Company Quick10K Filing
Sturm Ruger & Co
Price41.56 EPS2
Shares18 P/E20
MCap732 P/FCF82
Net Debt-23 EBIT50
TEV709 TEV/EBIT14
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-28 Filed 2020-05-06
10-K 2019-12-31 Filed 2020-02-20
10-Q 2019-09-28 Filed 2019-11-07
10-Q 2019-06-29 Filed 2019-07-31
10-Q 2019-03-30 Filed 2019-05-07
10-K 2018-12-31 Filed 2019-02-20
10-Q 2018-09-29 Filed 2018-10-31
10-Q 2018-06-30 Filed 2018-08-01
10-Q 2018-03-31 Filed 2018-05-08
10-K 2017-12-31 Filed 2018-02-21
10-Q 2017-09-30 Filed 2017-10-31
10-Q 2017-07-01 Filed 2017-08-02
10-Q 2017-04-01 Filed 2017-05-08
10-K 2016-12-31 Filed 2017-02-22
10-Q 2016-10-01 Filed 2016-11-01
10-Q 2016-07-02 Filed 2016-08-02
10-Q 2016-04-02 Filed 2016-05-02
10-K 2015-12-31 Filed 2016-02-24
10-Q 2015-09-26 Filed 2015-11-04
10-Q 2015-06-30 Filed 2015-07-28
10-Q 2015-03-28 Filed 2015-05-04
10-K 2014-12-31 Filed 2015-02-25
10-Q 2014-09-27 Filed 2014-10-29
10-Q 2014-06-28 Filed 2014-07-29
10-Q 2014-03-29 Filed 2014-05-05
10-K 2013-12-31 Filed 2014-02-25
10-Q 2013-09-28 Filed 2013-11-05
10-Q 2013-06-29 Filed 2013-07-31
10-Q 2013-03-30 Filed 2013-04-29
10-Q 2012-09-29 Filed 2012-10-31
10-Q 2012-06-30 Filed 2012-08-01
10-Q 2012-03-31 Filed 2012-05-01
10-Q 2011-10-01 Filed 2011-11-02
10-Q 2011-07-02 Filed 2011-07-27
10-Q 2011-04-02 Filed 2011-04-26
10-K 2010-12-31 Filed 2011-02-23
10-Q 2010-10-02 Filed 2010-10-27
10-Q 2010-07-03 Filed 2010-07-28
10-Q 2010-04-03 Filed 2010-04-27
10-K 2009-12-31 Filed 2010-02-24
8-K 2020-05-13
8-K 2020-05-07
8-K 2020-05-06
8-K 2020-02-20
8-K 2020-02-19
8-K 2019-11-12
8-K 2019-11-08
8-K 2019-11-07
8-K 2019-09-30
8-K 2019-08-01
8-K 2019-07-31
8-K 2019-05-08
8-K 2019-05-08
8-K 2019-05-07
8-K 2019-02-21
8-K 2019-02-20
8-K 2019-02-08
8-K 2018-11-01
8-K 2018-10-31
8-K 2018-09-27
8-K 2018-08-02
8-K 2018-08-01
8-K 2018-05-09
8-K 2018-05-09
8-K 2018-05-08
8-K 2018-03-12
8-K 2018-02-22
8-K 2018-02-21

RGR 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Note 1 — Basis of Presentation
Note 2 — Significant Accounting Policies
Note 3 — Revenue Recognition and Contracts with Customers
Note 4 — Inventories
Note 5 — Leased Assets
Note 6 — Line of Credit
Note 7 — Employee Benefit Plans
Note 8 — Income Taxes
Note 9 — Earnings per Share
Note 10 — Compensation Plans
Note 11 — Operating Segment Information
Note 12 — Related Party Transactions
Note 13 — Contingent Liabilities
Note 14 — Subsequent Events
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 rgr10qex31-1.htm
EX-31.2 rgr10qex31-2.htm
EX-32.1 rgr10qex32-1.htm
EX-32.2 rgr10qex32-2.htm

Sturm Ruger & Co Earnings 2020-03-28

Balance SheetIncome StatementCash Flow
0.40.30.20.20.10.02012201420172020
Assets, Equity
0.30.20.10.1-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

STURM, RUGER & COMPANY, INC.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 28, 2020

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 1-10435

STURM, RUGER & COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware

06-0633559

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)

 

Lacey Place, Southport, Connecticut

06890

(Address of principal executive offices)

(Zip code)

(203) 259-7843

(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. Yes ☒ No ☐

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). Yes ☒ No ☐

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. Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1 par value

RGR

New York Stock Exchange

The number of shares outstanding of the issuer's common stock as of April 30, 2020: 17,483,154.



INDEX

STURM, RUGER & COMPANY, INC.

Page

Number

PART I.FINANCIAL INFORMATION

3

Item 1.Financial Statements (Unaudited)

3

Condensed consolidated balance sheets – March 28, 2020 and December 31, 2019

3

Condensed consolidated statements of income and comprehensive income – Three months ended March 28, 2020 and March 30, 2019

5

Condensed consolidated statement of stockholders’ equity – Three months ended March 28, 2020

6

Condensed consolidated statements of cash flows – Three months ended March 28, 2020 and March 30, 2019

7

Notes to condensed consolidated financial statements – March 28, 2020

8

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.Controls and Procedures

27

PART II.OTHER INFORMATION

27

Item 1.Legal Proceedings

27

Item 1A.Risk Factors

28

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.Defaults Upon Senior Securities

28

Item 4.Mine Safety Disclosures

28

Item 5.Other Information

28

Item 6.Exhibits .

29

SIGNATURES

30

2


Index

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 

March 28, 2020

December 31, 2019

 

 

(Note)

Assets

 

 

  

 

 

Current Assets

 

 

Cash

$37,979

$35,420

Short-term investments

149,575

129,488

Trade receivables, net

55,836

52,640

  

 

Gross inventories (Note 4)

68,795

79,011

Less LIFO reserve

(47,481)

(47,137)

Less excess and obsolescence reserve

(3,025)

(3,573)

Net inventories

18,289

28,301

  

 

Prepaid expenses and other current assets

2,939

3,467

Total Current Assets

264,618

249,316

  

 

Property, plant and equipment

376,117

372,482

Less allowances for depreciation

(305,251)

(298,568)

Net property, plant and equipment

70,866

73,914

  

 

Deferred income taxes

3,863

5,393

Other assets

23,052

20,338

Total Assets

$362,399

$348,961

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.

3


Index

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)

(Dollars in thousands, except per share data)

March 28, 2020

December 31, 2019

(Note)

Liabilities and Stockholders’ Equity

 

Current Liabilities

Trade accounts payable and accrued expenses

$29,268

$29,771

Contract liabilities with customers (Note 3)

8,563

9,623

Product liability

737

735

Employee compensation and benefits

14,400

14,273

Workers’ compensation

5,841

5,619

Income taxes payable

3,683

1,223

Total Current Liabilities

62,492

61,244

 

Product liability accrual

23

83

Lease liability (Note 5)

2,065

2,176

 

Contingent liabilities (Note 13)

 

 

Stockholders’ Equity

Common Stock, non-voting, par value $1:

Authorized shares 50,000; none issued

Common Stock, par value $1:

Authorized shares – 40,000,000

2020 – 24,193,052 issued, 17,483,154 outstanding

2019 – 24,160,424 issued, 17,450,526 outstanding

24,193

24,160

Additional paid-in capital

38,707

38,683

Retained earnings

380,509

368,205

Less: Treasury stock – at cost

2020 – 6,709,898 shares

2019 – 6,709,898 shares

(145,590)

(145,590)

Total Stockholders’ Equity

297,819

285,458

Total Liabilities and Stockholders’ Equity

$362,399

$348,961

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.

4


Index

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

Three Months Ended

March 28, 2020

March 30, 2019

Net firearms sales

$122,765

$112,932

Net castings sales

874

1,106

Total net sales

123,639

114,038

 

Cost of products sold

87,630

81,441

 

Gross profit

36,009

32,597

 

Operating expenses:

Selling

7,636

8,131

General and administrative

8,210

8,014

Total operating expenses

15,846

16,145

 

Operating income

20,163

16,452

 

Other income:

Interest income

566

679

Interest expense

(25)

(26)

Other income, net

107

295

Total other income, net

648

948

 

Income before income taxes

20,811

17,400

 

Income taxes

5,473

4,367

 

Net income and comprehensive income

$15,338

$13,033

 

Basic earnings per share

$0.88

$0.75

 

Diluted earnings per share

$0.87

$0.74

 

Cash dividends per share

$0.18

$0.28

See notes to condensed consolidated financial statements.

5


Index

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

$24,160

$38,683

$368,205

$(145,590)

$285,458

Net income and comprehensive income

15,338

15,338

Common stock issued – compensation plans

33

(33)

Vesting of RSUs

(1,297)

(1,297)

Dividends paid

(3,034)

(3,034)

Recognition of stock-based compensation expense

1,354

1,354

Balance at March 28, 2020

$24,193

$38,707

$380,509

$(145,590)

$297,819

See notes to condensed consolidated financial statements.

6


Index

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

Three Months Ended

March 28, 2020

March 30, 2019

Operating Activities

Net income

$15,338

$13,033

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation and amortization

7,214

7,486

Stock-based compensation

1,354

1,541

Deferred income taxes

1,530

411

Changes in operating assets and liabilities:

Trade receivables

(3,196)

(7,187)

Inventories

10,012

(5,062)

Trade accounts payable and accrued expenses

(266)

(4,485)

Contract liability to customers

(1,060)

(3,518)

Employee compensation and benefits

127

(8,157)

Product liability

(58)

501

Prepaid expenses, other assets and other liabilities

(2,384)

(4,872)

Income taxes payable

2,460

7

Cash provided by (used for) operating activities

31,071

(10,302)

  

Investing Activities

Property, plant and equipment additions

(4,094)

(2,711)

Purchases of short-term investments

(89,535)

(44,961)

Proceeds from maturities of short-term investments

69,448

59,763

Cash (used for) provided by investing activities

(24,181)

12,091

  

Financing Activities

Remittance of taxes withheld from employees related to share-based compensation

(1,297)

Dividends paid

(3,034)

(4,887)

Cash used for financing activities

(4,331)

(4,887)

  

Increase (decrease) in cash and cash equivalents

2,559

(3,098)

  

Cash and cash equivalents at beginning of period

35,420

38,492

  

Cash and cash equivalents at end of period

$37,979

$35,394

See notes to condensed consolidated financial statements.

7


Index

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 three months ended March 28, 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 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.

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.

8


Index

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 $2.5 million and lease liabilities of $2.5 million on its Condensed Consolidated Balance Sheets as of March 28, 2020. There was no impact on the Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Stockholders’ Equity, or Condensed Consolidated Statements of Cash Flows as a result of this adoption.

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.

9


Index

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 months ended March 28, 2020 and March 30, 2019 is as follows:

Three Months Ended

March 28, 2020

March 30, 2019

Contract liabilities with customers at beginning of period

$9,623

$7,477

Revenue deferred

3,484

1,066

Revenue recognized

(4,544)

(4,584)

Contract liabilities with customers at end of period

$8,563

$3,959

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 second 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 three month period ended March 28, 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.

10


Index

Inventories consist of the following:

 

March 28, 2020

December 31, 2019

Inventory at FIFO

 

 

Finished products

$6,040

$13,131

Materials and work in process

62,755

65,880

Gross inventories

68,795

79,011

Less: LIFO reserve

(47,481)

(47,137)

Less: excess and obsolescence reserve

(3,025)

(3,573)

Net inventories

$18,289

$28,301

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 March 28, 2020:

Balance Sheet Line Item

March 28, 2020

Right-of-use assets

Other assets

$2,482

Operating lease liabilities

Current portion

Trade accounts payable and accrued expenses

$449

  

Noncurrent portion

Lease liabilities

2,065

Total operating lease liabilities

$2,514

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.

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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 March 28, 2020:

Remainder of 2020

$430

2021

559

2022

244

2023

213

2024

215

Thereafter

1,600

Total undiscounted future minimum lease payments

3,261

Less: Difference between undiscounted lease payments & the present value of future lease payments

(747)

Total operating lease liabilities

$2,514

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 March 28, 2020 is 11.89 years.

NOTE 6 — LINE OF CREDIT

The Company has a $40 million revolving line of credit with a bank. This facility is renewable annually and terminates on September 30, 2020. Borrowings under this facility bear interest at the one-month LIBOR rate (1.016% at March 28, 2020) plus 150 basis points. The Company is charged one-quarter of a percent (0.25%) per year on the unused portion. At March 28, 2020 and December 31, 2019, the Company was in compliance with the terms and covenants of the credit facility, which remains unused.

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 $0.9 million for the three months ended March 28, 2020, and $1.2 million for the three months ended March 30, 2019. The Company plans to contribute approximately $2.7 million to the plan in matching employee contributions during the remainder of 2020.

In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $1.5 million for the three months ended March 28, 2020, and $1.7 million for the three months ended March 30, 2019. The Company plans to contribute approximately $4.0 million in supplemental contributions to the plan during the remainder of 2020.

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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 26.3% and 25.1% for the three months ended March 28, 2020 and March 30, 2019, respectively.

Income tax payments for the three months ended March 28, 2020 and March 30, 2019 totaled $1.6 million and $4.0 million, respectively.

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 2015.

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

March 28, 2020

March 30, 2019

Numerator:

Net income

$15,338

$13,033

Denominator:

Weighted average number of common shares outstanding – Basic

17,461,524

17,458,020

 

Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans

257,894

263,718

 

Weighted average number of common shares outstanding – Diluted

17,719,418

17,721,738

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.

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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 750,000 shares for issuance under the 2017 SIP, of which 461,000 shares remain available for future grants as of March 28, 2020.

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 three-year vesting period. The retention-based awards are subject only to the three-year vesting period. There were no restricted stock units issued during the three months ended March 28, 2020.

Compensation costs related to all outstanding restricted stock units recognized in the statements of income aggregated $1.4 million and $1.5 million for the three months ended March 28, 2020 and March 30, 2019, respectively.

NOTE 11 — OPERATING SEGMENT INFORMATION

The Company has two reportable segments: firearms and castings. The firearms segment manufactures and sells rifles, pistols, and revolvers principally to a select number of independent wholesale distributors primarily located in the United States. The castings segment manufactures and sells steel investment castings and metal injection molding parts.

Selected operating segment financial information follows:

Three Months Ended

(in thousands)

March 28, 2020

March 30, 2019

Net Sales

Firearms

$122,765

$112,932

Castings

Unaffiliated

874

1,106

Intersegment

4,773

5,601

5,647

6,707

Eliminations

(4,773)

(5,601)

$123,639

$114,038

Income (Loss) Before Income Taxes

Firearms

$20,478

$17,153

Castings

(210)

(477)

Corporate

543

724

$20,811

$17,400

March 28, 2020

December 31, 2019

Identifiable Assets

Firearms

$154,573

$163,792

Castings

10,790

11,332

Corporate

197,036

173,837

$362,399

$348,961

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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 were de minimis in the three months ended March 28, 2020 and March 30, 2019. One of the Company’s Directors also serves as a Director on the Board of the NRA.

NOTE 13 — CONTINGENT LIABILITIES

As of March 28, 2020, the Company was a defendant in four (4) 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, discussed in turn below.

Traditional Product Liability Litigation

One lawsuit mentioned above involves a claim for damages related to an allegedly defective product due to its design and/or manufacture. This lawsuit stems from a specific incident of personal injury and is based on traditional product liability theories such as strict liability, negligence and/or breach of warranty.

The Company management believes that the allegations in this case are unfounded, that the incident is unrelated to the design or manufacture of the firearm 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 such a report on April 14, 2020, and claimed that it expected to be in a position to reactivate or dismiss the appeal within 60 days.

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 the mark “Ruger-57” in connection with a recently launched pistol. 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.

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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.

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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 been 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 $5 million per claim, or an aggregate maximum loss of $10 million annually, except for certain new claims which might be brought by governments or municipalities after July 10, 2000, which are excluded from coverage.

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 and cash flows 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 $0.1 million and $0.1 million at December 31, 2019 and 2018, respectively, are set forth as an indication of possible maximum liability the Company might be required to incur in these cases (regardless of the likelihood or reasonable probability of any or all of this amount being awarded to claimants) as a result of adverse judgments that are sustained on appeal.

NOTE 14 — SUBSEQUENT EVENTS

On May 1, 2020, the Board of Directors authorized a dividend of 35¢ per share, for shareholders of record as of May 18, 2020, payable on June 1, 2020.

The Company has evaluated events and transactions occurring subsequent to March 28, 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.

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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 quarter 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 implications to 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 first quarter of 2020, the Company was debt-free, and had cash and short-term investments totaling $187.6 million and an unused $40.0 million revolving credit facility.

In the first quarter of 2020, the Company did not experience a significant adverse impact on its business as a result of COVID-19. While the adverse effects of COVID-19 on the Company increased in April 2020, 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 hospitals, health care facilities, and police and fire departments in its local communities.

The costs of these actions are expected to total approximately $2.5 million in 2020, of which approximately $0.4 million was recognized during the first quarter of 2020.

The Company has been able to keep all of its facilities safe and open with only limited restrictions on production.

Since the latter stages of the first quarter of 2020, there has been a significant increase in consumer demand for firearms, as evidenced by the increase in adjusted National Instant Criminal Background Check System (“NICS”) checks. This increased demand may be attributable to COVID-19. The sustainability of this increased consumer demand, and the ultimate impact of COVID-19 on consumer demand, cannot be predicted at this time.

The ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. See Part II, Item 1A. Risk Factors, for an additional discussion of risk related to COVID-19.

Results of Operations

Demand

The estimated unit sell-through of the Company’s products from the independent distributors to retailers increased 37% in the first quarter of 2020 compared to the prior year period. For the same period, NICS background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) increased 42%. These substantial increases are attributable to increased consumer demand for firearms in the first quarter of 2020, especially the latter stages.

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 $23.0 million or 20% of firearm sales in the first quarter 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 five quarters follow:

2020

2019

Q1

Q4

Q3

Q2

Q1

Estimated Units Sold from Distributors to Retailers (1)

476,800

397,000

295,100

316,300

347,100

Total adjusted NICS Background Checks (thousands) (2)

4,841

4,001

2,956

2,828

3,414

 

(1)

The estimates for each period were calculated by taking the beginning inventory at the distributors, plus shipments from the Company to distributors during the period, less the ending inventory at distributors. These estimates are only a proxy for actual market demand as they:

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Rely on data provided by independent distributors that are not verified by the Company,

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.)

2020

2019

Q1

Q4

Q3

Q2

Q1

Units Ordered

626,700

413,900

362,200

257,900

327,100

Orders Received

$203.0

$121.5

$102.3

$70.3

$104.3

Average Sales Price of Units Ordered

$324

$294

$283

$273

$319

Ending Backlog

$142.7

$57.8

$44.7

$37.8

$58.9

Average Sales Price of Ending Unit Backlog

$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 quarter of 2020 2% from the fourth quarter of 2019, the second consecutive quarterly increase in production. The COVID-19 pandemic had only a minimal negative impact on production in the first quarter of 2020.

The COVID-19 pandemic may have a more significant adverse impact on production in the second quarter of 2020.

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Summary Unit Data

Firearms unit data for the trailing five quarters are as follows (dollar amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns):

2020

2019

Q1

Q4

Q3

Q2

Q1

Units Ordered

626,700

413,900

362,200

257,900

327,100

Units Produced

363,300

355,000

286,500

297,900

374,000

Units Shipped

398,900

387,500

328,400

288,300

322,000

Average Sales Price of Units Shipped

$285

$269

$286

$329

$351

Ending Unit Backlog

415,700

187,900

161,500

127,700

158,100

Inventories

During the first quarter of 2020, the Company’s finished goods inventory decreased by 35,500 units and distributor inventories of the Company’s products decreased by 77,900 units. In the aggregate, total Company and distributor inventories decreased 113,400 units from the end of the first quarter of 2019.

Inventory data for the trailing five quarters follows:

2020

2019

Q1

Q4

Q3

Q2

Q1

Units — Company Inventory

31,900

67,400

100,000

141,900

132,300

Units — Distributor Inventory (1)(2)

192,500

270,400

280,000

246,700

274,700

Total Inventory (3)

224,400

337,800

380,000

388,600

407,000

 

(1)

Distributor ending inventory is provided by the Company’s independent distributors. These numbers do not include goods-in-transit inventory that has been shipped from the Company but not yet received by the distributors.

 

(2)

Distributor ending inventory for the second and third quarter of 2019 does not include any potential inventory remaining at a distributor that filed for bankruptcy protection in 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 $123.6 million for the three months ended March 28, 2020, an increase of 8.4% from $114.0 million in the comparable prior year period.

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Firearms net sales were $122.8 million for the three months ended March 28, 2020, an increase of 8.7% from $112.9 million in the comparable prior year period.

Firearms unit shipments increased 23.9% for the three months ended March 28, 2020, relative to the comparable prior year period.

Castings net sales were $0.9 million for the three months ended March 28, 2020, a decrease of 21.0% from $1.1 million in the comparable prior year period.

Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $87.6 million for the three months ended March 28, 2020, an increase of 7.6% from $81.4 million in the comparable prior year period.

Gross margin was 29.1% for the three months ended Months 28, 2020, compared to 28.6% in the comparable prior year period.

Gross margin for the three months ended March 28, 2020 and March 30, 2019 is illustrated below (in thousands):

Three Months Ended

March 28, 2020

March 30, 2019

Net sales

$123,639

100.0%

$114,038

100.0%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls

86,267

69.8%

80,424

70.5%

LIFO expense

344

0.3%

604

0.5%

Overhead rate adjustments to inventory

689

0.5%

(197)

(0.2)%

Labor rate adjustments to inventory

112

0.1%

70

0.1%

Product liability

218

0.2%

740

0.7%

Product safety bulletins and recalls

(200)

(0.2)%

Total cost of products sold

87,630

70.9%

81,441

71.4%

Gross profit

$36,009

29.1%

$32,597

28.6%

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Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls — During the three months ended March 28, 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 0.7%, compared with the corresponding 2019 period, due primarily to the increase in sales and production which resulted in favorable leveraging of fixed costs.

LIFO — For the three months ended March 28, 2020, the Company recognized LIFO expense resulting in increased cost of products sold of $0.3 million. In the comparable 2019 period, the Company recognized LIFO expense resulting in increased cost of products sold of $0.6 million.

Overhead Rate Adjustments — The Company uses actual overhead expenses incurred as a percentage of sales-value-of-production over a trailing six month period to absorb overhead expense into inventory.

During the three months ended March 28, 2020, the Company became more efficient in overhead spending and the overhead rates used to absorb overhead expenses into inventory decreased, resulting in an decrease in inventory values of $0.7 million, and a corresponding increase to cost of products sold.

During the three months ended March 30, 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 $0.2 million, 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 months ended March 28, 2020 and March 30, 2019, the Company became slightly 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 corresponding increases 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 months ended March 28, 2020 and March 30, 2019, product liability expense was $0.2 million and $0.7 million, respectively.

Product Safety Bulletins and Recalls — There were no costs incurred due to product safety bulletins and recalls during the three months ended March 28, 2020. During the three months ended March 30, 2019, the estimated costs remaining for a product safety bulletin issued in 2018 was reduced, which reduced cost of sales by $0.2 million for the three months ended March 30, 2019.

Gross Profit — As a result of the foregoing factors, for the three months ended March 28, 2020, gross profit was $36.0 million, an increase of $3.4 million from $32.6 million in the comparable prior year period.

Gross profit as a percentage of sales increased to 29.1% in the three months ended March 28, 2020, from 28.6% in the comparable prior year period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $15.8 million for the three months ended March 28, 2020, a decrease of $0.3 million or 1.9% from $16.1 million in the comparable prior year period. These decreases were primarily attributable to reduced sales promotion expenses in the three months ended March 28, 2020.

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Other income, net

Other income, net was $0.6 million in the three months ended March 28, 2020, a decrease of $0.3 million from $0.9 million in the three months ended March 30, 2019 as a result of decreased interest income on short-term investments due to decreased interest rates in the three months ended March 28, 2020.

Income Taxes and Net Income

The Company’s 2020 and 2019 effective tax rates differ from the statutory federal tax rate due principally to state income taxes. The Company’s effective income tax rate was 26.3% and 25.1% for the three months ended March 28, 2020 and March 30, 2019, respectively.

As a result of the foregoing factors, consolidated net income was $15.3 million for the three months ended March 28, 2020. This represents an increase of 17.7% from $13.0 million in the comparable prior year period.

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Non-GAAP Financial Measure

In an effort to provide investors with additional information regarding its financial results, the Company refers to various 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 $27.5 million for the three months ended March 28, 2020, an increase of 13.5% from $24.2 million in the comparable prior year period.

Non-GAAP Reconciliation — EBITDA

EBITDA

(Unaudited, dollars in thousands)

Three Months Ended

March 28, 2020

March 30, 2019

Net income

$ 15,338

$ 13,033

  

Income tax expense

5,473

4,367

Depreciation and amortization expense

7,214

7,486

Interest income

(566)

(679)

Interest expense

25

26

EBITDA

$27,484

$24,233

Financial Condition

Liquidity

At the end of the first quarter of 2020, the Company’s cash and short-term investments totaled $187.6 million. Pre-LIFO working capital of $249.6 million, less the LIFO reserve of $47.5 million, resulted in working capital of $202.1 million and a current ratio of 4.2 to 1.

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Operations

Cash provided by operating activities was $31.1 million for the three months ended March 28, 2020, compared to cash used by operating activities of $10.3 million for the comparable prior year period. The increase in cash provided in the three months ended March 28, 2020 is primarily attributable to the increased net income in the current period, the significant decrease in inventory in the current period compared to a significant increase in the prior year period, the slight increase in employee compensation and benefits payable in the current period compared to a significant reduction in the prior year period, and other balance sheet fluctuations.

Third parties supply the Company with various raw materials for its firearms and castings, such as steel, fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory or on order to provide sufficient time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions, including the impact of tariffs, result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

If the Company’s suppliers are negatively impacted by the COVID-19 pandemic, and their ability to produce raw materials or component parts is compromised, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

Investing and Financing

Capital expenditures for the three months ended March 28, 2020 totaled $4.1 million, an increase from $2.7 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 $3.0 million were paid during the three months ended March 28, 2020.

On May 1, 2020, the Board of Directors authorized a dividend of 35¢ per share, for shareholders of record as of May 18, 2020, payable on June 1, 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.

In 2018, the Company began to purchase United States Treasury instruments which mature within one year with available cash. At March 28, 2020, the Company’s investment in these instruments totaled $149.6 million.

No shares were repurchased in the three months ended March 28, 2020 and March 30, 2019. As of March 28, 2020, $86.7 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 September 30, 2020, was unused at March 28, 2020 and the Company has no debt.

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Index

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 three months ended March 28, 2020.

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Index

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 March 28, 2020.

Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 28, 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 March 28, 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 March 28, 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. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard.

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 December 31, 2019, 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.

One lawsuit was formally instituted against the Company during the three months ending March 28, 2020. The case of 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.

During the three months ending March 28, 2020, the Company resolved the previously reported cases of David Palmer v. Sturm, Ruger & Co., Inc. and Aaron Yuhas v. Sturm, Ruger & Co., Inc.

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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 March 28, 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

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ITEM 6. EXHIBITS

(a)

Exhibits:

31.1

Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

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)

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STURM, RUGER & COMPANY, INC.

FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 28, 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: May 6, 2020

S/

THOMAS A. DINEEN

Thomas A. Dineen

Principal Financial Officer,

Principal Accounting Officer,

Senior Vice President, Treasurer and

Chief Financial Officer

30