STURM, RUGER & COMPANY, INC. Company Overview
The Company also manufactures investment castings made from steel alloys and metal injection molding ("MIM") parts for internal use in its firearms and for sale to unaffiliated, third-party customers. Approximately 1% of sales are from the castings segment.
Orders for many models of firearms from the independent distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.
Impact of Covid-19
The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a
pandemic by the
From a liquidity perspective, the Company believes it is currently well
positioned to manage through this global crisis. At the end of the first quarter
of 2020, the Company was debt-free, and had cash and short-term investments
totaling
In the first quarter of 2020, the Company did not experience a significant
adverse impact on its business as a result of COVID-19. While the adverse
effects of COVID-19 on the Company increased in
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Providing all hourly employees with an additional two weeks of paid time off,
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Encouraging employees to work remotely, wherever possible, and implementing social distancing throughout each manufacturing facility, including in every manufacturing cell,
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Communicating with and assisting employees with potential health issues,
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Restricting visitor access to avoid introducing new people to the factory environment,
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Implementing additional cleaning, sanitizing and other health and safety processes to maintain a clean and safe workplace, and
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Manufacturing and donating personal protective equipment to hospitals, health care facilities, and police and fire departments in its local communities.
The costs of these actions are expected to total approximately
The Company has been able to keep all of its facilities safe and open with only limited restrictions on production.
Since the latter stages of the first quarter of 2020, there has been a significant increase in consumer demand for firearms, as evidenced by the increase in adjusted National Instant Criminal Background Check System ("NICS") checks. This increased demand may be attributable to COVID-19. The sustainability of this increased consumer demand, and the ultimate impact of COVID-19 on consumer demand, cannot be predicted at this time.
The ultimate impact of COVID-19 on the Company's business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. See Part II, Item 1A. Risk Factors, for an additional discussion of risk related to COVID-19.
Results of Operations Demand
The estimated unit sell-through of the Company's products from the independent
distributors to retailers increased 37% in the first quarter of 2020 compared to
the prior year period. For the same period, NICS background checks (as adjusted
by the
Sales of new products, including the Wrangler, the Ruger-57, the LCP II in .22
LR, the PC Charger, and the AR-556 pistol, represented
Estimated sell-through from the independent distributors to retailers and total adjusted NICS background checks for the trailing five quarters follow:
2020 2019
Q1 Q4 Q3 Q2 Q1
Estimated Units Sold from
Distributors to Retailers (1) 476,800 397,000 295,100 316,300 347,100
Total adjusted NICS Background
Checks (thousands) (2) 4,841 4,001 2,956 2,828 3,414
(1) The estimates for each period were calculated by taking the beginning
inventory at the distributors, plus shipments from the Company to
distributors during the period, less the ending inventory at distributors.
These estimates are only a proxy for actual market demand as they:
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Rely on data provided by independent distributors that are not verified by
the Company,
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Do not consider potential timing issues within the distribution channel,
including goods-in-transit, and
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Do not consider fluctuations in inventory at retail.
(2) NICS background checks are performed when the ownership of most firearms,
either new or used, is transferred by a Federal Firearms Licensee. NICS
background checks are also performed for permit applications, permit
renewals, and other administrative reasons.
The adjusted NICS data presented above was derived by the NSSF by subtracting out NICS checks that are not directly related to the sale of a firearm, including checks used for concealed carry ("CCW") permit application checks as well as checks on active CCW permit databases. The adjusted NICS checks represent less than half of the total NICS checks.
Adjusted NICS data can be impacted by changes in state laws and regulations and any directives and interpretations issued by governmental agencies.
Orders Received and Ending Backlog
The Company uses the estimated unit sell-through of its products from the independent distributors to retailers, along with inventory levels at the independent distributors and at the Company, as the key metrics for planning production levels. The Company generally does not use the orders received or ending backlog for planning production levels.
The units ordered, value of orders received, average sales price of units ordered, and ending backlog for the trailing five quarters are as follows (dollars in millions, except average sales price):
(All amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for
long guns.)
2020 2019
Q1 Q4 Q3 Q2 Q1
Units Ordered 626,700 413,900 362,200 257,900 327,100
Orders Received $203.0 $121.5 $102.3 $70.3 $104.3
Average Sales Price of Units Ordered
$142.7 $57.8 $44.7 $37.8 $58.9
Average Sales Price of Ending Unit Backlog
Production
The Company reviews the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, semi-monthly to plan production levels. The Company increased overall production in the first quarter of 2020 2% from the fourth quarter of 2019, the second consecutive quarterly increase in production. The COVID-19 pandemic had only a minimal negative impact on production in the first quarter of 2020.
The COVID-19 pandemic may have a more significant adverse impact on production in the second quarter of 2020.
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Summary Unit Data
Firearms unit data for the trailing five quarters are as follows (dollar amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns):
2020 2019
Q1 Q4 Q3 Q2 Q1
Units Ordered 626,700 413,900 362,200 257,900 327,100
Units Produced 363,300 355,000 286,500 297,900 374,000
Units Shipped 398,900 387,500 328,400 288,300 322,000
Average Sales Price of Units Shipped
415,700 187,900 161,500 127,700 158,100
Inventories
During the first quarter of 2020, the Company's finished goods inventory decreased by 35,500 units and distributor inventories of the Company's products decreased by 77,900 units. In the aggregate, total Company and distributor inventories decreased 113,400 units from the end of the first quarter of 2019.
Inventory data for the trailing five quarters follows:
2020 2019
Q1 Q4 Q3 Q2 Q1
Units - Company Inventory 31,900 67,400 100,000 141,900 132,300
Units - Distributor Inventory (1)(2) 192,500 270,400 280,000 246,700 274,700 Total Inventory (3)
224,400 337,800 380,000 388,600 407,000
(1) Distributor ending inventory is provided by the Company's independent
distributors. These numbers do not include goods-in-transit inventory that
has been shipped from the Company but not yet received by the distributors.
(2) Distributor ending inventory for the second and third quarter of 2019 does
not include any potential inventory remaining at a distributor that filed
for bankruptcy protection in
(3) This total does not include inventory at retailers. The Company does not
have access to data on retailer inventories of the Company's products.
Consolidated net sales were
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Firearms net sales were
Firearms unit shipments increased 23.9% for the three months ended
Castings net sales were
Cost of Products Sold and Gross Profit
Consolidated cost of products sold was
Gross margin was 29.1% for the three months ended Months 28, 2020, compared to 28.6% in the comparable prior year period.
Gross margin for the three months ended
Three Months Ended
March 28, 2020 March 30, 2019
Net sales $123,639 100.0% $114,038 100.0%
Cost of products sold, before
LIFO, overhead and labor rate
adjustments to inventory, product
liability, and product safety
bulletins and recalls 86,267 69.8% 80,424 70.5%
LIFO expense 344 0.3% 604 0.5%
Overhead rate adjustments to
inventory 689 0.5% (197) (0.2)%
Labor rate adjustments to
inventory 112 0.1% 70 0.1%
Product liability 218 0.2% 740 0.7%
Product safety bulletins and
recalls - - (200) (0.2)%
Total cost of products sold 87,630 70.9% 81,441 71.4%
Gross profit $36,009 29.1% $32,597 28.6%
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Cost of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability, and product safety bulletins and recalls - During
the three months ended
LIFO - For the three months ended
Overhead Rate Adjustments - The Company uses actual overhead expenses incurred as a percentage of sales-value-of-production over a trailing six month period to absorb overhead expense into inventory.
During the three months ended
During the three months ended
Labor Rate Adjustments - The Company uses actual direct labor expense incurred
as a percentage of sales-value-of-production over a trailing six month period to
absorb direct labor expense into inventory. During the three months ended
Product Liability - This expense includes the cost of outside legal fees,
insurance, and other expenses incurred in the management and defense of product
liability matters. During the three months ended
Product Safety Bulletins and Recalls - There were no costs incurred due to
product safety bulletins and recalls during the three months ended
Gross Profit - As a result of the foregoing factors, for the three months ended
Gross profit as a percentage of sales increased to 29.1% in the three months
ended
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
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Other income, net
Other income, net was
Income Taxes and Net Income
The Company's 2020 and 2019 effective tax rates differ from the statutory
federal tax rate due principally to state income taxes. The Company's effective
income tax rate was 26.3% and 25.1% for the three months ended
As a result of the foregoing factors, consolidated net income was
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Non-GAAP Financial Measure
In an effort to provide investors with additional information regarding its
financial results, the Company refers to various
EBITDA is defined as earnings before interest, taxes, and depreciation and amortization. The Company calculates its EBITDA by adding the amount of interest expense, income tax expense, and depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest income that was included in net income from net income.
EBITDA was
Non-GAAP Reconciliation - EBITDA
EBITDA
(Unaudited, dollars in thousands)
Three Months Ended
March 28, 2020 March 30, 2019
Net income $ 15,338 $ 13,033
Income tax expense 5,473 4,367
Depreciation and amortization expense 7,214 7,486
Interest income (566) (679)
Interest expense 25 26
EBITDA $27,484 $24,233
Financial Condition
Liquidity
At the end of the first quarter of 2020, the Company's cash and short-term
investments totaled
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Operations
Cash provided by operating activities was
Third parties supply the Company with various raw materials for its firearms and castings, such as steel, fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory or on order to provide sufficient time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions, including the impact of tariffs, result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be obtained, the Company's manufacturing processes could be interrupted and the Company's financial condition or results of operations could be materially adversely affected.
If the Company's suppliers are negatively impacted by the COVID-19 pandemic, and their ability to produce raw materials or component parts is compromised, the Company's manufacturing processes could be interrupted and the Company's financial condition or results of operations could be materially adversely affected.
Investing and Financing
Capital expenditures for the three months ended
Dividends of
On
In 2018, the Company began to purchase United States Treasury instruments which
mature within one year with available cash. At
No shares were repurchased in the three months ended
Based on its unencumbered assets, the Company believes it has the ability to
raise cash through the issuance of short-term or long-term debt. The Company's
unsecured
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Other Operational Matters
In the normal course of its manufacturing operations, the Company is subject to
occasional governmental proceedings and orders pertaining to workplace safety,
firearms serial number tracking and control, waste disposal, air emissions and
water discharges into the environment. The Company believes that it is generally
in compliance with applicable
Since 2018, two of the Company's independent domestic wholesale distributors have filed for bankruptcy protection. Additionally, three of the Company's smaller domestic distributors discontinued their firearms distribution operations in 2019. The Company currently has 14 active domestic distributors. Additionally, the Company has 41 and 26 distributors servicing the export and law enforcement markets, respectively.
The Company self-insures a significant amount of its product liability, workers' compensation, medical, and other insurance. It also carries significant deductible amounts on various insurance policies.
The Company expects to realize its deferred tax assets through tax deductions against future taxable income.
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its critical accounting estimates
and assumptions described in the Company's 2019 Annual Report on Form 10-K filed
on
Forward-Looking Statements and Projections
The Company may, from time to time, make forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company, the impact of future firearms control and environmental legislation, the impact of COVID-19, and accounting estimates, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.
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