Ruger(RGR) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, prepared under GAAP Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (Dollars in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :---------------------------- | :------------------- | :------------------ | | Cash | $13,559 | $65,173 | | Short-term investments | $106,451 | $159,132 | | Total Current Assets | $273,960 | $361,838 | | Total Assets | $400,350 | $484,763 | | Total Current Liabilities | $61,187 | $163,067 | | Total Stockholders' Equity | $335,305 | $316,738 | Condensed Consolidated Statements of Income and Comprehensive Income Condensed Consolidated Statements of Income and Comprehensive Income (Dollars in thousands, except per share) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Oct 1, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :---------------------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :---------------------------- | | Total net sales | $120,893 | $139,390 | $413,150 | $446,618 | | Gross profit | $24,728 | $38,869 | $101,362 | $140,531 | | Operating income | $6,326 | $19,859 | $41,762 | $83,776 | | Income before income taxes | $8,089 | $20,991 | $46,814 | $86,614 | | Net income and comprehensive income | $7,431 | $18,389 | $37,966 | $69,378 | | Basic earnings per share | $0.42 | $1.04 | $2.14 | $3.93 | | Cash dividends per share | $0.36 | $0.47 | $6.10 | $2.01 | Condensed Consolidated Statement of Stockholders' Equity Condensed Consolidated Statement of Stockholders' Equity (Dollars in thousands) | Metric | December 31, 2022 | September 30, 2023 | | :---------------------------- | :---------------- | :----------------- | | Balance | $316,738 | $335,305 | | Net income | | $37,966 | | Dividends paid | | $(19,462) | | Stock-based compensation expense | | $2,968 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Dollars in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :---------------------------- | :----------------------------- | :---------------------------- | | Cash provided by operating activities | $17,298 | $50,263 | | Cash provided by investing activities | $41,049 | $17,498 | | Cash used for financing activities | $(109,961) | $(38,952) | | (Decrease) increase in cash and cash equivalents | $(51,614) | $28,809 | | Cash and cash equivalents at end of period | $13,559 | $49,853 | Notes to Condensed Consolidated Financial Statements - The Company is primarily engaged in the design, manufacture, and sale of firearms, which constitute approximately 99% of total sales. Export sales accounted for approximately 7% of total sales for the nine-month periods ended September 30, 2023 and October 1, 2022[18] - Net inventories increased to $79,271 thousand as of September 30, 2023, from $64,993 thousand at December 31, 2022[30] - The Company's effective income tax rate was 8.1% for the three months ended September 30, 2023, down from 12.4% in the prior year, and 18.9% for the nine months ended September 30, 2023, down from 19.9% in the prior year, primarily due to higher than anticipated tax credits[39] - The Company has a $40 million unsecured revolving line of credit, which was unused as of September 30, 2023[35] - The Company faces eight lawsuits related to municipal litigation, negligence, and unfair trade practices. Management believes these are unlikely to have a material adverse effect on the Company's financial position[54][68] - On October 27, 2023, the Board of Directors authorized a dividend of 17¢ per share, payable on November 29, 2023[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes the Company's financial performance, condition, liquidity, and capital resources for the reporting period Company Overview - Sturm, Ruger & Company, Inc. primarily designs, manufactures, and sells firearms to domestic customers, accounting for approximately 99% of sales. The remaining sales are from investment castings[74][75] - Export sales constituted approximately 7% of total sales for both the nine-month periods ended September 30, 2023, and October 1, 2022[74] - Orders for firearms typically show seasonality, being stronger in the first quarter and weaker in the third quarter, influenced by the distributor show season[76] Results of Operations Demand - Estimated unit sell-through from independent distributors to retailers decreased by 8% in the first nine months of 2023 compared to the prior year[77] - Adjusted NICS background checks, a proxy for market demand, decreased by 7% for the same period[77] Estimated Units Sold and NICS Background Checks | Metric | Q3 2023 | Q2 2023 | Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | | :------------------------------------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Estimated Units Sold from Distributors to Retailers | 307,400 | 323,000 | 391,500 | 397,800 | 343,500 | 354,300 | 411,200 | | Total adjusted NICS Background Checks (thousands) | 3,284 | 3,654 | 4,168 | 4,531 | 3,764 | 3,917 | 4,213 | Orders Received and Ending Backlog Orders Received and Ending Backlog (Dollars in millions, except average sales price) | Metric | Q3 2023 | Q2 2023 | Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | | :------------------------------------------------------- | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Units Ordered | 176,300 | 258,100 | 408,000 | 156,000 | 295,600 | 250,600 | 381,600 | | Orders Received | $58.8 | $102.1 | $156.2 | $81.0 | $124.3 | $98.9 | $147.0 | | Average Sales Price of Units Ordered | $334 | $396 | $383 | $519 | $421 | $395 | $385 | | Ending Backlog | $234.8 | $293.7 | $327.3 | $314.4 | $377.6 | $389.6 | $420.5 | | Average Sales Price of Ending Unit Backlog | $510 | $496 | $488 | $486 | $427 | $405 | $384 | Production - Overall production decreased by 18% in the first nine months of 2023 compared to the same period in 2022, in response to estimated sell-through and inventory levels[84] Summary Unit Data Summary Unit Data | Metric | Q3 2023 | Q2 2023 | Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | | :-------------------------- | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Units Ordered | 176,300 | 258,100 | 408,000 | 156,000 | 295,600 | 250,600 | 381,600 | | Units Produced | 324,500 | 387,400 | 381,000 | 397,300 | 382,800 | 431,800 | 521,300 | | Units Shipped | 308,400 | 336,400 | 384,900 | 393,100 | 373,800 | 382,600 | 491,500 | | Average Sales Price of Units Shipped | $390 | $422 | $387 | $378 | $371 | $366 | $338 | | Ending Unit Backlog | 460,000 | 592,100 | 670,400 | 647,300 | 884,400 | 962,600 | 1,094,600 | Inventories - The Company's finished goods inventory increased by 16,100 units during Q3 2023, while distributor inventories of the Company's products increased by 1,000 units[86] Inventory Levels (Units) | Metric | Q3 2023 | Q2 2023 | Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | | :------------------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Company Inventory | 176,100 | 160,000 | 108,900 | 112,800 | 108,600 | 99,700 | 50,400 | | Distributor Inventory | 306,200 | 305,200 | 291,800 | 298,400 | 303,100 | 272,800 | 244,600 | | Total Inventory | 482,300 | 465,200 | 400,700 | 411,200 | 411,700 | 372,500 | 295,000 | Net Sales, Cost of Products Sold, and Gross Profit Net Sales, Gross Profit, and Gross Margin (Three Months Ended) (Dollars in millions) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Oct 1, 2022 | Change ($) | Change (%) | | :--------------------------- | :------------------------------ | :----------------------------- | :--------- | :--------- | | Total net sales | $120.9 | $139.4 | $(18.5) | (13.3%) | | Gross profit | $24.7 | $38.9 | $(14.2) | (36.4%) | | Gross margin | 20.5% | 27.9% | (7.4%) | (26.5%) | Net Sales, Gross Profit, and Gross Margin (Nine Months Ended) (Dollars in millions) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | Change ($) | Change (%) | | :--------------------------- | :----------------------------- | :---------------------------- | :--------- | :--------- | | Total net sales | $413.2 | $446.6 | $(33.4) | (7.5%) | | Gross profit | $101.4 | $140.5 | $(39.1) | (27.9%) | | Gross margin | 24.5% | 31.5% | (7.0%) | (22.2%) | - New product sales contributed $27.2 million (22.9% of firearm sales) in Q3 2023 and $90.5 million (22.7% of firearm sales) in the first nine months of 2023[89][93] - The decrease in gross profit and margin was primarily due to decreased sales, unfavorable fixed cost deleveraging from reduced production, increased promotional costs, inflationary cost increases, and a product mix shift towards lower-margin products[90][94] Selling and General and Administrative Expenses Selling and General and Administrative Expenses (Three Months Ended) (Dollars in millions) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Oct 1, 2022 | Change ($) | Change (%) | | :--------------------------- | :------------------------------ | :----------------------------- | :--------- | :--------- | | Selling expenses | $8.7 | $8.8 | $(0.1) | (1.1%) | | General and administrative expenses | $9.7 | $10.2 | $(0.5) | (5.0%) | | Total operating expenses | $18.4 | $19.0 | $(0.6) | (3.2%) | Selling and General and Administrative Expenses (Nine Months Ended) (Dollars in millions) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | Change ($) | Change (%) | | :--------------------------- | :----------------------------- | :---------------------------- | :--------- | :--------- | | Selling expenses | $27.7 | $25.8 | $1.9 | 7.3% | | General and administrative expenses | $31.9 | $30.9 | $1.0 | 3.1% | | Total operating expenses | $59.6 | $56.7 | $2.9 | 5.0% | - The increase in selling expenses for the nine months was due to the resumption of trade show participation, travel, and advertising, partially offset by decreased sales volume[98] - The increase in general and administrative expenses for the nine months was primarily due to increased professional service costs, partially offset by decreased incentive compensation[99] Other Income Other Income (Three Months Ended) (Dollars in millions) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Oct 1, 2022 | Change ($) | Change (%) | | :--------------------------- | :------------------------------ | :----------------------------- | :--------- | :--------- | | Other income | $1.8 | $1.1 | $0.7 | 55.7% | Other Income (Nine Months Ended) (Dollars in millions) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | Change ($) | Change (%) | | :--------------------------- | :----------------------------- | :---------------------------- | :--------- | :--------- | | Other income | $5.1 | $2.8 | $2.3 | 78.0% | - The increase in other income for both periods was primarily driven by higher interest income[100][101] Non-GAAP Financial Measures (EBITDA) EBITDA and EBITDA Margin (Dollars in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Oct 1, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :---------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :---------------------------- | | EBITDA | $13,287 | $27,005 | $62,420 | $105,988 | | EBITDA margin | 11.0% | 19.4% | 15.1% | 23.7% | - EBITDA decreased by 50.8% for the three months and 41.1% for the nine months ended September 30, 2023, reflecting the decline in net income[105] Financial Condition Liquidity and Capital Resources - As of September 30, 2023, cash and short-term investments totaled $120.0 million[107] - The Company reported working capital of $212.8 million and a current ratio of 4.5 to 1[107] Operations (Cash Flow and Raw Materials) - Cash provided by operating activities decreased to $17.3 million for the nine months ended September 30, 2023, from $50.3 million in the prior year, primarily due to decreased net income and increased prepaid expenses[108] - The Company faces potential risks from limited supply and increased prices of raw materials, which could adversely affect production and financial results[109] Investing and Financing - Capital expenditures for the nine months ended September 30, 2023, were $11.6 million, a decrease from $17.2 million in the prior year. The Company projects approximately $20 million in capital expenditures for the full year 2023[110] - Dividends paid totaled $107.8 million during the nine months, including an $88.3 million special dividend. The Company's policy is to pay approximately 40% of net income as dividends[111] - As of September 30, 2023, $86.6 million remained authorized for future stock repurchases, with no shares repurchased during the nine-month period[114] Other Operational Matters - The Company operates with 15 independent distributors for the domestic commercial market, 45 for export, and 25 for law enforcement markets[116] - The Company self-insures a significant portion of its product liability, workers' compensation, medical, and other insurance[116] Impact of COVID-19 - The Company did not experience a significant adverse impact on its business from COVID-19 or related government restrictions during the nine months ended September 30, 2023[118] Adjustments to Critical Accounting Policies - No adjustments were made to critical accounting estimates and assumptions described in the Company's 2022 Annual Report on Form 10-K[119] Forward-Looking Statements and Projections - The Company's forward-looking statements are subject to risks and uncertainties, including market demand, sales levels, litigation, legislative impacts, COVID-19, and accounting estimates, which could cause actual results to differ materially[121] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section assesses the Company's exposure to market risks, particularly interest rate risk - The Company's interest rate market risk is typically low due to limited exposure to changing interest rates on invested cash[122] - There has been no material change in the Company's exposure to interest rate risks during the three months ended September 30, 2023[122] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and internal control over financial reporting - The Company's disclosure controls and procedures were deemed effective as of September 30, 2023[124] - There have been no material changes in the Company's internal control over financial reporting during the quarter ended September 30, 2023, and no material impact from the COVID-19 pandemic[125] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to the detailed discussion of legal proceedings in Note 13 to the financial statements and confirms no new lawsuits were formally instituted during the quarter - The nature of legal proceedings against the Company is discussed in Note 13 to the financial statements[128] - No new lawsuits were formally instituted against the Company during the three months ending September 30, 2023[129] Item 1A. Risk Factors This section states that there were no material changes to the Company's risk factors during the reporting period - There were no material changes in the Company's risk factors from the information provided in its Annual Report on Form 10-K for the year ended December 31, 2022[130] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the Company for the reporting period - Not applicable[131] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company for the reporting period - Not applicable[131] Item 4. Mine Safety Disclosures This item is not applicable to the Company for the reporting period - Not applicable[131] Item 5. Other Information This section discloses information regarding Rule 10b5-1 trading plans adopted by Company officers - A Rule 10b5-1 Plan was adopted by Michael W. Wilson, Vice President of Operations, on May 22, 2023, for the potential sale of up to 2,919 shares of common stock, expiring December 31, 2023. This plan was not reported in the previous Form 10-Q due to an administrative oversight[133] - No other Section 16 officers or directors adopted or terminated Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the three months ended September 30, 2023[132][134] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including certifications and XBRL documents - Exhibits include certifications pursuant to the Sarbanes-Oxley Act of 2002 (Rules 13a-14(a) and 18 U.S.C. Section 1350) and various XBRL taxonomy extension documents[136] SIGNATURES SIGNATURES This section provides the formal signatures, certifying the submission of the report by authorized personnel - The report was signed on November 1, 2023, by Thomas A. Dineen, Principal Financial Officer, Principal Accounting Officer, Senior Vice President, Treasurer, and Chief Financial Officer[140]