Sturm Ruger & Co Inc 10-Q for FY2020 Q3
Sturm Ruger & Co Inc (RGR)
About this 10-Q
Sturm Ruger & Co Inc filed this 10-Q on October 28, 2020, covering the quarter ended September 26, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 26, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $145.71M
- up 53.4% from $95M a year earlier
- Net income
- $24.75M
- up 413.9% from net income of $4.82M a year earlier
- Diluted EPS
- $1.39
- up 414.8% from $0.27 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
|
(Mark One) | |
|
| |
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
|
OR | |
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ |
Commission file number
(Exact name of registrant as specified in its charter)
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) |
|
| |
|
|
|
|
(Address of principal executive offices) |
(Zip code) |
(
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
|
|
|
The number of shares outstanding of the issuer's common stock as of October 23, 2020:
INDEX
STURM, RUGER & COMPANY, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
|
|
September 26, 2020 |
December 31, 2019 |
|
|
(Note) | |
|
Assets |
| |
|
|
| |
|
Current Assets |
| |
|
Cash |
$ |
$ |
|
Short-term investments |
|
|
|
Trade receivables, net |
|
|
|
| ||
|
Gross inventories (Note 4) |
|
|
|
Less LIFO reserve |
( |
( |
|
Less excess and obsolescence reserve |
( |
( |
|
Net inventories |
|
|
|
| ||
|
Prepaid expenses and other current assets |
|
|
|
Total Current Assets |
|
|
|
| ||
|
Property, plant and equipment |
|
|
|
Less allowances for depreciation |
( |
( |
|
Net property, plant and equipment |
|
|
|
| ||
|
Deferred income taxes |
|
|
|
Other assets |
|
|
|
Total Assets |
$ |
$ |
Note:
The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
See notes to condensed consolidated financial statements.
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
(Dollars in thousands, except per share data)
|
September 26, 2020 |
December 31, 2019 | |
|
(Note) | ||
|
Liabilities and Stockholders’ Equity | ||
|
| ||
|
Current Liabilities | ||
|
Trade accounts payable and accrued expenses |
$ |
$ |
|
Contract liabilities with customers (Note 3) |
|
|
|
Product liability |
|
|
|
Employee compensation and benefits |
|
|
|
Workers’ compensation |
|
|
|
Income taxes payable |
|
|
|
Total Current Liabilities |
|
|
|
| ||
|
Product liability accrual |
|
|
|
Lease liability (Note 5) |
|
|
|
| ||
|
Contingent liabilities (Note 13) |
|
|
|
| ||
|
| ||
|
Stockholders’ Equity | ||
|
Common Stock, non-voting, par value $ | ||
|
Authorized shares |
|
|
|
Common Stock, par value $ | ||
|
Authorized shares – | ||
|
2020 – | ||
|
2019 – |
|
|
|
Additional paid-in capital |
|
|
|
Retained earnings |
|
|
|
Less: Treasury stock – at cost | ||
|
2020 – | ||
|
2019 – |
( |
( |
|
Total Stockholders’ Equity |
|
|
|
Total Liabilities and Stockholders’ Equity |
$ |
$ |
Note:
The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
See notes to condensed consolidated financial statements.
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
|
Three Months Ended |
Nine Months Ended | |||
|
September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 | |
|
Net firearms sales |
$ |
$ |
$ |
$ |
|
Net castings sales |
|
|
|
|
|
Total net sales |
|
|
|
|
|
| ||||
|
Cost of products sold |
|
|
|
|
|
| ||||
|
Gross profit |
|
|
|
|
|
| ||||
|
Operating expenses: | ||||
|
Selling |
|
|
|
|
|
General and administrative |
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
| ||||
|
Operating income |
|
|
|
|
|
| ||||
|
Other income: | ||||
|
Interest income |
|
|
|
|
|
Interest expense |
( |
( |
( |
( |
|
Other income, net |
|
|
|
|
|
Total other income, net |
|
|
|
|
|
| ||||
|
Income before income taxes |
|
|
|
|
|
| ||||
|
Income taxes |
|
|
|
|
|
| ||||
|
Net income and comprehensive income |
$ |
$ |
$ |
$ |
|
| ||||
|
Basic earnings per share |
$ |
$ |
$ |
$ |
|
| ||||
|
Diluted earnings per share |
$ |
$ |
$ |
$ |
|
| ||||
|
Cash dividends per share |
$ |
$ |
$ |
$ |
See notes to condensed consolidated financial statements.
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands)
|
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Treasury Stock |
Total | |
|
Balance at December 31, 2019 |
$ |
$ |
$ |
$( |
$ |
|
Net income and comprehensive income |
|
| |||
|
Common stock issued – compensation plans |
|
( |
— | ||
|
Vesting of RSUs |
( |
( | |||
|
Dividends paid |
( |
( | |||
|
Unpaid dividends accrued |
( |
( | |||
|
Recognition of stock-based compensation expense |
|
| |||
|
Balance at September 26, 2020 |
$ |
$ |
$ |
$( |
$ |
See notes to condensed consolidated financial statements.
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
|
Nine Months Ended | ||
|
September 26, 2020 |
September 28, 2019 | |
|
Operating Activities | ||
|
Net income |
$ |
$ |
|
Adjustments to reconcile net income to cash provided by operating activities: | ||
|
Depreciation and amortization |
|
|
|
Stock-based compensation |
|
|
|
(Gain) loss on sale of assets |
( |
|
|
Deferred income taxes |
|
|
|
Changes in operating assets and liabilities: | ||
|
Trade receivables |
( |
( |
|
Inventories |
|
( |
|
Trade accounts payable and accrued expenses |
( |
( |
|
Contract liability to customers |
( |
( |
|
Employee compensation and benefits |
|
( |
|
Product liability |
|
( |
|
Prepaid expenses, other assets and other liabilities |
( |
( |
|
Income taxes payable |
( |
( |
|
Cash provided by operating activities |
|
|
|
| ||
|
Investing Activities | ||
|
Property, plant and equipment additions |
( |
( |
|
Proceeds from sale of assets |
|
|
|
Purchases of short-term investments |
( |
( |
|
Proceeds from maturities of short-term investments |
|
|
|
Cash provided by (used for) investing activities |
|
( |
|
| ||
|
Financing Activities | ||
|
Remittance of taxes withheld from employees related to share-based compensation |
( |
( |
|
Repurchase of common stock |
|
( |
|
Dividends paid |
( |
( |
|
Cash used for financing activities |
( |
( |
|
| ||
|
Decrease in cash and cash equivalents |
( |
( |
|
| ||
|
Cash and cash equivalents at beginning of period |
|
|
|
| ||
|
Cash and cash equivalents at end of period |
$ |
$ |
See notes to condensed consolidated financial statements.
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results of the interim periods. Operating results for the nine months ended September 26, 2020 may not be indicative of the results to be expected for the full year ending December 31, 2020. These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Organization:
Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately
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
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition:
The Company recognizes revenue in accordance with the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), which became effective January 1, 2018. Substantially all product sales are sold FOB (free on board) shipping point. Customary payment terms are 2% 30 days, net 40 days. Generally, all performance obligations are satisfied when product is shipped and the customer takes ownership and assumes the risk of loss. In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which downstream customers are entitled to receive no charge products based on their purchases of certain of the Company’s products from the independent distributors. The fulfillment of these no charge products is the Company’s responsibility. In such instances, the Company allocates the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the firearms included in the promotional program, including the no charge firearms. Revenue is recognized proportionally as each performance obligation is satisfied, based on the relative customary price of each product. Customary prices are generally determined based on the prices charged to the independent distributors. The net change in contract liabilities for a given period is reported as an increase or decrease to sales.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments, including cash, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short-term maturity of these items.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications:
Certain prior period balances have been reclassified to conform to current year presentation.
Recent Accounting Pronouncements:
On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842), its final standard on the accounting for leases. The most significant change in the new lease guidance requires lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. This change results in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under legacy U.S. GAAP. The new lease guidance was effective in fiscal years beginning after December 15, 2018 and interim periods thereafter. The Company adopted ASU 2016-02 effective January 1, 2019. As more fully discussed in Note 5, as a result of adopting ASU 2016-02, the Company recorded right-of-use assets totaling $
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new guidance requires financial instruments measured at amortized cost basis to be presented at the net amount expected to be collected through application of the current expected credit losses model. The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This pronouncement was effective for fiscal years beginning after December 15, 2019. The Company adopted the new guidance effective January 1, 2020. There was no impact on the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Stockholders’ Equity, or Condensed Consolidated Statements of Cash Flows as a result of this adoption.
NOTE 3 — REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, applied to those contracts for which all performance obligations were not completed as of that date. Under the modified retrospective method, results for reporting periods beginning after January 1, 2018 are presented using the guidance of ASC 606.
The impact of the adoption of ASC 606 on revenue recognized during the three and nine months ended September 26, 2020 and September 28, 2019 is as follows:
|
Three Months Ended |
Nine Months Ended | |||
|
September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 | |
|
Contract liabilities with customers at beginning of period |
$ |
$ |
$ |
$ |
|
Revenue deferred |
|
|
|
|
|
Revenue recognized |
( |
( |
( |
( |
|
Contract liabilities with customers at end of period |
$ |
$ |
$ |
$ |
As more fully described in the Revenue Recognition section of Note 2, the deferral of revenue and subsequent recognition thereof relates to certain of the Company’s sales promotion programs that include the future shipment of free products. The Company expects the deferred revenue from this contract liability with customers to be recognized in the fourth quarter of 2020.
Practical Expedients and Exemptions
The Company has elected to account for shipping and handling activities that occur after control of the related product transfers to the customer as fulfillment activities that are recognized upon shipment of the goods.
NOTE 4 — INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs existing at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation.
During the nine month period ended September 26, 2020, inventory quantities were reduced. If this reduction remains through year-end, it will result in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases. Although the effect of such a liquidation cannot be precisely quantified at the present time, management believes that if a LIFO liquidation occurs in 2020, the impact may be material to the Company’s results of operations for the period but will not have a material impact on the financial position of the Company.
Inventories consist of the following:
|
September 26, 2020 |
December 31, 2019 | |
|
Inventory at FIFO | ||
|
Finished products |
$ |
$ |
|
Materials and work in process |
|
|
|
Gross inventories |
|
|
|
Less: LIFO reserve |
( |
( |
|
Less: excess and obsolescence reserve |
( |
( |
|
Net inventories |
$ |
$ |
NOTE 5 — LEASED ASSETS
The Company leases certain of its real estate and equipment. The Company has evaluated all its leases and determined that all are operating leases under the definitions of the guidance of ASU 2016-02. The Company’s lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
The Company adopted the provisions of ASU 2016-02 using the effective date method on January 1, 2019 and recorded right-of-use assets equal to the present value of the contractual liability for future lease payments. The table below presents the right-of-use assets and related lease liabilities recognized on the Condensed Consolidated Balance Sheet as of September 26, 2020:
|
Balance Sheet Line Item |
September 26, 2020 | |
|
Right-of-use assets |
Other assets |
$ |
|
Operating lease liabilities | ||
|
Current portion |
Trade accounts payable and accrued expenses |
$ |
|
| ||
|
Noncurrent portion |
Lease liabilities |
|
|
Total operating lease liabilities |
$ |
The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight line basis over the life of the lease.
The Company’s leases generally do not provide an implicit interest rate, and therefore the Company uses its incremental borrowing rate enumerated in its revolving line of credit (see Note 6) to determine the present value of its operating lease liabilities. The following table reconciles the undiscounted future minimum lease payments to the total operating lease liabilities recognized on the Condensed Consolidated Balance Sheet as of September 26, 2020:
|
Remainder of 2020 |
$ |
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
Thereafter |
|
|
Total undiscounted future minimum lease payments |
|
|
Less: Difference between undiscounted lease payments & the present value of future lease payments |
( |
|
Total operating lease liabilities |
$2,285 |
Certain of the Company’s lease agreements contain renewal options at the Company’s discretion. The Company does not recognize right-of-use assets or lease liabilities for leases of one year or less or for renewal periods unless it is reasonably certain that the Company will exercise the renewal option at the inception of the lease or when a triggering event occurs. The Company’s weighted average remaining lease term for operating leases as of September 26, 2020 is
NOTE 6 — LINE OF CREDIT
The Company has a $
NOTE 7 — EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) plan that covers substantially all employees. The Company matches a certain portion of employee contributions using the safe harbor guidelines contained in the Internal Revenue Code. Expenses related to these matching contributions totaled $
In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $
NOTE 8 — INCOME TAXES
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
Income tax payments for the three and nine months ended September 26, 2020 totaled $
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2017.
The Company does not believe it has included any “uncertain tax positions” in its federal income tax return or any of the state income tax returns it is currently filing. The Company has made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. The Company does not anticipate that such additional taxes, if any, would result in a material change to its financial position.
NOTE 9 — EARNINGS PER SHARE
Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:
|
Three Months Ended |
Nine Months Ended | |||
|
September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 | |
|
Numerator: | ||||
|
Net income |
$ |
$ |
$ |
$ |
|
Denominator: | ||||
|
Weighted average number of common shares outstanding – Basic |
|
|
|
|
|
| ||||
|
Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans |
|
|
|
|
|
| ||||
|
Weighted average number of common shares outstanding – Diluted |
|
|
|
|
The dilutive effect of outstanding options and restricted stock units is calculated using the treasury stock method. There were no stock options that were anti-dilutive and therefore not included in the diluted earnings per share calculation.
NOTE 10 — COMPENSATION PLANS
In May 2017, the Company’s shareholders approved the 2017 Stock Incentive Plan (the “2017 SIP”) under which employees, independent contractors, and non-employee directors may be granted stock options, restricted stock, deferred stock awards, and stock appreciation rights, any of which may or may not require the satisfaction of performance objectives. Vesting requirements are determined by the Compensation Committee of the Board of Directors. The Company has reserved
Restricted Stock Units
The Company grants performance-based and retention-based restricted stock units to senior employees. The vesting of the performance-based awards is dependent on the achievement of corporate objectives established by the Compensation Committee of the Board of Directors and a
Compensation costs related to all outstanding restricted stock units recognized in the statements of income aggregated $
NOTE 11 — OPERATING SEGMENT INFORMATION
The Company has
Selected operating segment financial information follows:
|
Three Months Ended |
Nine Months Ended | |||
|
(in thousands) |
September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 |
|
Net Sales | ||||
|
Firearms |
$ |
$ |
$ |
$ |
|
Castings | ||||
|
Unaffiliated |
|
|
|
|
|
Intersegment |
|
|
|
|
|
|
|
|
| |
|
Eliminations |
( |
( |
( |
( |
|
$ |
$ |
$ |
$ | |
|
| ||||
|
Income (Loss) Before Income Taxes | ||||
|
Firearms |
$ |
$ |
$ |
$ |
|
Castings |
( |
( |
( |
( |
|
Corporate |
( |
|
|
|
|
$ |
$ |
$ |
$ | |
|
| ||||
|
September 26, 2020 |
December 31, 2019 | |||
|
Identifiable Assets | ||||
|
Firearms |
$ |
$ | ||
|
Castings |
|
| ||
|
Corporate |
|
| ||
|
$ |
$ | |||
NOTE 12 — RELATED PARTY TRANSACTIONS
The Company contracts with the National Rifle Association (“NRA”) for some of its promotional and advertising activities. Payments made to the NRA in the three and nine months ended September 26, 2020 totaled $
NOTE 13 — CONTINGENT LIABILITIES
As of September 26, 2020, the Company was a defendant in five (5) lawsuits and is aware of certain other such claims. The lawsuits fall into three categories: traditional product liability litigation, non-product litigation, and municipal litigation. Each is discussed in turn below.
Traditional Product Liability Litigation
Two lawsuits mentioned above involve a claim for damages related to an allegedly defective product due to its design and/or manufacture. The lawsuits stem from specific incidents of personal injury and are based on traditional product liability theories such as strict liability, negligence, and/or breach of warranty.
The Company management believes that the allegations in these cases are unfounded, that the incidents are unrelated to the design or manufacture of the firearms involved, and that there should be no recovery against the Company.
Non-Product Litigation
Primus Group LLC v. Smith and Wesson, et al. is a putative class action filed in the United States District Court for the Southern District of Ohio on August 8, 2019. Plaintiff alleges that the defendants’ lawful sale of modern sporting rifles violates the Racketeer Influenced Corrupt Organizations Act and seeks a temporary restraining order (“TRO”) and permanent injunction. On August 20, 2019, the court denied plaintiff’s request for a TRO. On September 3, 2019, defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). On September 16, 2019, plaintiff filed an Amended Complaint. On October 9, 2019, the court dismissed plaintiff’s Amended Complaint, with prejudice. Plaintiff filed a Notice of Appeal on October 15, 2019 and sought two extensions of time to file its initial brief. Plaintiff’s subsequent motion to hold the appeal in abeyance was granted, though the court also ordered plaintiff to file periodic status reports. Plaintiff filed a series of status reports and eventually requested that the appeal be reactivated. Pursuant to the scheduling order in place currently, the matter should be briefed fully by December 9, 2020.
FN Herstal S.A. v. Sturm, Ruger & Co., Inc. was filed in the United States District Court for the Eastern District of Virginia on March 6, 2020. The Complaint alleges injury and economic loss based upon alleged federal and state trademark infringement and unfair competition. These allegations arise from the Company’s use and efforts to seek registration of “Ruger-57” in connection with the launch of a pistol bearing that mark. The Company believes that the suit lacks any merit and has filed an Answer denying all material allegations and Counterclaims seeking cancellation of certain of Plaintiff’s registered trademarks. Discovery has been initiated and is ongoing.
Municipal Litigation
Municipal litigation generally includes those cases brought by cities or other governmental entities against firearms manufacturers, distributors and retailers seeking to recover damages allegedly arising out of the misuse of firearms by third parties.
There is only one remaining lawsuit of this type, filed by the City of Gary in Indiana State Court in 1999. The complaint in that case seeks damages, among other things, for the costs of medical care, police and emergency services, public health services, and other services as well as punitive damages. In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacture, marketing and distribution practices of the various defendants. The suit alleges, among other claims, negligence in the design of products, public nuisance, negligent distribution and marketing, negligence per se and deceptive advertising. The case does not allege a specific injury to a specific individual as a result of the misuse or use of any of the Company's products.
After a long procedural history, the case was scheduled for trial on June 15, 2009. The case was not tried on that date and was largely dormant until a status conference was held on July 27, 2015. At that time, the court entered a scheduling order setting deadlines for plaintiff to file a Second Amended Complaint, for defendants to answer, and for defendants to file dispositive motions. The plaintiff did not file a Second Amended Complaint by the deadline.
In 2015, Indiana passed a new law such that Indiana Code §34-12-3-1 became applicable to the City's case. The defendants filed a joint motion for judgment on the pleadings, asserting immunity under §34-12-3-1 and asking the court to revisit the Court of Appeals' decision holding the Protection of Lawful Commerce in Arms Act inapplicable to the City's claims. The motion was fully briefed by the parties.
On September 29, 2016, the court entered an order staying the case pending a decision by the Indiana Supreme Court in KS&E Sports v. Runnels, which presented related issues. The Indiana Supreme Court decided KS&E Sports on April 24, 2017, and the City of Gary court lifted the stay. The City of Gary court also entered an order setting a supplemental briefing schedule under which the parties addressed the impact of the KS&E Sports decision on defendants' motion for judgment on the pleadings.
A hearing on the motion for judgment on the pleadings was held on December 12, 2017. On January 2, 2018, the court issued an order granting defendants’ motion for judgment on the pleadings, but denying defendants’ request for attorney’s fees and costs. On January 8, 2018, the court entered judgment for the defendants. The City filed a Notice of Appeal on February 1, 2018. Defendants cross-appealed the order denying attorney’s fees and costs.
Briefing in the Indiana Court of Appeals was completed on the City’s appeal and Defendants’ cross appeal on September 10, 2018. The Court of Appeals issued its ruling on May 23, 2019, affirming dismissal of the City’s negligent design and warnings count on the basis that the City had not alleged that Manufacturer Defendants’ conduct was unlawful. However, the court reversed dismissal of the City’s negligent sale and distribution and related public nuisance counts for damages and injunctive relief.
The Manufacturer Defendants filed a Petition to Transfer the case to the Indiana Supreme Court on July 8, 2019. The Petition was denied on November 26, 2019. The case was remanded to the trial court for further proceedings, though there has been no activity since then.
Summary of Claimed Damages and Explanation of Product Liability Accruals
Punitive damages, as well as compensatory damages, are demanded in certain of the lawsuits and claims. In many instances, the plaintiff does not seek a specified amount of money, though aggregate amounts ultimately sought may exceed product liability accruals and applicable insurance coverage. For product liability claims made after July 10, 2000, coverage is provided on an annual basis for losses exceeding $
The Company management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company’s financial results for a particular period.
Product liability claim payments are made when appropriate if, as, and when claimants and the Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the lawsuits and claims develop, the timing of which may vary greatly from case to case. A time schedule cannot be determined in advance with any reliability concerning when payments will be made in any given case.
Provision is made for product liability claims based upon many factors related to the severity of the alleged injury and potential liability exposure, based upon prior claim experience. Because the Company's experience in defending these lawsuits and claims is that unfavorable outcomes are typically not probable or estimable, only in rare cases is an accrual established for such costs.
In most cases, an accrual is established only for estimated legal defense costs. Product liability accruals are periodically reviewed to reflect then-current estimates of possible liabilities and expenses incurred to date and reasonably anticipated in the future. Threatened product liability claims are reflected in the Company's product liability accrual on the same basis as actual claims; i.e., an accrual is made for reasonably anticipated possible liability and claims handling expenses on an ongoing basis.
A range of reasonably possible losses relating to unfavorable outcomes cannot be made. However, in product liability cases in which a dollar amount of damages is claimed, the amount of damages claimed, which totaled $
NOTE 14 — SUBSEQUENT EVENTS
On September 29, 2020, the United States Bankruptcy Court for the Northern District of Alabama approved the Company’s offer to purchase certain of the assets used to manufacture Marlin firearms from Remington Outdoor Company, Inc. for $
On September 30, 2020, the Company entered into the Second Amendment to Credit Agreement its bank, which extended the termination date of the Company’s line of credit agreement to September 30, 2021 and modified a financial covenant.
October 23, 2020, the Board of Directors authorized a dividend of ¢ per share, for shareholders of record as of November 13, 2020, payable on November 27, 2020.
The Company has evaluated events and transactions occurring subsequent to September 26, 2020 and determined that there were no other unreported events or transactions that would have a material impact on the Company’s results of operations or financial position.
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Company Overview
Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of sales are from firearms. Export sales typically represent no more than 5% of total sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.
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 World Health Organization and a national emergency by the U.S. Government in March 2020. The COVID-19 pandemic has created significant uncertainty and adversely impacted many industries throughout the global economy. In the first nine months of 2020, the Company did not experience a significant adverse impact on its business resulting from government restrictions on the movement of people, goods, and services. The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, the Company cannot predict the extent to which its business, results of operations, financial condition, or cash flows will ultimately be impacted. Management continues to monitor and assess the situation and to prepare for potential implications for the Company’s business, supply chain and customer demand.
From a liquidity perspective, the Company believes it is currently well positioned to manage through this global crisis. At the end of the third quarter of 2020, the Company was debt-free, and had cash and short-term investments totaling $133.6 million and an unused $40.0 million revolving credit facility.
The Company has taken many proactive steps to maintain the health and safety of its employees and to mitigate the impact on its business. These actions include:
•
Providing all hourly employees with an additional two weeks of paid time off,
•
Encouraging employees to work remotely, wherever possible, and implementing social distancing throughout each manufacturing facility, including in every manufacturing cell,
•
Communicating with and assisting employees with potential health issues,
•
Restricting visitor access to avoid introducing new people to the factory environment,
•
Implementing additional cleaning, sanitizing and other health and safety processes to maintain a clean and safe workplace, and
•
Manufacturing and donating personal protective equipment to local hospitals, health care facilities, and police and fire departments in its local communities.
The costs of these actions are expected to total approximately $3.5 million in 2020, of which approximately $0.9 million and $2.4 million was recognized during the three and nine months ended September 26, 2020, respectively. The Company has also experienced expense reductions and deferrals in certain areas of our business, including reductions or delays in sponsorships and advertising, reduced conference and trade show participation costs, and reduced travel expenditures. These expense reductions and deferrals approximate $1.1 million and $2.2 million for the three and nine months ended September 26, 2020, respectively.
The Company has been able to keep all of its facilities safe and open with only limited restrictions on operations. While certain parts of the economy have begun to reopen as restrictions have been lifted, it is possible that additional restrictions will be put in place in the future which could adversely impact the Company’s business for an indeterminate period.
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, in part, 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 50% in the first nine months of 2020 compared to the prior year period. For the same period, NICS background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) increased 68%. These substantial increases may be attributable to increased public concern about personal protection and home defense in reaction to:
•
Some political and public leaders calling for a reduction in funding and limitations on law enforcement activities,
•
Recent protests, demonstrations, and civil unrest in many cities throughout the United States, and
•
The continuing COVID-19 pandemic.
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 $87.9 million or 24% of firearm sales in the first nine months of 2020. New product sales include only major new products that were introduced in the past two years.
Estimated sell-through from the independent distributors to retailers and total adjusted NICS background checks for the trailing seven quarters follow:
|
2020 |
2019 | ||||||
|
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 | |
|
Estimated Units Sold from Distributors to Retailers (1) |
457,400 |
501,600 |
476,800 |
397,000 |
295,100 |
316,300 |
347,100 |
|
Total adjusted NICS Background Checks (thousands) (2) |
5,165 |
5,452 |
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: |
|
| |
|
• Rely on data provided by independent distributors that are not verified by the Company, • Do not consider potential timing issues within the distribution channel, including goods-in-transit, and • 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 seven 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 | ||||||
|
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 | |
|
Units Ordered |
935,200 |
746,600 |
626,700 |
413,900 |
362,200 |
257,900 |
327,100 |
|
Orders Received |
$284.0 |
$228.8 |
$203.0 |
$121.5 |
$102.3 |
$70.3 |
$104.3 |
|
Average Sales Price of Units Ordered |
$304 |
$306 |
$324 |
$294 |
$283 |
$273 |
$319 |
|
Ending Backlog |
$410.1 |
$255.6 |
$142.7 |
$57.8 |
$44.7 |
$37.8 |
$58.9 |
|
Average Sales Price of Ending Unit Backlog |
$322 |
$333 |
$343 |
$308 |
$277 |
$296 |
$372 |
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 nine months of 2020 by 22% from the first nine months of 2019. Reduced hiring to help maintain the health and safety of employees and the cleanliness of our facilities during the COVID-19 pandemic negatively impacted production in 2020.
Summary Unit Data
Firearms unit data for the trailing seven quarters are as follows (dollar amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns):
|
2020 |
2019 | ||||||
|
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 | |
|
Units Ordered |
935,200 |
746,600 |
626,700 |
413,900 |
362,200 |
257,900 |
327,100 |
|
Units Produced |
430,400 |
374,400 |
363,300 |
355,000 |
286,500 |
297,900 |
374,000 |
|
Units Shipped |
430,700 |
395,100 |
398,900 |
387,500 |
328,400 |
288,300 |
322,000 |
|
Average Sales Price of Units Shipped |
$337 |
$328 |
$285 |
$269 |
$286 |
$329 |
$351 |
|
Ending Unit Backlog |
1,271,700 |
767,200 |
415,700 |
187,900 |
161,500 |
127,700 |
158,100 |
Inventories
During the third quarter of 2020, the Company’s finished goods inventory decreased by 400 units and distributor inventories of the Company’s products decreased by 26,700 units. In the aggregate, total Company and distributor inventories decreased 310,000 units from the end of the third quarter of 2019.
Inventory data for the trailing seven quarters follows:
|
2020 |
2019 | ||||||
|
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 | |
|
Units — Company Inventory |
10,700 |
11,100 |
31,900 |
67,400 |
100,000 |
141,900 |
132,300 |
|
Units — Distributor Inventory (1)(2) |
59,300 |
86,000 |
192,500 |
270,400 |
280,000 |
246,700 |
274,700 |
|
Total Inventory (3) |
70,000 |
97,100 |
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 June 2019 and did not provide inventory data. |
|
| |
|
(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. |
Net Sales
Consolidated net sales were $145.7 million for the three months ended September 26, 2020, an increase of 53.4% from $95.0 million in the comparable prior year period.
For the nine months ended September 26, 2020, consolidated net sales were $399.6 million, an increase of 30.9% from $305.4 million in the comparable prior year period.
Firearms net sales were $145.2 million for the three months ended September 26, 2020, an increase of 54.3% from $94.1 million in the comparable prior year period.
For the nine months ended September 26, 2020 firearms net sales were $397.3 million, an increase of 31.6% from $302.0 million in the comparable prior year period.
Firearms unit shipments increased 31.2% and 30.5% for the three and nine months ended September 26, 2020, respectively, from the comparable prior year periods.
Castings net sales were $0.5 million for the three months ended September 26, 2020, a decrease of 41.5% from $0.9 million in the comparable prior year period.
For the nine months ended September 26, 2020, castings net sales were $2.3 million, a decrease of 33.2% from $3.4 million in the comparable prior year period.
Cost of Products Sold and Gross Profit
Consolidated cost of products sold was $94.6 million for the three months ended September 26, 2020, an increase of 25.9% from $75.1 million in the comparable prior year period.
Consolidated cost of products sold was $272.4 million for the nine months ended September 26, 2020, an increase of 18.1% from $230.6 million in the comparable prior year period.
Gross margin was 35.1% and 31.8% for the three and nine months ended September 26, 2020, respectively, compared to 20.9% and 24.5% in the comparable prior year periods.
Gross margin for the three and nine months ended September 26, 2020 and September 28, 2019 are illustrated below (in thousands):
|
Three Months Ended | ||||
|
September 26, 2020 |
September 28, 2019 | |||
|
Net sales |
$145,705 |
100.0% |
$94,999 |
100.0% |
|
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability |
93,847 |
64.4% |
77,242 |
81.3% |
|
LIFO (income) expense |
(158) |
(0.1)% |
584 |
0.6% |
|
Overhead rate adjustments to inventory |
342 |
0.2% |
(2,297) |
(2.4)% |
|
Labor rate adjustments to inventory |
94 |
0.1% |
(328) |
(0.3)% |
|
Product liability |
428 |
0.3% |
(69) |
(0.1)% |
|
Total cost of products sold |
94,553 |
64.9% |
75,132 |
79.1% |
|
Gross profit |
$51,152 |
35.1% |
$19,867 |
20.9% |
|
Nine Months Ended | ||||
|
September 26, 2020 |
September 28, 2019 | |||
|
Net sales |
$399,608 |
100.0% |
$305,367 |
100.0% |
|
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls |
270,656 |
67.7% |
232,307 |
76.1% |
|
LIFO expense |
194 |
0.1% |
1,772 |
0.5% |
|
Overhead rate adjustments to inventory |
1,158 |
0.3% |
(3,496) |
(1.1)% |
|
Labor rate adjustments to inventory |
361 |
0.1% |
(398) |
(0.1)% |
|
Product liability |
863 |
0.2% |
615 |
0.2% |
|
Product safety bulletins and recalls |
(870) |
(0.2)% |
(200) |
(0.1)% |
|
Total cost of products sold |
272,362 |
68.2% |
230,600 |
75.5% |
|
Gross profit |
$127,246 |
31.8% |
$ 74,767 |
24.5% |
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls — During the three and nine months ended September 26, 2020, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls decreased as a percentage of sales by 16.9% and 8.4%, respectively, compared with the corresponding 2019 periods, due primarily to the increase in sales and production which resulted in favorable leveraging of fixed costs and a reduction in promotional activities.
LIFO — For the three and nine months ended September 26, 2020, the impact of LIFO was insignificant. In the comparable 2019 periods, the Company recognized LIFO expense resulting in increased cost of products sold of $0.6 million and $1.8 million, respectively.
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 and nine months ended September 26, 2020, the Company became more efficient in overhead spending and the overhead rates used to absorb overhead expenses into inventory decreased, resulting in decreases in inventory values of $0.3 million and $1.2 million, respectively, and corresponding increases to cost of products sold.
During the three and nine months ended September 28, 2019, the Company became less efficient in overhead spending and the overhead rates used to absorb overhead expenses into inventory increased, resulting in an increase in inventory values of $2.3 million and $3.5 million, respectively, and a corresponding decrease to cost of products sold.
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 and nine months ended September 26, 2020, the Company became more efficient in direct labor utilization and the labor rates used to absorb labor expenses into inventory decreased, resulting in decreases in inventory value of $0.1 million and $0.4 million, respectively, and corresponding increases to cost of products sold in both periods.
During the three and nine months ended September 28, 2019 the Company became less efficient in direct labor utilization and the labor rates used to absorb labor expenses into inventory decreased, resulting in increases in inventory value of $0.3 million and $0.4, respectively, and corresponding decreases to cost of products sold in both periods.
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 and nine months ended September 26, 2020, product liability expense was $0.4 million and $0.9 million, respectively.
During the three months ended September 28, 2019, product liability expense was de minimis. During the nine months ended September 28, 2019, product liability expense was $0.6 million.
Product Safety Bulletins and Recalls — During the nine months ended September 26, 2020 the estimated costs remaining for product safety bulletins and recalls was reduced, which reduced cost of sales $0.9 million for the period. There was no impact in the three months ended September 26, 2020.
During the nine months ended September 28, 2019, the estimated costs remaining for the product safety bulletin was reduced, which reduced cost of sales by $0.2 million for the period. There was no impact in the three months ended September 28, 2019.
Gross Profit — As a result of the foregoing factors, for the three and nine months ended September 26, 2020, gross profit was $51.2 million and $127.2 million, respectively, an increase of $31.3 million and $52.4 million, respectively, from $19.9 million and $74.8 million, respectively, in the comparable prior year periods.
Gross profit as a percentage of sales increased to 35.1% and 31.8% in the three and nine months ended September 26, 2020, respectively, from 20.9% and 24.5% in the comparable prior year periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $18.3 million for the three months ended September 26, 2020, an increase of $4.0 million or 28.0% from $14.3 million in the comparable prior year period. Selling, general and administrative expenses were $50.2 million for the nine months ended September 26, 2020, an increase of $4.9 million or 10.9% from $45.3 million in the comparable prior year period. These increases were primarily attributable to increased sales and compensation expenses.
Other income, net
Other income, net was de minimis for the three months and $1.4 million for the nine months ended September 26, 2020, respectively, which was a decrease from $0.8 million and $2.7 million for the three and nine months ended September 28, 2019 as a result of reduced interest rates earned on short-term investments in 2020 compared to 2019.
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 24.7% and 25.2% for the three and nine months ended September 26, 2020, respectively. The Company’s effective income tax rate was 24.4% and 25.2% for the three and nine months ended September 28, 2019, respectively.
As a result of the foregoing factors, consolidated net income was $24.8 million and $58.7 million for the three and nine months ended September 26, 2020, respectively. This represents an increase of 413.9% and 143.7% from $4.8 million and $24.1 million in the comparable prior year periods.
Non-GAAP Financial Measure
In an effort to provide investors with additional information regarding its financial results, the Company refers to various United States generally accepted accounting principles (“GAAP”) financial measures and one non-GAAP financial measure, EBITDA, which management believes provides useful information to investors. This non-GAAP financial measure may not be comparable to similarly titled financial measures being disclosed by other companies. In addition, the Company believes that the non-GAAP financial measure should be considered in addition to, and not in lieu of, GAAP financial measures. The Company believes that EBITDA is useful to understanding its operating results and the ongoing performance of its underlying business, as EBITDA provides information on the Company’s ability to meet its capital expenditure and working capital requirements, and is also an indicator of profitability. The Company believes that this reporting provides better transparency and comparability to its operating results. The Company uses both GAAP and non-GAAP financial measures to evaluate the Company’s financial performance.
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 $40.1 million for the three months ended September 26, 2020, an increase of 200.7% from $13.3 million in the comparable prior year period.
For the nine months ended September 26, 2020 EBITDA was $99.1 million, an increase of 87.7% from $52.8 million in the comparable prior year period.
Non-GAAP Reconciliation — EBITDA
EBITDA
(Unaudited, dollars in thousands)
|
Three Months Ended |
Nine Months Ended | |||
|
September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 | |
|
Net income |
$24,753 |
$ 4,817 |
$58,685 |
$24,083 |
|
| ||||
|
Income tax expense |
8,141 |
1,556 |
19,719 |
8,101 |
|
Depreciation and amortization expense |
7,215 |
7,486 |
21,644 |
22,458 |
|
Interest income |
(112) |
(611) |
(1,072) |
(1,973) |
|
Interest expense |
114 |
90 |
166 |
141 |
|
EBITDA |
$40,111 |
$13,338 |
$99,142 |
$52,810 |
Financial Condition
Liquidity
At the end of the third quarter of 2020, the Company’s cash and short-term investments totaled $133.6 million. Pre-LIFO working capital of $192.9 million, less the LIFO reserve of $47.3 million, resulted in working capital of $145.6 million and a current ratio of 3.2 to 1.
Operations
Cash provided by operating activities was $82.0 million for the nine months ended September 26, 2020, compared to $8.9 million for the comparable prior year period. The increase in cash provided in the nine months ended September 26, 2020 is primarily attributable to the increased net income and the significant decrease in inventory in the current period.
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 nine months ended September 26, 2020 totaled $8.0 million, a decrease from $9.2 million in the comparable prior year period. In 2020, the Company expects to spend approximately $20 million on capital expenditures, much of which will relate to tooling and fixtures for new product introductions and to upgrade and modernize manufacturing equipment. Due to market conditions and business circumstances, actual capital expenditures could vary significantly from the projected amount. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash.
Dividends of $104.1 million were paid during the nine months ended September 26, 2020, reflecting the quarterly dividends and a $5.00 per share special dividend paid in August 2020. On October 22, 2020, the Board of Directors authorized a 56¢ dividend for shareholders of record as of November 13, 2020, payable on November 27, 2020. The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash and short-term investments, and the Company’s need for funds. The Company has financed its dividends with cash provided by operations and current cash.
The Company purchases United States Treasury instruments which mature within one year with available cash. At September 26, 2020, the Company’s investment in these instruments totaled $104.0 million.
No shares were repurchased in the nine months ended September 26, 2020. During the nine months ended September 28, 2019, the Company repurchased 44,500 shares of its common stock for $2.0 million in the open market. The average price per share purchased was $44.83. These purchases were funded with cash on hand. As of September 26, 2020, $86.7 million remained authorized for future stock repurchases.
On September 29, 2020, the United States Bankruptcy Court for the Northern District of Alabama approved the Company’s offer to purchase certain of the assets used to manufacture Marlin firearms from Remington Outdoor Company, Inc. The Company will pay the $30 million purchase price from cash on hand at the time of closing, which is expected to occur in the fourth quarter of 2020.
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 $40 million credit facility, which expires on September 30, 2021, was unused at September 26, 2020 and the Company has no debt.
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 Bureau of Alcohol, Tobacco, Firearms & Explosives, environmental, and safety regulations and the outcome of any proceedings or orders will not have a material adverse effect on the financial position or results of operations of the Company. If these regulations become more stringent in the future and the Company is not able to comply with them, such noncompliance could have a material adverse impact on the Company.
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 February 20, 2020, or the judgments affecting the application of those estimates and assumptions.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The interest rate market risk implicit to the Company at any given time is typically low, as the Company does not have significant exposure to changing interest rates on invested cash. There has been no material change in the Company’s exposure to interest rate risks during the nine months ended September 26, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (the “Disclosure Controls and Procedures”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 26, 2020.
Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 26, 2020, such Disclosure Controls and Procedures are effective to ensure that information required to be disclosed in the Company’s periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure.
The Company’s Chief Executive Officer and Chief Financial Officer have further concluded that, as of September 26, 2020, there have been no material changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 26, 2020 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019 and implemented internal controls to ensure the Company adequately evaluated its lease obligations and properly assessed the impact of the new accounting standard related to recognition of right-of-use assets and lease liabilities on its financial statements. The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments on January 1, 2020 and implemented internal controls to ensure the Company adequately accounted for any potential credit losses on financial assets. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of either of the new standards. The Company has not experienced any material impact to its internal controls over financial reporting as a result of the COVID-19 pandemic.
The effectiveness of any system of internal controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that the Disclosure Controls and Procedures will detect all errors or fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system will be attained.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at Note 13 to the financial statements, which are included in this Form 10-Q.
The Company has reported all cases instituted against it through June 27, 2020, and the results of those cases, where terminated, to the SEC on its previous Form 10-Q and 10-K reports, to which reference is hereby made.
There was one lawsuit formally instituted against the Company during the three months ending September 26, 2020. Benjamin Jeffry Pegg v. Shane David Hoffman, et al, was filed in Wise County, Texas on July 14, 2020.
ITEM 1A. RISK FACTORS
The COVID-19 pandemic should be added to the Company’s risk factors included in Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There were no other material changes during the three months ended September 26, 2020 to the risk factors disclosed in Item 1A. Risk Factors in the Company’s 2019 Annual Report.
The COVID-19 pandemic could have a significant adverse impact on the Company’s operations, financial results, cash flow, and financial condition.
The COVID-19 pandemic has created significant uncertainty and adversely impacted many industries throughout the global economy. Thus far, the impact of COVID-19 on the Company has not been significant. However, as this pandemic continues, it is unknown how it may impact the Company in the future. The extent to which it impacts the Company’s operations, financial results, cash flow, and financial condition is difficult to predict and dependent upon many factors over which it has no control. These factors include, but are not limited to, the duration and severity of the pandemic; government restrictions on businesses and individuals; potential significant adverse impacts on the Company’s employees, customers, suppliers, or service providers; the impact on U.S. and global economies and the timing and rate of economic recovery; and potential adverse effects on the financial markets, any of which could negatively impact the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
|
(a) |
Exhibits: |
|
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
101.INS |
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
101.SCH |
XBRL Taxonomy Extension Schema Document |
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
|
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 26, 2020
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
STURM, RUGER & COMPANY, INC. | ||
|
Date: October 28, 2020 |
S/ |
THOMAS A. DINEEN |
|
Thomas A. Dineen | ||
|
Principal Financial Officer, Principal Accounting Officer, Senior Vice President, Treasurer and Chief Financial Officer |
35