the first nine months were $45.2 million. On October 29, the board authorized a $0.79-per-share dividend, payable November 30, 2021. The filing reports $86.7 million remaining authorized for repurchases and no repurchases during the period.
Changes, operating trends, and outlook
- Sales increased 22.3% in Q3 and 40.8% year to date; net income rose 42.2% and 100.7%, respectively. Gross margin improved, which management attributed to higher sales and production, better fixed-cost absorption and labor efficiencies, and fewer sales promotions.
- Production increased 41% year to date. Estimated distributor-to-retailer sell-through increased 9%, while adjusted NICS background checks decreased 11%. New products introduced in the prior two years generated $116.2 million, or 22% of nine-month firearm sales.
- Orders received fell to $61.1 million in Q3 from $284.0 million a year earlier; backlog was $471.7 million, up from $410.1 million. Management says orders and backlog are not its primary production-planning measures.
- Management anticipated Marlin rifle shipments beginning in Q4 2021 following the 2020 acquisition of Marlin assets for $28.3 million. No earnings or revenue guidance is provided.
- COVID-19 had not significantly disrupted operations in the first nine months, but management cautioned that its effects on demand, supply chains, and the economy remain uncertain. The company expected approximately $1.5 million of COVID-related health and safety costs in 2021.
Risks, contingencies, and notable items
- Limited raw-material deliveries affected manufacturing. Management warned that prolonged price inflation or insufficient materials could disrupt production and materially harm results.
- The company faced four lawsuits at quarter-end, including two traditional product-liability cases and two municipal matters. The Mexico lawsuit was filed in August 2021. Management considers the allegations without merit and does not believe litigation is likely to materially harm financial position, but says it could materially affect results in a particular period. A reliable range of reasonably possible losses was not provided.
- Other income rose to $1.4 million in Q3 from $0.04 million a year earlier; management attributed the increase to royalty and miscellaneous income. Interim LIFO inventory valuation is based on estimates and remains subject to year-end adjustment.
Important facts for investors to verify
- Whether strong consumer demand and elevated firearm backlog convert into shipments and remain sustainable as adjusted NICS checks declined year over year.
- Whether raw-material constraints, input costs, and production capacity affect margins, inventory, and delivery timing.
- Progress and costs associated with launching Marlin rifle production and the company’s planned capital expenditures.
- Developments in the Mexico and City of Gary litigation, including potential exposure not quantified in the filing.
- Whether cash generation and future dividends are maintained; the filing notes that future dividends depend on performance, liquidity, and funding needs.