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% of total sales for each of the three month periods ended March 28, 2026 and March 29, 2025. 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 During the three months ended March 28, 2026, the Company executed on its Ruger 2030 plan – strengthening operational responsiveness, enhancing the product portfolio and positioning the Company for sustainable long-term growth. Activity in the quarter included: · The Company’s Board of Directors advancing a deliberate and independent refreshment process, which saw the retirement of three existing directors and the addition of three new directors with relevant operational, industrial and strategic expertise while maintaining continuity during a period of leadership transition. · The appointment of a new CFO in April of 2026, along with other ongoing organizational realignment designed to improve efficiency and effectiveness. · The generation of $18.8 million in cash from operations, versus $11.1 million over the same period last year. · New product sales reaching $51.6 million, or 41%, of total firearm sales for the quarter. New product sales include only major new products that were introduced in the past two years and include the RXM pistol, Marlin 1894 lever-action rifles, American Centerfire Rifle Generation II, Glenfield rifles, Harrier rifles and the Ruger Red Label III Shotgun. · The increase of estimated sell-through of the Company’s products from the independent distributors to retailers by 3.2% from Q1 2025, exceeding a 1.6% increase in adjusted NICS during the same period. At the same time, compared to the first quarter of 2025, the Company’s finished goods inventories decreased 95,800 units while distributors’ inventories decreased 26,400 units, reflecting strong retail pull through of the Company’s new products. · The Hebron Facility is operating at target capacity, as of March 28, 2026. 22 As announced on May 4, 2026, Ruger and Beretta Holding entered an Agreement that reflects a shared commitment to long-term value creation, constructive engagement, and stability for Ruger’s shareholders, employees, customers and industry partners. Throughout that process, the Company took actions to protect the interests of all shareholders and to maintain focus on executing its long-term strategy. These efforts resulted in professional fees and advisory costs totaling $3.2 million during the quarter. These costs are largely non-recurring in nature and do not reflect the underlying performance of the core business. With the Agreement now in place, the Company expects these costs to be limited in duration, though some additional expenses may be incurred in the near term. Additionally, in February, the Company executed a reduction-in-force as part of broader efforts to structurally align the organization to strategic priorities and the future operating model. These actions are consistent with the changes outlined in the 2026 Plan and, more broadly, the Ruger 2030 framework. The moves improve efficiency, enhance accountability and position the Company for long-term profitable growth. The associated severance and related cost of $2.5 million were recognized in the quarter and are not indicative of ongoing operations. As a result of the factors listed above, the results of operations for the three month period ending March 28, 2026 were negatively impacted, on a non-GAAP basis, by $0.26 per share (see the Non-GAAP Financial Performance Measures below.) The impact was as follows: · Additional general and administrative expenses of $3.2 million, or $0.15 per share, related to the proxy contest with Beretta. · Increased general and administrative expenses of $2.5 million, or $0.11 per share, related to the leadership/governance transition and organizational realignment Demand The estimated unit sell-through of the Company’s products from the independent distributors to retailers increased 3% in the first three months of 2026 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”)) increased 2%. Estimated sell-through from the independent distributors to retailers and total adjusted NICS background checks for the trailing five quarters follow: 2026 2025 Q1 Q4 Q3 Q2 Q1 Estimated Units Sold from Distributors to Retailers (1) 376,400 473,800 370,600 328,500 364,700 Total adjusted NICS Background Checks (thousands) (2) 3,877 4,295 3,249 3,251 3,817 (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, 23 · 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 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.) 2026 2025 Q1 Q4 Q3 Q2 Q1 Units Ordered 525,300 550,300 286,500 355,900 410,000 Orders Received $ 211.0 $ 160.2 $ 87.9 $ 113.7 $ 154.0 Average Sales Price of Units Ordered $ 402 $ 322 $ 307 $ 319 $ 376 Ending Backlog $ 329.7 $ 285.0 $ 227.0 $ 263.1 $ 275.2 Average Sales Price of Ending Unit Backlog $ 475 $ 524 $ 543 $ 534 $ 552 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. The Company’s overall production in the first quarter of 2026 decreased 4% from the fourth quarter of 2025 . 24 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): 2026 2025 Q1 Q4 Q3 Q2 Q1 Units Ordered 525,300 550,300 286,500 355,900 410,000 Units Produced 342,800 357,800 344,900 381,600 372,000 Units Shipped 375,600 424,400 361,600 361,400 356,700 Average Sales Price of Units Shipped $ 375 $ 355 $ 336 $ 349 $ 379 Ending Unit Backlog 693,600 543,900 418,000 493,100 498,600 Inventories During the first three months of 2026, the Company’s finished goods inventory decreased by 32,800 units and distributor inventories of the Company’s products decreased by 800 units. Inventory unit data for the trailing five quarters follows: 2026 2025 Q1 Q4 Q3 Q2 Q1 Company Inventory 34,700 67,500 134,100 150,700 130,500 Distributor Inventory (1) 161,500 162,300 211,700 220,700 187,900 Total Inventory (2) 196,200 229,800 345,800 371,400 318,400 (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. 25 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 28, 2026 March 29, 2025 Change % Change Net firearms sales $ 140.9 $ 135.2 $ 5.7 4.2% Net castings sales 0.5 0.5 — (15.3% ) Total net sales 141.4 135.7 5.7 4.1% Cost of products sold 113.3 105.8 7.5 7.0% Gross profit $ 28.1 $ 29.9 $ (1.8 ) (7.3% ) Gross margin 19.9% 22.0% (2.1% ) (9.5% ) Total consolidated net sales and net firearms sales increased slightly for the three months ended March 28, 2026. Sales of new products, including the RXM pistol, Marlin 1894 lever-action rifles, American Centerfire Rifle Generation II, Glenfield rifles, Harrier rifles, and the Ruger Red Label III Shotgun represented $51.6 million or 41% of firearm sales in the three months ended March 28, 2026. 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 28, 2026 is attributable to unfavorable leveraging of fixed costs resulting from decreased production, exacerbated by the $0.8 million of deferred revenue related to sales promotions. The decrease in gross margin for the three months ended March 28, 2026 is attributable to the aforementioned factors. Selling and General and Administrative Expenses Selling and general and administrative expenses data for the three months ended (dollars in millions): March 28, 2026 March 29, 2025 Change % Change Selling expenses $ 9.3 $ 9.4 $ (0.1 ) (0.6% ) General and administrative expenses 20.7 12.0 8.7 72.1% Total operating expenses $ 30.0 $ 21.4 $ 8.6 40.2% Selling expenses for the three months ended March 28, 2026 were substantially comparable to the corresponding period in the prior year. 26 The increase in general and administrative expenses for the three months ended March 28, 2026 was primarily attributable to $3.2 million in legal fees incurred related to the Beretta Strategic Cooperation Agreement, $2.5 million in severance costs, increased to share based compensation, which included a one-time non-recurring expense of $1.7 million, and increased professional service costs. Other Income Other income data for the three months ended (dollars in millions): March 28, 2026 March 29, 2025 Change % Change Other income $ 1.9 $ 1.3 $ 0.6 47.1% The increase in other income for the three months ended March 28, 2026 was attributable to increased royalty income. Income Taxes and Net Income The Company's 2026 and 2025 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 reduction in 2026 earnings increased the impact of these items. The Company’s effective income tax rate was 271.6% and 20.3% for the three months ended March 28, 2026 and March 29, 2025, respectively. The discrete nature of these tax credits yields an effective tax rate for the period that is not meaningful at low earnings levels. As a result of the foregoing factors, consolidated net income was $0.1 million for the three months ended March 28, 2026, a decrease of 98.4% from $7.8 million in the comparable prior year period. Non-GAAP Financial Performance 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 supplemental non-GAAP financial performance measures, Adjusted EBITDA and Adjusted EBITDA margin, which management believes provides useful information to investors. These non-GAAP financial performance measures may not be comparable to similarly titled financial performance measures being disclosed by other companies. In addition, the Company believes that these non-GAAP financial performance measures have limitations as analytical tools, and, accordingly, should be considered in addition to, and not in lieu of, GAAP financial measures. The presentation of Adjusted EBITDA should not be construed to imply that the Company’s future results will not be affected by unusual or non-recurring items. The Company believes that Adjusted EBITDA and Adjusted EBITDA margin are useful to understanding its operating results and the ongoing performance of its underlying business, as Adjusted EBITDA assists investors in comparing the Company’s performance across reporting periods on a consistent basis by excluding items that the Company does not believe are indicative of its operating performance. 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. 27 The Company defines Adjusted EBITDA as earnings before interest, taxes, and depreciation and amortization (EBITDA), as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of its ongoing operating performance, as itemized below. Specifically, the Company calculates Adjusted EBITDA by (i) 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, (ii) subtracting the amount of interest income that was included in net income from net income, (iii) subtracting income tax benefits, (iv) adding the amount of extraordinary cash and non-cash, non-operating expenses, and (v) subtracting non-recurring income or non-recurring gains that do not contribute directly to management’s evaluation of its operating results. The Company calculates Adjusted EBITDA margin by dividing Adjusted EBITDA by total net sales. Adjusted EBITDA was $10.9 million for the three months ended March 28, 2026, a decrease of 23.9% from $14.3 million in the comparable prior year period. Non-GAAP Reconciliation – Adjusted EBITDA Adjusted EBITDA (Unaudited, dollars in thousands) Three Months Ended March 28, 2026 March 29, 2025 Net income $ 128 $ 7,768 Income tax (benefit) expense (202 ) 1,979 Depreciation and amortization expense 6,008 5,571 Interest income (801 ) (1,038 ) Interest expense 22 16 Stockholder rights costs (a) 3,200 — Severance costs (b) 2,523 — Adjusted EBITDA $ 10,878 $ 14,296 Adjusted EBITDA margin 7.7% 10.5% Net income margin 0.1% 5.7% (a) Costs incurred in engaging with Beretta Holding S.A. (“Beretta”) on, amongst other things, Beretta’s ownership of Company Common Stock, the Rights Plan, negotiations concerning potential strategic cooperation between the Company and Beretta, and in engaging a proxy solicitation firm and preparing a preliminary proxy statement associated with the 2026 Annual Meeting. (b) Costs incurred associated severance and related costs as part of an executed reduction-in-force as part of broader efforts to structurally align the organization to strategic priorities and the future operating model and are not indicative of ongoing operations Financial Condition Liquidity and Capital Resources At the end of the first quarter of 2026, the Company’s cash and short-term investments totaled $105.2 million. Pre-LIFO working capital of $225.4 million, less the LIFO reserve of $67.9 million, resulted in working capital of $157.5 million and a current ratio of 3.5 to 1. 28 Operations Cash provided by operating activities was $18.8 million for the three months ended March 28, 2026, compared to $11.1 million for the comparable prior year period. The increase in cash provided in the three months ended March 28, 2026 is primarily attributable to decreased inventory, lower net payouts of accrued employee compensation and benefits, and the lesser reduction in accounts payable and accrued expenses, and increases to prepaid expenses and other current assets in the three months ended March 28, 2026, partially offset by the decrease in net income and decreased collections of trade receivables in the three months ended March 28, 2026. 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. Investing and Financing Capital expenditures for the three months ended March 28, 2026 totaled $4.8 million, an increase from $1.1 million in the comparable prior year period. In 2026, the Company expects capital expenditures related to new product introductions and upgrades to its manufacturing equipment and facilities could range from $20 million to $30 million. Actual capital expenditures could vary significantly from the projected amounts due to the timing of capital projects. 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 $1.3 million were paid during the three months ended March 28, 2026. 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 30, 2026, the Company’s Board of Directors authorized a dividend of 11¢ per share to stockholders of record on May 14, 2026, payable on May 29, 2026. This dividend is approximately 40% of adjusted diluted earnings of 27¢ per share for the first quarter of 2026. 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 28, 2026, the Company had $39.6 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 28, 2026, the Company’s investment in this money market fund totaled $41.8 million. During the three months ended March 28, 2026 the Company did not purchase any shares of its common stock for in the open market. As of March 28, 2026, $14.3 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, 2028, was unused at March 28, 2026. 29 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 13 independent distributors that service the domestic commercial market. Additionally, the Company has 39 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. In September 2024, the Company did not renew its product liability coverage with its incumbent carriers and established a wholly-owned captive insurance company for claims made on or after September 1, 2024. The Company expects to realize its deferred tax assets through tax deductions against future taxable income. On March 27, 2026, the Company announced that Thomas A. Dineen would step down from his role as Chief Financial Officer of Sturm, Ruger & Company, Inc. on March 31, 2026. On April 1, 2026, Andrew T. Wieland succeeded Mr. Dineen as Chief Financial Officer of the Company and also became a Senior Vice President of the Company. Adjustments to Critical Accounting Policies The Company has not made any adjustments to its critical accounting estimates and assumptions described in the Company’s 2025 Annual Report on Form 10-K filed on March 2, 2026, 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. 30 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 three months ended March 28, 2026.