STURM RUGER & CO INC 10-Q

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 accounted for approximately 5% and 7% of total sales for the three month periods ended March 30, 2024 and April 1, 2023, respectively. 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. Less than 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. Results of Operations Demand The estimated unit sell-through of the Company’s products from the independent distributors to retailers increased 1% in the first quarter months of 2024 compared to the prior year period. For the same period, National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) decreased 4%. Estimated sell-through from the independent distributors to retailers and total adjusted NICS background checks for the trailing five quarters follow: 2024 2023 Q1 Q4 Q3 Q2 Q1 Estimated Units Sold from Distributors to Retailers (1) 396,700 384,700 307,400 323,000 391,500 Total adjusted NICS Background Checks (thousands) (2) 3,983 4,742 3,284 3,654 4,168 (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. 21 (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.) 2024 2023 Q1 Q4 Q3 Q2 Q1 Units Ordered 472,600 316,600 176,300 258,100 408,000 Orders Received $ 198.2 $ 116.7 $ 58.8 $ 102.1 $ 156.2 Average Sales Price of Units Ordered $ 419 $ 369 $ 334 $ 396 $ 383 Ending Backlog $ 296.2 $ 229.0 $ 234.8 $ 293.7 $ 327.3 Average Sales Price of Ending Unit Backlog $ 523 $ 522 $ 510 $ 496 $ 488 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 to plan production levels. Consequently, the Company’s overall production in the first quarter of 2024 increased 3% from the fourth quarter of 2023 . 22 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): 2024 2023 Q1 Q4 Q3 Q2 Q1 Units Ordered 472,600 316,600 176,300 258,100 408,000 Units Produced 314,500 305,200 324,500 387,400 381,000 Units Shipped 345,400 337,800 308,400 336,400 384,900 Average Sales Price of Units Shipped $ 394 $ 383 $ 390 $ 422 $ 387 Ending Unit Backlog 566,000 438,800 460,000 592,100 670,400 Inventories During the first quarter of 2024, the Company’s finished goods inventory decreased by 30,900 units and distributor inventories of the Company’s products decreased by 51,300 units. Inventory unit data for the trailing five quarters follows: 2024 2023 Q1 Q4 Q3 Q2 Q1 Company Inventory 112,600 143,500 176,100 160,000 108,900 Distributor Inventory (1) 208,000 259,300 306,200 305,200 291,800 Total Inventory (2) 320,600 402,800 482,300 465,200 400,700 (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) This total does not include inventory at retailers. The Company does not have access to data on retailer inventories of the Company’s products. 23 Net Sales, Cost of Products Sold, and Gross Profit Net sales, cost of products sold, and gross profit data for the three months ended (dollars in millions): March 30, 2024 April 1, 2023 Change % Change Net firearms sales $ 136.0 $ 148.9 $ (12.9 ) (8.7% ) Net castings sales 0.8 0.6 0.2 45.0% Total net sales 136.8 149.5 (12.7 ) (8.5% ) Cost of products sold 107.4 111.0 (3.6 ) (3.2% ) Gross profit $ 29.4 $ 38.5 $ (9.1 ) (23.6% ) Gross margin 21.5% 25.8% (4.3% ) (16.7% ) Sales of new products, including the Security-380 pistol, Super Wrangler revolver, Marlin lever-action rifles, LC Carbine, Small-Frame Autoloading Rifle, and American Centerfire Rifle Generation II represented $41.8 million or 32.0% of firearm sales in the three months ended March 30, 2024. New product sales include only major new products that were introduced in the past two years. The decreased gross profit for the three months ended March 30, 2024 is attributable to the decrease in sales, a product mix shift toward products with relatively lower margins that remain in relatively stronger demand, unfavorable deleveraging of fixed costs resulting from decreased production, and inflationary cost increases in materials, commodities, services, wages, energy, fuel and transportation. The decrease in gross margin for the three months ended March 30, 2024 is attributable the aforementioned factors, partially offset by increased pricing. Selling and General and Administrative Expenses Selling and general and administrative expenses data for the three months ended (dollars in millions): March 30, 2024 April 1, 2023 Change % Change Selling expenses $ 9.7 $ 9.2 $ 0.5 5.2% General and administrative expenses 12.2 12.3 (0.1 ) (0.6% ) Total operating expenses $ 21.9 $ 21.5 $ 0.4 1.9% The increase in selling expenses for the three months ended March 30, 2024 was primarily attributable to increases in shipping costs and increased advertising and promotional activity. 24 The decrease in general, and administrative expenses for the three months ended March 30, 2024 was primarily attributable to decreased professional service costs and decreased incentive compensation, offset by accrued severance expense of $1.5 million related to a reduction in force that involved about 80 employees. The accrued severances are expected to be settled in cash and consist of one-time termination charges arising from severance obligations and other customary employee benefit payments in connection with a reduction in force. The reduction in force is expected to result in approximately $9 million of annualized cash savings. This action is part of the Company’s initiatives to reallocate its resources and cost structure into prioritized areas that will drive long-term growth and improve margins. As the Company focuses on these goals, it will continue to pursue opportunities to consolidate functions and reduce or eliminate investment in areas of lower focus. Other Income Other income data for the three months ended (dollars in millions): March 30, 2024 April 1, 2023 Change % Change Other income $ 1.5 $ 1.5 $ — 3.1% Other income for the three months ended March 30, 2024 was essentially unchanged as increases in interest income were offset by decreased royalty and miscellaneous income. The Company's 2024 and 2023 effective tax rates differ from the statutory federal tax rate due principally to research and development tax credits, state income taxes and the nondeductibility of certain executive compensation. The Company’s effective income tax rate was 21.7% for the three months ended March 30, 2024, a decrease from 22.4% for the three months ended April 1, 2023. Non-GAAP Financial Measures 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 two non-GAAP financial measures, EBITDA and EBITDA margin, which management believes provides useful information to investors. These non-GAAP financial measures may not be comparable to similarly titled financial measures being disclosed by other companies. In addition, the Company believes that the non-GAAP financial measures should be considered in addition to, and not in lieu of, GAAP financial measures. The Company believes that EBITDA and EBITDA margin are 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 this 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 to arrive at EBITDA. The Company calculates EBITDA margin by dividing EBITDA by total net sales. 25 EBITDA was $13.5 million for the three months ended March 30, 2024, a decrease of 43.2% from $23.8 million in the comparable prior year period. Non-GAAP Reconciliation – EBITDA EBITDA (Unaudited, dollars in thousands) Three Months Ended March 30, 2024 April 1, 2023 Net income $ 7,084 $ 14,350 Income tax expense 1,963 4,142 Depreciation and amortization expense 5,833 6,536 Interest income (1,355 ) (1,214 ) Interest expense 17 25 EBITDA $ 13,542 $ 23,839 EBITDA margin 9.9% 16.0% Financial Condition Liquidity and Capital Resources At the end of the first quarter of 2024, the Company’s cash and short-term investments totaled $115.3 million. Pre-LIFO working capital of $274.1 million, less the LIFO reserve of $65.6 million, resulted in working capital of $208.5 million and a current ratio of 5.2 to 1. Operations Cash provided by operating activities was $7.3 million for the three months ended March 30, 2024, compared to $5.3 million for the comparable prior year period. The increase in cash provided in the three months ended March 30, 2024 is primarily attributable to the decrease in inventory and the decrease in prepaid expenses and other assets in the three months ended March 30, 2024, partially offset by the decrease in net income and the increase in accounts receivable in the three months ended March 30, 2024. 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. A limited supply of these materials in the marketplace can result in increases to purchase prices and adversely affect production levels. If market conditions 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. 26 Investing and Financing Capital expenditures for the three months ended March 30, 2024 totaled $1.8 million, an increase from $1.7 million in the comparable prior year period. In 2024, the Company expects capital expenditures related to new product introductions and upgrades to our manufacturing equipment and facilities to total approximately $15 million. 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 and cash equivalents. Dividends of $4.1 million were paid during the three months ended March 30, 2024. The Company has financed its dividends with cash provided by operations and current cash. The quarterly dividend varies every quarter because the Company pays a percentage of earnings rather than a fixed amount per share. The Company’s practice is to pay a dividend of approximately 40% of net income. On April 26, 2024, the Company’s Board of Directors authorized a dividend of 16¢ per share to shareholders of record on May 20, 2024, payable on June 7, 2024. 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. As of March 30, 2024, the Company had $75.3 million of United States Treasury instruments which mature within one year. The Company also invests available cash in a bank-managed money market fund that invests exclusively in United States Treasury instruments which mature within one year. At March 30, 2024, the Company’s investment in this money market fund totaled $24.2 million. During the three months ended March 30, 2024 the Company purchased 75,024 shares of its common stock for $3.2 million in the open market. The average price per share purchased was $42.89. These purchases were funded with cash on hand. As of March 30, 2024, $71.5 million remained authorized for future stock repurchases. 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 January 7, 2025, was unused at March 30, 2024. 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. The Company has 15 independent distributors that service the domestic commercial market. Additionally, the Company has 44 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. 27 Adjustments to Critical Accounting Policies The Company has not made any adjustments to its critical accounting estimates and assumptions described in the Company’s 2023 Annual Report on Form 10-K filed on February 21, 2024, 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, 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.