STURM RUGER & CO INC - Quarter Report: 2023 September (Form 10-Q)

 

 

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 September 30, 2023

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		(I.R.S. employer
incorporation or organization)		identification no.)
One Lacey Place, Southport, Connecticut		06890
(Address of principal executive offices)		(Zip code)

(203) 259-7843

(Registrant's telephone number, including area code)

 

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

 

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 such files). 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 the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒        Accelerated filer ☐        Non-accelerated filer ☐         Smaller reporting company ☐        Emerging growth 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 ☒

 

The number of shares outstanding of the issuer's common stock as of October 20, 2023: 17,722,682

 

INDEX

 

STURM, RUGER & COMPANY, INC.

 

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed consolidated balance sheets – September 30, 2023 and December 31, 2022	3
	Condensed consolidated statements of income and comprehensive income – Three and nine months ended September 30, 2023 and October 1, 2022	5
	Condensed consolidated statement of stockholders’ equity – Nine months ended September 30, 2023	6
	Condensed consolidated statements of cash flows – Nine months ended September 30, 2023 and October 1, 2022	7
	Notes to condensed consolidated financial statements – September 30, 2023	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	30
Item 6.	Exhibits	31
SIGNATURES		32

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 

		September 30, 2023				December 31, 2022
						(Note)
Assets
Current Assets
Cash		$	13,559			$	65,173
Short-term investments			106,451				159,132
Trade receivables, net			59,899				65,449
Gross inventories (Note 4)			150,021				129,294
Less LIFO reserve			(64,969	)			(59,489	)
Less excess and obsolescence reserve			(5,781	)			(4,812	)
Net inventories			79,271				64,993
Prepaid expenses and other current assets			14,780				7,091
Total Current Assets			273,960				361,838
Property, plant and equipment			458,332				447,126
Less allowances for depreciation			(388,531	)			(370,273	)
Net property, plant and equipment			69,801				76,853
Deferred income taxes			10,167				6,109
Other assets			46,422				39,963
Total Assets		$	400,350			$	484,763

 

Note:

 

The Condensed Consolidated Balance Sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

See notes to condensed consolidated financial statements.

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)

(Dollars in thousands, except per share data)

 

		September 30, 2023				December 31, 2022
						(Note)
Liabilities and Stockholders’ Equity
Current Liabilities
Trade accounts payable and accrued expenses		$	29,736			$	35,658
Dividends payable			—				88,343
Contract liabilities with customers (Note 3)			1,436				1,031
Product liability			406				235
Employee compensation and benefits			23,142				30,160
Workers’ compensation			6,467				6,469
Income taxes payable			—				1,171
Total Current Liabilities			61,187				163,067
Employee compensation			1,484				1,846
Product liability accrual			46				73
Lease liability (Note 5)			2,328				3,039
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
2023 – 24,437,020 issued,
17,722,682 outstanding
2022 – 24,378,568 issued,
17,664,230 outstanding			24,437				24,378
Additional paid-in capital			45,828				45,075
Retained earnings			410,852				393,097
Less: Treasury stock – at cost
2023 – 6,714,338 shares
2022 – 6,714,338 shares			(145,812	)			(145,812	)
Total Stockholders’ Equity			335,305				316,738
Total Liabilities and Stockholders’ Equity		$	400,350			$	484,763

 

Note:

 

The Condensed Consolidated Balance Sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

See notes to condensed consolidated financial statements.

 

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

 

		Three Months Ended								Nine Months Ended
		September 30, 2023				October 1, 2022				September 30, 2023				October 1, 2022
Net firearms sales		$	120,368			$	138,771			$	411,114			$	444,615
Net castings sales			525				619				2,036				2,003
Total net sales			120,893				139,390				413,150				446,618
Cost of products sold			96,165				100,521				311,788				306,087
Gross profit			24,728				38,869				101,362				140,531
Operating expenses:
Selling			8,669				8,763				27,702				25,828
General and administrative			9,733				10,247				31,898				30,927
Total operating expenses			18,402				19,010				59,600				56,755
Operating income			6,326				19,859				41,762				83,776
Other income:
Interest income			1,454				730				4,147				951
Interest expense			(122	)			(88	)			(177	)			(205	)
Other income, net			431				490				1,082				2,092
Total other income, net			1,763				1,132				5,052				2,838
Income before income taxes			8,089				20,991				46,814				86,614
Income taxes			658				2,602				8,848				17,236
Net income and comprehensive income		$	7,431			$	18,389			$	37,966			$	69,378
Basic earnings per share		$	0.42			$	1.04			$	2.14			$	3.93
Diluted earnings per share		$	0.42			$	1.03			$	2.13			$	3.90
Weighted average number of common shares outstanding - Basic			17,722,682				17,668,435				17,705,280				17,643,473
Weighted average number of common shares outstanding - Diluted			17,889,089				17,825,797				17,828,710				17,770,120
Cash dividends per share		$	0.36			$	0.47			$	6.10			$	2.01

 

 

See notes to condensed consolidated financial statements.

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)

 

		Common Stock				Additional Paid-in Capital				Retained Earnings				Treasury Stock				Total
Balance at December 31, 2022		$	24,378			$	45,075			$	393,097			$	(145,812	)		$	316,738
Net income and comprehensive income											37,966								37,966
Common stock issued – compensation plans			59				(59	)											—
Vesting of RSUs							(2,156	)											(2,156	)
Dividends paid											(19,462	)							(19,462	)
Unpaid dividends accrued											(749	)							(749	)
Recognition of stock-based compensation expense							2,968												2,968
Balance at September 30, 2023		$	24,437			$	45,828			$	410,852			$	(145,812	)		$	335,305

 

 

See notes to condensed consolidated financial statements.

 

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

 

		Nine Months Ended
		September 30, 2023				October 1, 2022
Operating Activities
Net income		$	37,966			$	69,378
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			19,576				20,120
Stock-based compensation			2,968				5,053
(Gain) loss on sale of assets			(4	)			15
Deferred income taxes			(4,058	)			(1,908	)
Changes in operating assets and liabilities:
Trade receivables			5,550				(4,326	)
Inventories			(14,278	)			(17,655	)
Trade accounts payable and accrued expenses			(5,967	)			(5,315	)
Contract liability with customers			405				—
Employee compensation and benefits			(8,129	)			(11,774	)
Product liability			144				(340	)
Prepaid expenses, other assets and other liabilities			(15,704	)			(2,985	)
Income taxes payable			(1,171	)			—
Cash provided by operating activities			17,298				50,263
Investing Activities
Property, plant and equipment additions			(11,637	)			(17,206	)
Proceeds from sale of assets			5				41
Purchases of short-term investments			(141,410	)			(200,378	)
Proceeds from maturities of short-term investments			194,091				235,041
Cash provided by investing activities			41,049				17,498
Financing Activities
Remittance of taxes withheld from employees related to share-based compensation			(2,156	)			(3,371	)
Repurchase of common stock			—				(107	)
Dividends paid			(107,805	)			(35,474	)
Cash used for financing activities			(109,961	)			(38,952	)
(Decrease) increase in cash and cash equivalents			(51,614	)			28,809
Cash and cash equivalents at beginning of period			65,173				21,044
Cash and cash equivalents at end of period		$	13,559			$	49,853

 

 

See notes to condensed consolidated financial statements.

 

 

STURM, RUGER & COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share)

 

 

NOTE 1 - BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results of the interim periods. Operating results for the three and nine months ended September 30, 2023 may not be indicative of the results to be expected for the full year ending December 31, 2023. 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, 2022.

 

 

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 accounted for approximately 7% of total sales for the nine month periods ended September 30, 2023 and October 1, 2022. 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”). Substantially all product sales are sold FOB (free on board) shipping point. Customary payment terms are 2% 30 days, net 40 days. Generally, all performance obligations are satisfied when product is shipped and the customer takes ownership and assumes the risk of loss. In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which downstream customers are entitled to receive no charge products based on their purchases of certain of the Company’s products from the independent distributors. The fulfillment of these no charge products is the Company’s responsibility. In such instances, the Company allocates the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the firearms included in the promotional program, including the no charge firearms. Revenue is recognized proportionally as each performance obligation is satisfied, based on the relative customary price of each product. Customary prices are generally determined based on the prices charged to the independent distributors. The net change in contract liabilities for a given period is reported as an increase or decrease to sales.

 

Fair Value of Financial Instruments:

 

The carrying amounts of financial instruments, including cash, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short-term maturity of these items.

 

The Company’s short-term investments consist of United States Treasury instruments, which mature within one year, and investments in a bank-managed money market fund that invests exclusively in United States Treasury obligations and is valued at the net asset value ("NAV") daily closing price, as reported by the fund, based on the amortized cost of the fund’s securities. The NAV is used as a practical expedient to estimate fair value. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV.

 

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.

 

 

NOTE 3 - REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

 

The impact of ASC 606 on revenue recognized during the three and nine months ended September 30, 2023 and October 1, 2022 is as follows:

 

		Three Months Ended								Nine Months Ended
		September 30, 2023				October 1, 2022				September 30, 2023				October 1, 2022
Contract liabilities with customers at beginning of period		$	100			$	—			$	1,031			$	—
Revenue deferred			1,468				—				1,680				—
Revenue recognized			(132	)			—				(1,275	)			—
Contract liabilities with customers at end of period		$	1,436			$	—			$	1,436			$	—

 

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 remaining deferred revenue from this contract liability with customers to be recognized in the fourth quarter of 2023.

 

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.

 

Inventories consist of the following:

 

		September 30, 2023				December 31, 2022
Inventory at FIFO
Finished products		$	31,907			$	23,573
Materials and work in process			118,114				105,721
Gross inventories			150,021				129,294
Less: LIFO reserve			(64,969	)			(59,489	)
Less: excess and obsolescence reserve			(5,781	)			(4,812	)
Net inventories		$	79,271			$	64,993

 

 

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, Leases (Topic 842). The Company’s lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.

 

Under the provisions of ASU 2016-02, the Company records right-of-use assets equal to the present value of the contractual liability for future lease payments. The table below presents the right-of- use assets and related lease liabilities recognized on the Condensed Consolidated Balance Sheet as of September 30, 2023:

 

		Balance Sheet Line Item		September 30, 2023
Right-of-use assets		Other assets		$	2,926
Operating lease liabilities
Current portion		Trade accounts payable and accrued expenses		$	598
Noncurrent portion		Lease liabilities			2,328
Total operating lease liabilities				$	2,926

 

The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight line basis over the life of the lease.

 

The Company’s leases generally do not provide an implicit interest rate, and therefore the Company calculates an incremental borrowing rate to determine the present value of its operating lease liabilities. The following table reconciles the undiscounted future minimum lease payments to the total operating lease liabilities recognized on the Condensed Consolidated Balance Sheet as of September 30, 2023:

 

Remainder of 2023		$	200
2024			808
2025			702
2026			705
2027			229
Thereafter			1,120
Total undiscounted future minimum lease payments			3,764
Less: Difference between undiscounted lease payments & the present value of future lease payments			(838	)
Total operating lease liabilities		$	2,926

 

Certain of the Company’s lease agreements contain renewal options at the Company’s discretion. The Company does not recognize right-of-use assets or lease liabilities for leases of one year or less or for renewal periods unless it is reasonably certain that the Company will exercise the renewal option at the inception of the lease or when a triggering event occurs. The Company’s weighted average remaining lease term for operating leases as of September 30, 2023 is 8.1 years.

 

 

NOTE 6 - LINE OF CREDIT

 

On January 7, 2022, the Company entered into a $40 million unsecured revolving line of credit agreement with a bank that expires January 7, 2025. Borrowings under this new facility bear interest at either 1) the Bloomberg short-Term Bank Yield Index – 1 month plus 150 basis points, or 2) a fluctuating rate per annum equal to the greater of (i) the Bank’s prime rate or (ii) the federal funds rate plus 50 basis points. The Company is also charged one-quarter of a percent (0.25%) per year on the unused portion. At September 30, 2023, the Company was in compliance with the terms and covenants of the credit facility and the line of credit was 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 $1.0 million and $3.7 million for the three and nine months ended September 30, 2023, respectively, and $0.9 million and $3.1 million for the three and nine months ended October 1, 2022, respectively. The Company plans to contribute approximately $1.0 million to the plan in matching employee contributions during the remainder of 2023.

 

In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $1.6 million and $5.3 million for the three and nine months ended September 30, 2023, respectively, and $1.5 million and $5.4 million for the three and nine months ended October 1, 2022, respectively. The Company plans to contribute approximately $1.6 million in supplemental contributions to the plan during the remainder of 2023.

 

 

NOTE 8 - INCOME TAXES

 

The Company's 2023 and 2022 effective tax rates differ from the statutory federal tax rate due principally to the availability of research and development tax credits, state income taxes, and the nondeductibility of certain executive compensation. The Company’s effective income tax rate was 8.1% and 18.9% for the three and nine months ended September 30, 2023, respectively. The Company’s effective income tax rate was 12.4% and 19.9% for the three and nine months October 1, 2022, respectively. The lower effective income tax rates for the three and nine months ended September 30, 2023 resulted from the recognition of higher than anticipated tax credits that were noted when the Company filed its 2022 Federal and state income tax returns.

 

Income tax payments for the three and nine months ended September 30, 2023 totaled $7.3 million and $23.8 million, respectively. Income tax payments for the three and nine months ended October 1, 2022 totaled $6.0 million and $26.6 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 2018.

 

The Company does not believe it has included any “uncertain tax positions” in its federal income tax return or any of the state income tax returns it is currently filing. The Company has made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. The Company does not anticipate that such additional taxes, if any, would result in a material change to its financial position.

 

 

NOTE 9 - EARNINGS PER SHARE

 

Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:

 

		Three Months Ended								Nine Months Ended
		September 30, 2023				October 1, 2022				September 30, 2023				October 1, 2022
Numerator:
Net income		$	7,431			$	18,389			$	37,966			$	69,378
Denominator:
Weighted average number of common shares outstanding – Basic			17,722,682				17,668,435				17,705,280				17,643,473
Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans			166,407				157,362				123,430				126,647
Weighted average number of common shares outstanding – Diluted			17,889,089				17,825,797				17,828,710				17,770,120

 

The dilutive effect of outstanding options and restricted stock units is calculated using the treasury stock method. There were no stock options that were anti-dilutive and therefore not included in the diluted earnings per share calculation.

 

 

NOTE 10 - COMPENSATION PLANS

 

In May 2017, the Company’s shareholders approved the 2017 Stock Incentive Plan (the “2017 SIP”) under which employees, independent contractors, and non-employee directors may be granted stock options, restricted stock, deferred stock awards, and stock appreciation rights, any of which may or may not require the satisfaction of performance objectives. Vesting requirements are determined by the Compensation Committee of the Board of Directors. The Company reserved 750,000 shares for issuance under the 2017 SIP.

 

In June 2023, the Company’s shareholders approved the 2023 Stock Incentive Plan (the “2023 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 reserved 1,000,000 shares for issuance under the 2023 SIP, of which 869,000 shares remain available for future grants as of September 30, 2023. Any shares remaining from the 2017 SIP will be available for future grants under the terms of the 2023 SIP. As of September 30, 2023, 121,034 shares remained unawarded from the 2017 SIP. Since the shareholder approval of the 2023 SIP, no additional awards have been or will be granted under the 2017 SIP. Previously granted and outstanding awards under the 2017 SIP will remain subject to the terms of the 2017 SIP.

 

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 a three-year vesting period. There were 113,862 restricted stock units issued during the nine months ended September 30, 2023. Total compensation costs related to these restricted stock units are $6.1 million.

 

Compensation costs related to all outstanding restricted stock units recognized in the statements of income aggregated $1.6 million and $5.0 million for the three and nine months ended September 30, 2023, respectively, and $1.7 million and $5.1 million for the three and nine months ended October 1, 2022, 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:

 

(in thousands)		Three Months Ended								Nine Months Ended
		September 30, 2023				October 1, 2022				September 30, 2023				October 1, 2022
Net Sales
Firearms		$	120,368			$	138,771			$	411,114			$	444,615
Castings
Unaffiliated			525				619				2,036				2,003
Intersegment			7,947				4,453				25,307				13,781
			8,472				5,072				27,343				15,784
Eliminations			(7,947	)			(4,453	)			(25,307	)			(13,781	)
		$	120,893			$	139,390			$	413,150			$	446,618
Income (Loss) Before Income Taxes
Firearms		$	6,108			$	21,339			$	43,637			$	88,130
Castings			420				(1,029	)			(1,178	)			(2,754	)
Corporate			1,561				681				4,355				1,238
		$	8,089			$	20,991			$	46,814			$	86,614
Depreciation
Firearms		$	5,676			$	5,815			$	17,027			$	17,430
Castings			553				574				1,661				1,736
		$	6,229			$	6,389			$	18,688			$	19,166
Capital Expenditures
Firearms		$	6,674			$	2,324			$	11,456			$	15,971
Castings			90				552				181				1,235
		$	6,764			$	2,876			$	11,637			$	17,206

 

		September 30, 2023				December 31, 2022
Identifiable Assets
Firearms		$	230,340			$	223,301
Castings			10,137				11,910
Corporate			159,873				249,552
		$	400,350			$	484,763
Goodwill
Firearms		$	3,055			$	3,055
Castings			209				209
		$	3,264			$	3,264

 

 

NOTE 12 - RELATED PARTY TRANSACTIONS

 

The Company contracts with the National Rifle Association (“NRA”) for some of its promotional and advertising activities. Payments made to the NRA in the three and nine months ended September 30, 2023 totaled $0.1 million and $0.4 million, respectively. Payments made to the NRA in the three and nine months ended October 1, 2022 totaled $0.2 million and $0.4 million, respectively. One of the Company’s Directors also serves as a Director on the Board of the NRA.

 

The Company is a member of the National Shooting Sports Foundation (“NSSF”), the firearm industry trade association.  Payments made to the NSSF in the three and nine month periods ended September 30, 2023 totaled $0.1 million and $0.3 million, respectively.   Payments made to the NSSF in the three and nine months ended October 1, 2022 totaled $0.1 million and $0.2 million, respectively. One of the Company’s Directors also serves on the Board of the NSSF.

 

 

NOTE 13 - CONTINGENT LIABILITIES

 

As of September 30, 2023, the Company was a defendant in eight (8) lawsuits and is aware of certain other such claims. The lawsuits fall into three categories: municipal litigation, negligence, and unfair trade practices. Each is discussed in turn below.

 

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 are four lawsuits of this type: the City of Gary, filed in Indiana State Court in 1999; Estados Unidos Mexicanos v. Smith & Wesson, et al., filed in the U.S. District Court for the District of Massachusetts in August 2021; The City of Buffalo, filed in the Supreme Court of the State of New York for Erie County on December 20, 2022; and The City of Rochester, filed in the Supreme Court for the State of New York for Monroe County on December 21, 2022, each of which is described in more detail below.

 

The City of Gary Complaint 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, during the quarter ended April 3, 2021, the City initiated discovery and the manufacturer defendants reciprocated. Discovery is ongoing.

 

Estados Unidos Mexicanos v. Smith & Wesson Brands, Inc., et al. was filed by the Country of Mexico and names seven defendants, mostly U.S.-based firearms manufacturers, including the Company. The Complaint advances a variety of legal theories including negligence, public nuisance, unjust enrichment, restitution, and others. Plaintiff essentially alleges that Defendants design, manufacture, distribute, market and sell firearms in a way that they know results in the illegal trafficking of firearms into Mexico, where they are used by Mexican drug cartels for criminal activities. Plaintiff seeks injunctive relief and monetary damages. On November 22, 2021, defendants filed a joint Rule 12(b)(6) motion to dismiss the Mexican Government’s complaint. On September 30, 2022, the court entered an order granting defendants’ motion. On October 26, 2022, plaintiff filed a Notice of Appeal and the matter is being briefed before the First Circuit Court of Appeals. Oral argument was held on July 24, 2023.

 

On December 20, 2022, the City of Buffalo, New York filed a lawsuit captioned The City of Buffalo v. Smith & Wesson Brands, Inc., et al. in the New York State Supreme Court for Erie County, New York. The suit names a number of firearm manufacturers, distributors, and retailers as defendants, including the Company, and purports to state causes of action for violations of Sections 898, 349 and 350 of the New York General Business Law, as well as common law public nuisance. Generally, plaintiff alleges that the criminal misuse of firearms in the City of Buffalo is the result of the manufacturing, sales, marketing, and distribution practices of the defendants. Defendants timely removed the matter to the U.S. District Court for the Western District of New York.

 

On December 21, 2022, the City of Rochester, New York filed a lawsuit captioned The City of Rochester v. Smith & Wesson Brands, Inc., et al. in the New York State Supreme Court for Monroe County, New York. The allegations essentially mirror those in The City of Buffalo, discussed in the preceding paragraph. Defendants timely removed the matter to the U.S. District Court for the Western District of New York.

 

Defendants moved to consolidate the The City of Buffalo and The City of Rochester cases for pretrial purposes only. Defendants also moved to stay the cases pending a decision by the Second Circuit Court of Appeals in National Shooting Sports Foundation, Inc. et al. v. James, which challenges the constitutionality of the recently enacted N.Y. Gen. Bus. Law §§ 898-a–e. On June 8, 2023, the court granted defendants’ motions and the cases were consolidated for pretrial purposes and stayed.

 

Negligence

 

Rossiter v. Sturm, Ruger, et al. is a lawsuit arising out of a slip and fall accident by a contract security officer in December 2019. The Complaint was filed in the Superior Court for Sullivan County, New Hampshire on December 13, 2022 and names Pine Hill Construction, a snow removal contractor, as a co-defendant. The Company has tendered the defense of this matter to its insurance carrier and is assisting as required.

 

The Company was named in two purported class action lawsuits arising out of a data breach at Freestyle Solutions, Inc., the vendor who hosted the Company’s ShopRuger.com website at the time of the breach. Jones v. Sturm, Ruger & Co., was filed in the U.S. District Court for Connecticut on October 4, 2022 and Copeland v. Sturm, Ruger & Company, et al. was filed in the U.S. District Court for New Jersey on October 27, 2022. Copeland also named Freestyle Solutions, Inc. as a defendant. By agreement of the parties, Copeland was dismissed, without prejudice, and consolidated with Jones in the pending Connecticut case. On January 20, 2023, five plaintiffs filed an Amended Complaint naming the Company and Freestyle Software, Inc. as defendants. The Complaint alleges causes of action for negligence, breach of implied warranties, and unjust enrichment. The Company filed a Motion to Dismiss on a variety of grounds. The matter has been briefed fully, and a decision is pending.

 

Unfair Trade Practices

 

Estate of Suzanne Fountain v. Sturm, Ruger & Co., Inc., was filed in the Connecticut Superior Court in Stamford and arises out of the criminal shootings at the King Soopers supermarket in Boulder, Colorado on March 22, 2021. On that date, plaintiff’s decedent, Suzanne Fountain, was murdered by 21-year-old Ahmad Al Aliwi Al-Issa. The Complaint alleges that the Company’s advertising and marketing of the Ruger AR-556 pistol violate the Connecticut Unfair Trade Practices Act and were a substantial factor in bringing about the wrongful death of Suzanne Fountain.

 

Estate of Neven Stanisic et al. v. Sturm, Ruger & Co., Inc., was filed in the Connecticut Superior Court in Stamford on behalf of five plaintiffs. Like Estate of Suzanne Fountain, the claims arise from the criminal shootings at the King Soopers supermarket in Boulder, Colorado on March 22, 2021. Plaintiffs’ decedents were murdered by Ahmad Al Aliwi Al-Issa and plaintiffs allege that the Company’s advertising and marketing of the Ruger AR-556 pistol violate the Connecticut Unfair Trade Practices Act and were a substantial factor in causing the wrongful death of plaintiffs’ decedents.

 

The Fountain and Stanisic cases have been consolidated for discovery purposes only and transferred by the court to the Complex Litigation Docket. Plaintiffs sought leave to file an amended complaint, essentially abandoning their negligent marketing allegations and advancing a new theory predicated upon alleged violations of the Gun Control Act and National Firearms Act. Over the Company’s objections, plaintiffs were permitted to file the amended complaint. The matter was timely removed to the U.S. District Court for the District of Connecticut based upon federal question jurisdiction.

 

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.

 

The Company management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company's financial results for a particular period.

 

Product liability claim payments are made when appropriate if, as, and when claimants and the Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as 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 $1.1 million at December 31, 2021, is 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. At December 31, 2022, the total amount claimed specifically in these cases was de minimis.

 

 

NOTE 14 - SUBSEQUENT EVENTS

 

On October 27, 2023, the Board of Directors authorized a dividend of 17¢ per share, for shareholders of record as of November 15, 2023, payable on November 29, 2023.

 

The Company has evaluated events and transactions occurring subsequent to September 30, 2023 and determined that there were no other unreported events or transactions that would have a material impact on the Company’s results of operations or financial position.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Company Overview

 

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of sales are from firearms. Export sales accounted for approximately 7% of total sales for the nine month periods ended September 30, 2023 and October 1, 2022. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.

 

The Company also manufactures investment castings made from steel alloys and metal injection molding (“MIM”) parts for internal use in its firearms and for sale to unaffiliated, third-party customers. Less than 1% of sales are from the castings segment.

 

Orders for many models of firearms from the independent distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.

 

Results of Operations

 

Demand

 

The estimated unit sell-through of the Company’s products from the independent distributors to retailers decreased 8% in the first nine months of 2023 compared to the prior year period. For the same period, NICS background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) decreased 7%. Estimated sell-through from the independent distributors to retailers and total adjusted NICS background checks for the trailing seven quarters follow:

 

		2023												2022
		Q3				Q2				Q1				Q4				Q3				Q2				Q1
Estimated Units Sold from Distributors to Retailers (1)			307,400				323,000				391,500				397,800				343,500				354,300				411,200
Total adjusted NICS Background Checks (thousands) (2)			3,284				3,654				4,168				4,531				3,764				3,917				4,213

 

(1)

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

 

●

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

●

Do not consider potential timing issues within the distribution channel, including goods-in-transit, and

●

Do not consider fluctuations in inventory at retail.

 

(2)

NICS background checks are performed when the ownership of most firearms, either new or used, is transferred by a Federal Firearms Licensee. NICS background checks are also performed for permit applications, permit renewals, and other administrative reasons.

 

The adjusted NICS data presented above was derived by the NSSF by subtracting out NICS checks that are not directly related to the sale of a firearm, including checks used for concealed carry (“CCW”) permit application checks, as well as checks on active CCW permit databases. The adjusted NICS checks represent less than half of the total NICS checks.

 

Adjusted NICS data can be impacted by changes in state laws and regulations and any directives and interpretations issued by governmental agencies.

 

Orders Received and Ending Backlog

 

The Company uses the estimated unit sell-through of its products from the independent distributors to retailers, along with inventory levels at the independent distributors and at the Company, as the key metrics for planning production levels. The Company generally does not use the orders received or ending backlog for planning production levels.

 

The units ordered, value of orders received, average sales price of units ordered, and ending backlog for the trailing seven quarters are as follows (dollars in millions, except average sales price):

 

(All amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns.)

 

		2023												2022
		Q3				Q2				Q1				Q4				Q3				Q2				Q1
Units Ordered			176,300				258,100				408,000				156,000				295,600				250,600				381,600
Orders Received		$	58.8			$	102.1			$	156.2			$	81.0			$	124.3			$	98.9			$	147.0
Average Sales Price of Units Ordered		$	334			$	396			$	383			$	519			$	421			$	395			$	385
Ending Backlog		$	234.8			$	293.7			$	327.3			$	314.4			$	377.6			$	389.6			$	420.5
Average Sales Price of Ending Unit Backlog		$	510			$	496			$	488			$	486			$	427			$	405			$	384

 

 

Production

 

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. Consequently, the Company’s overall production in the first nine months of 2023 decreased by 18% from the first nine months of 2022.

 

Summary Unit Data

 

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

 

		2023												2022
		Q3				Q2				Q1				Q4				Q3				Q2				Q1
Units Ordered			176,300				258,100				408,000				156,000				295,600				250,600				381,600
Units Produced			324,500				387,400				381,000				397,300				382,800				431,800				521,300
Units Shipped			308,400				336,400				384,900				393,100				373,800				382,600				491,500
Average Sales Price of Units Shipped		$	390			$	422			$	387			$	378			$	371			$	366			$	338
Ending Unit Backlog			460,000				592,100				670,400				647,300				884,400				962,600				1,094,600

Inventories

During the third quarter of 2023, the Company’s finished goods inventory increased by 16,100 units and distributor inventories of the Company’s products increased by 1,000 units.

 

Inventory unit data for the trailing seven quarters follows:

 

		2023												2022
		Q3				Q2				Q1				Q4				Q3				Q2				Q1
Company Inventory			176,100				160,000				108,900				112,800				108,600				99,700				50,400
Distributor Inventory (1)			306,200				305,200				291,800				298,400				303,100				272,800				244,600
Total Inventory (2)			482,300				465,200				400,700				411,200				411,700				372,500				295,000

(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)

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, 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):

 

		September 30, 2023				October 1, 2022				Change				% Change
Net firearms sales		$	120.4			$	138.8			$	(18.4	)			(13.3%	)
Net castings sales			0.5				0.6				(0.1	)			(15.2%	)
Total net sales			120.9				139.4				(18.5	)			(13.3%	)
Cost of products sold			96.2				100.5				(4.3	)			(4.3%	)
Gross profit		$	24.7			$	38.9			$	(14.2	)			(36.4%	)
Gross margin			20.5%				27.9%				(7.4%	)			(26.5%	)

 

Sales of new products, including the LCP MAX pistol, Marlin lever-action rifles, LC Carbine, Small-Frame Autoloading Rifle, Super Wrangler revolver, and the Security-380 pistol, represented $27.2 million or 22.9% of firearm sales in the three months ended September 30, 2023. 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 September 30, 2023 is attributable to the decrease in sales, unfavorable deleveraging of fixed costs resulting from decreased production, increased promotional costs, inflationary cost increases in materials, commodities, services, wages, energy, fuel and transportation, and a product mix shift toward products with relatively lower margins that remain in relatively stronger demand.

 

The decrease in gross margin for the three months ended September 30, 2023 is attributable the aforementioned factors, partially offset by increased pricing.

 

Net sales, cost of products sold, and gross profit data for the nine months ended (dollars in millions):

 

		September 30, 2023				October 1, 2022				Change				% Change
Net firearms sales		$	411.1			$	444.6			$	(33.5	)			(7.5%	)
Net castings sales			2.1				2.0				0.1				1.6%
Total net sales			413.2				446.6				(33.4	)			(7.5%	)
Cost of products sold			311.8				306.1				5.7				1.9%
Gross profit		$	101.4			$	140.5			$	(39.1	)			(27.9%	)
Gross margin			24.5%				31.5%				(7.0%	)			(22.2%	)

 

The decrease in total consolidated net sales and net firearms sales for the three and nine months ended September 30, 2023 is attributable to decreased consumer demand for firearms, as evidenced by the adjusted NICS checks. Sales of new products, including the MAX-9 pistol (during the first quarter only), LCP MAX pistol, Marlin lever-action rifles, LC Carbine, Small-Frame Autoloading Rifle, Super Wrangler revolver, and the Security-380 pistol, represented $90.5 million or 22.7% of firearm sales in the first nine months of 2023. New product sales include only major new products that were introduced in the past two years.

 

The decreased gross profit for the nine months ended September 30, 2023 is attributable to the decrease in sales, inflationary cost increases in materials, commodities, services, wages, energy, fuel and transportation, unfavorable deleveraging of fixed costs resulting from decreased production, a product mix shift toward products with relatively lower margins that remain in relatively stronger demand, and increased promotional costs.

 

The decrease in gross margin for the nine months ended September 30, 2023 is attributable to the aforementioned factors, partially offset by increased pricing.

 

 

Selling and General and Administrative Expenses

 

Selling and general and administrative expenses data for the three months ended (dollars in millions):

 

		September 30, 2023				October 1, 2022				Change				% Change
Selling expenses		$	8.7			$	8.8			$	(0.1	)			(1.1%	)
General and administrative expenses			9.7				10.2				(0.5	)			(5.0%	)
Total operating expenses		$	18.4			$	19.0			$	(0.6	)			(3.2%	)

The decrease in selling expenses for the three months ended September 30, 2023 was primarily attributable to the decreased shipping costs as a result of the decrease in sales for the period, partially offset by increased advertising and promotional activity.

 

The decrease in general, and administrative expenses for the three months ended September 30, 2023 was primarily attributable to decreased professional service costs and decreased incentive compensation.

 

Selling and general and administrative expenses data for the nine months ended (dollars in millions):

 

		September 30, 2023				October 1, 2022				Change				% Change
Selling expenses		$	27.7			$	25.8			$	1.9				7.3%
General and administrative expenses			31.9				30.9				1.0				3.1%
Total operating expenses		$	59.6			$	56.7			$	2.9				5.0%

The increase in selling expenses for the nine months ended September 30, 2023 was primarily attributable to the resumption of trade show participation costs, travel expenditures, and advertising, some of which had been deferred in 2022 due to COVID-19 restrictions, partially offset by decreased sales volume.

 

The increase in general, and administrative expenses for the nine months ended September 30, 2023 was primarily attributable to increased professional service costs, partially offset by decreased incentive compensation.

 

 

Other Income

 

Other income data for the three months ended (dollars in millions):

 

		September 30, 2023				October 1, 2022				Change				% Change
Other income		$	1.8			$	1.1			$	0.7				55.7%

The increase in other income for the three months ended September 30, 2023 was the result of increases in interest income, partially offset by decreased royalty and miscellaneous income.

 

Other income data for the nine months ended (dollars in millions):

 

		September 30, 2023				October 1, 2022				Change				% Change
Other income		$	5.1			$	2.8			$	2.3				78.0%

 

The increase in other income for the nine months ended September 30, 2023 was the result of increases in interest income, partially offset by decreased royalty and miscellaneous income.

 

The Company's 2023 and 2022 effective tax rates differ from the statutory federal tax rate due principally to research and development tax credits, state income taxes and the nondeductibility of certain executive compensation. The Company’s effective income tax rate was 8.1% and 18.9% for the three and nine months ended September 30, 2023, respectively. The Company’s effective income tax rate was 12.4% and 19.9% for the three and nine months ended October 1, 2022, respectively.

 

Non-GAAP Financial Measures

In an effort to provide investors with additional information regarding its financial results, the Company refers to various United States generally accepted accounting principles (“GAAP”) financial measures and two non-GAAP financial measures, EBITDA and EBITDA margin, which management believes provides useful information to investors. These non-GAAP financial measures may not be comparable to similarly titled financial measures being disclosed by other companies. In addition, the Company believes that the non-GAAP financial measures should be considered in addition to, and not in lieu of, GAAP financial measures. The Company believes that EBITDA and EBITDA margin are useful to understanding its operating results and the ongoing performance of its underlying business, as EBITDA provides information on the Company’s ability to meet its capital expenditure and working capital requirements, and is also an indicator of profitability. The Company believes that this reporting provides better transparency and comparability to its operating results. The Company uses both GAAP and non-GAAP financial measures to evaluate the Company’s financial performance.

 

EBITDA is defined as earnings before interest, taxes, and depreciation and amortization. The Company calculates this by adding the amount of interest expense, income tax expense, and depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest income that was included in net income from net income to arrive at EBITDA. The Company calculates EBITDA margin by dividing EBITDA by total net sales.

 

EBITDA was $13.3 million for the three months ended September 30, 2023, a decrease of 50.8% from $27.0 million in the comparable prior year period.

 

For the nine months ended September 30, 2023 EBITDA was $62.4 million, a decrease of 41.1% from $106.0 million in the comparable prior year period.

Non-GAAP Reconciliation – EBITDA

EBITDA

(Unaudited, dollars in thousands)

 

		Three Months Ended								Nine Months Ended
		September 30, 2023				October 1, 2022				September 30, 2023				October 1, 2022
Net income		$	7,431			$	18,389			$	37,966			$	69,378
Income tax expense			658				2,602				8,848				17,236
Depreciation and amortization expense			6,530				6,656				19,576				20,120
Interest income			(1,454	)			(730	)			(4,147	)			(951	)
Interest expense			122				88				177				205
EBITDA		$	13,287			$	27,005			$	62,420			$	105,988
EBITDA margin			11.0%				19.4%				15.1%				23.7%

 

Financial Condition

 

Liquidity and Capital Resources

 

At the end of the third quarter of 2023, the Company’s cash and short-term investments totaled $120.0 million. Pre-LIFO working capital of $277.8 million, less the LIFO reserve of $65.0 million, resulted in working capital of $212.8 million and a current ratio of 4.5 to 1.

 

Operations

 

Cash provided by operating activities was $17.3 million for the nine months ended September 30, 2023, compared to $50.3 million for the comparable prior year period. The decrease in cash provided in the nine months ended September 30, 2023 is primarily attributable to the decrease in net income and the increase in prepaid expenses and other assets in the nine months ended September 30, 2023, partially offset by the decrease in accounts receivable in the nine months ended September 30, 2023.

 

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 nine months ended September 30, 2023 totaled $11.6 million, a decrease from $17.2 million in the comparable prior year period. In 2023, the Company expects capital expenditures related to new product introductions and upgrades to our manufacturing equipment and facilities to total approximately $20 million. Due to market conditions and business circumstances, actual capital expenditures could vary significantly from the projected amount. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash and cash equivalents.

 

Dividends of $107.8 million were paid during the nine months ended September 30, 2023. This included $88.3 million paid in January 2023 for a $5.00 per share special dividend declared by the Board of Directors in November 2022. 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 October 27, 2023, the Company’s Board of Directors authorized a dividend of 17¢ per share to shareholders of record on November 15, 2023, payable on November 29, 2023. 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 September 30, 2023, the Company had $88.1 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 September 30, 2023, the Company’s investment in this money market fund totaled $18.4 million.

 

The Company did not purchase any shares of its common stock during the nine months ended September 30, 2023. As of September 30, 2023, $86.6 million remained authorized for future stock repurchases.

 

Based on its unencumbered assets, the Company believes it has the ability to raise cash through the issuance of short-term or long-term debt. The Company’s unsecured $40 million credit facility, which expires on January 7, 2025, was unused at September 30, 2023.

 

Other Operational Matters

 

In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to workplace safety, firearms serial number tracking and control, waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable Bureau of Alcohol, Tobacco, Firearms & Explosives, environmental, and safety regulations and the outcome of any proceedings or orders will not have a material adverse effect on the financial position or results of operations of the Company. If these regulations become more stringent in the future and the Company is not able to comply with them, such noncompliance could have a material adverse impact on the Company.

 

The Company has 15 independent distributors that service the domestic commercial market. Additionally, the Company has 45 and 25 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.

 

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 Company has taken many proactive steps to maintain the health and safety of its employees and to mitigate the impact on its business. During the nine month period ended September 30, 2023, the Company did not experience a significant adverse impact on its business from COVID-19 or related government restrictions. The Company cannot predict the extent to which its business, results of operations, financial condition, or cash flows will ultimately be impacted by COVID-19.

 

Adjustments to Critical Accounting Policies

 

The Company has not made any adjustments to its critical accounting estimates and assumptions described in the Company’s 2022 Annual Report on Form 10-K filed on February 22, 2023, 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 September 30, 2023.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (the “Disclosure Controls and Procedures”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2023.

 

Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, such Disclosure Controls and Procedures are effective to ensure that information required to be disclosed in the Company’s periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure.

 

The Company’s Chief Executive Officer and Chief Financial Officer have further concluded that, as of September 30, 2023, there have been no material changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.   The Company has not experienced any material impact to its internal controls over financial reporting as a result of the COVID-19 pandemic.

 

The effectiveness of any system of internal controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that the Disclosure Controls and Procedures will detect all errors or fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system will be attained.

 

 

PART II.

OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

The nature of the legal proceedings against the Company is discussed at Note 13 to the financial statements, which are included in this Form 10-Q.

 

The Company has reported all cases instituted against it through July 1, 2023, and the results of those cases, where terminated, to the SEC on its previous Form 10-Q and 10-K reports, to which reference is hereby made.

 

There were no lawsuits formally instituted against the Company during the three months ending September 30, 2023.

 

 

ITEM 1A.

RISK FACTORS

 

During the three months ended September 30, 2023, there were no material changes in the Company’s risk factors from the information provided in Item 1A. Risk Factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

 

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

 

Rule 10b5-1 Trading Plans

 

During the three months ended September 30, 2023, none of the Company’s Section 16 officers or directors adopted or terminated contracts, instructions, or written plans for the purchase or sale of Company securities.

 

Due to an administrative oversight, a plan for the purchase and sale of the Company’s securities which is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act (“Rule 10b5-1 Plan”) was adopted during the three months ended July 1, 2023 by a Section 16 officer of Company securities was not reported in the Form 10-Q filed with respect to such period. The details of such Rule 10b5-1 Plan are as follows:

 

Name	Title	Action	Date Adopted	Expiration Date	Aggregate # of Securities to be Purchased/Sold
Michael W. Wilson (1)	Vice President of Operations for New Product Development, Product Engineering and Mayodan Manufacturing	Adoption of Rule 10b5-1 Plan	May 22, 2023	December 31, 2023	2,919

 

(1)

Michael W. Wilson, an officer of the Company, entered into a Rule 10b5-1 Plan on May 22, 2023. Mr. Wilson’s Rule 10b5-1 Plan provides for the potential sale of up to 2,919 shares of the Company’s common stock. The Rule 10b5-1 Plan expires on December 31, 2023, or upon the earlier completion of all authorized transactions under such Rule 10b5-1 Plan.

None of the Company’s directors or Section 16 officers adopted or terminated a “non-Rule 10b5-1 trading arrangement” as defined in Item 408 of Regulation S-K during the three months ended September 30, 2023.

 

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)

 

*Filed herewith

**Furnished herewith

 

 

 

STURM, RUGER & COMPANY, INC.

 

FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023

 

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:  November 1, 2023		S/THOMAS A. DINEEN
		Thomas A. Dineen Principal Financial Officer, Principal Accounting Officer, Senior Vice President, Treasurer and Chief Financial Officer