Jul 29, 2015
Executives
Michael O. Fifer - Chief Executive Officer & Director Kevin B.
Reid - Vice President & General Counsel
Analysts
Brian W. Ruttenbur - BB&T Securities LLC Brian Gary Rafn - Morgan Dempsey Capital Management LLC Andrea Susan James - Dougherty & Co.
LLC Colin Moran - Abdiel Capital LP Scott W. Hamann - KeyBanc Capital Markets, Inc.
Adam L. Starr - Gulfside Asset Management LLC
Operator
Good day, ladies and gentlemen, and welcome to the Q2 2015 Sturm, Ruger Earnings Conference Call. My name is Steve, and I'll be your operator for today.
At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded for replay purposes.
I would now like to turn the call over to Mr. Michael Fifer, Chief Executive Officer.
Please proceed.
Michael O. Fifer - Chief Executive Officer & Director
Good morning, and welcome to the Sturm, Ruger & Company second quarter 2015 conference call. I'd like to ask Kevin Reid, our General Counsel, to read the caution on forward-looking statements, which will be followed by a quick overview of the second quarter, and then we can get right into your questions.
Kevin?
Kevin B. Reid - Vice President & General Counsel
Thank you, Mike. We'd want to remind everyone that statements made in the course of this meeting that state the company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements.
It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's SEC filings, including, but not limited to, the company's reports on Form 10-K for the year ended December 31, 2014 and Form 10-Q for the quarter just ended June 27, 2015.
Copy of these documents may be obtained by contacting the company or the SEC or on the company website at www.ruger.com/corporate or of course at the SEC website at www.sec.gov. We reference non-GAAP EBITDA.
Please note that the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31, 2014 and our Form 10-Q for the quarter ended June 27, 2015, which are also posted on our website. Furthermore, the company disclaims all responsibility to update forward-looking statements.
Mike?
Michael O. Fifer - Chief Executive Officer & Director
Thank you, Kevin. Financial results.
For the second quarter of 2015, net sales were $140.9 million and fully diluted earnings were $0.91 per share. For the corresponding period in 2014, net sales were $153.7 million and fully diluted earnings were $1.12 per share.
For the first half of 2015, net sales were $277.8 million and fully diluted earnings were $1.71 per share. For the corresponding period in 2014, net sales were $323.5 million and fully diluted earnings were $2.34 per share.
Our second quarter 2015 EBITDA was $36.2 million or 26% of sales, and our second quarter 2014 EBITDA was $42.1 million or 27% of sales. Demand.
The estimated sell-through of the company's products from the independent wholesale distributors to retailers, which we believe to be the best available measure of demand, decreased 2% in the second quarter from the second quarter of 2014. For the first half of the year, estimated sell-through declined 9% from the first half of 2014.
We believe that demand for the company's firearms in the second quarter and first half of 2015 declined from the comparable periods in 2014 due to more conservative restocking behavior at retailers. We believe retailers experienced relatively weak consumer demand through much of 2014 and felt overstocked in the latter half of 2014.
The National Instant Criminal Background Check System numbers as adjusted by the National Shooting Sports Foundation, which are commonly referred to as NICS checks, increased 3% in the first half of 2015 compared with the first half of 2014. While we believe that the aggregate NICS data is the best available proxy for consumer demand, recent analysis of state-by-state numbers occasionally shows a low correlation with the anecdotal retailer reports of consumer behavior.
For example, the June 2015 Connecticut numbers would indicate that Connecticut transactions more than doubled from 2014. That is extremely unlikely.
Nonetheless, the aggregate mix numbers generally seem to follow what we believe to be the trends in consumer demand. So we will continue to monitor them and report them in comparison to our estimated sell-through numbers.
Anecdotal reports from a number of retailers indicate that we have maintained our market share in 2015, that consumer demand in 2015 has been stronger than in 2014, that retailers are in a better stocking position than one year ago, and that retailers have some cautious optimism for the balance of the year. New product development.
We believe that new products are a key driver of demand. Our recent new product launches include the SP101 double-action revolver in 327 Federal Magnum, the 77 bolt-action rifle in 17 Winchester Super Magnum, the Mini-14 Tactical rifle in 300 AAC Blackout, the Redhawk double-action revolver dual chambered in 45 Auto and 45 Colt, the second edition of the Ruger Collector Series 10/22 Rifle, the SR-556 Takedown rifle, and most recently, the Ruger Precision Rifle.
New products represented $47.7 million or 17% of firearm sales in the first half of 2015. New product sales include only major new products that were introduced in the past two years such as the LC9s pistol and the AR-556 Modern Sporting Rifle.
The Ruger Precision Rifle will be included in the future, but it launched in July and had no impact on second quarter results. Production.
In the second quarter of 2015, net sales increased 3% and earnings increased 14% from the first quarter of 2015. That is a direct result of the 32% increase in unit production from the first quarter of 2015, which resulted in improved efficiencies.
It also resulted in increased inventories at the company and at the independent wholesale distributors. The company and the independent distributors were willing to increase inventories both to restock from the significant inventory reduction in the first quarter of 2015 and in anticipation of the new recently announced summer retailer programs.
We've previously described the distributor show season that occurs every January and February and how the retailer buying programs that are offered at that time affect buying patterns for the next several months. Typically, the company has only offered programs during that time of the year.
However, that is not typical of the industry as the major retailer buying groups hold summer shows that most manufacturers and many of the large independent retailers participate in. This year, the company has decided to offer summer retailer programs to encourage retailers to stock the company's products as fully in the second half of the year as they typically do in the first half of the year.
In a related note, the selling expense in the second quarter increased in large part due to accruals for the anticipated expense of the new summer retailer programs. We also learned an inventory lesson after the industry and the company experienced a decline in demand following the post 2008 election search.
Throughout 2010, the company was extremely cautious about inventory levels and managed production rates to minimize inventory build. When consumer demand sharply rebounded in late 2010, the company increased production very quickly but not quickly enough to take full advantage of that demand.
Looking back, we believe we left significant opportunity for increased earnings on the table in early 2011 as a result. We think there are parallels between the decline in consumer demand in 2014 and the one in late-2009 and having experienced – and having learnt from the prior experience, we are more comfortable with higher inventory levels.
Firearms are fortunately non-perishable products and we want to be fully prepared when demand rebounds. Cash flows.
In the first six months of 2015, we generated $80.9 million of cash from operations. We reinvested $16.3 million of that back into the company in the form of capital expenditures.
Note, that is a 29% reduction from the comparable prior-year period. The reduction is not indicative of any decrease in our new product development effort but rather is primarily the result of repurposing equipment after we've dramatically cut production rates in the second half of 2014.
We estimate that our capital expenditures in 2015 will be approximately $30 million. Our primary focus for investment continues to be new product development.
Balance sheet. At June 27, 2015, our cash and cash equivalents totaled $61 million, an increase of $52 million from December 31, 2014.
Our current ratio was 2.2-to-1 and we have no debt. At June 27, 2015, stockholders' equity was $208 million, which equates to a book value of $11.12 per share, of which $3.27 is cash.
Cash returned to shareholders. In the first half of 2015, the company returned $12 million to its shareholders through the payment of $9.2 million of dividends and the repurchase of 82,100 shares of our common stock at an average price of $34.57 per share for a total of $2.8 million.
At June 27, 2015, $73.2 million remains authorized for future stock repurchases. Our board of directors had declared a $0.36 per share quarterly dividend for shareholders of record as of August 14, 2015, payable on August 28, 2015.
As a reminder, our quarterly dividend is approximately 40% of net income. Those were the highlights of the second quarter.
Operator, may we please have the first question?
Operator
Thank you. and standby for your first question, which comes from the line of Brian Ruttenbur of BB&T.
Please go ahead.
Brian W. Ruttenbur - BB&T Securities LLC
Great. Thank you very much.
Couple questions. First of all, on the 2 Million Gun Challenge, can you explain your plans and goals with that 2 Million Gun Challenge?
Is that all 2 million that you are going to produce this calendar year? Maybe explain the 2 Million Gun Challenge a little bit.
Michael O. Fifer - Chief Executive Officer & Director
Sure, Brian. As you may recall, we did a 1 Million Gun Challenge four years ago.
And it ran from one NRA Show to the next NRA Show. And that was actually kind of tough because that would have been like 11 months at that time.
This year, it's a little bit easier because I think there's 13 months between shows. So to keep the math simple, I think we actually used four quarters, which were the last three calendar quarters in one year and the first calendar quarter of the next year, which roughly corresponded to the dates of the NRA Shows.
And remember the objective here is both to raise awareness of Ruger products, to energize the customer base to buy Ruger product, and to benefit the NRA-ILA, which is a huge defender of the Second Amendment. And so it's not a calendar year exercise, but it's really a big marketing program.
Brian W. Ruttenbur - BB&T Securities LLC
Okay. And then, as part of that, you had on a year-over-year basis roughly a $5 million increase in marketing expenses.
Do you expect that level of marketing increase on a quarterly basis?
Michael O. Fifer - Chief Executive Officer & Director
No, not at all. In fact, the most significant component of that marketing increase was accruing for the summer programs.
If you'll recall, we've discussed in the past that in the quarter ending December 31, the fourth quarter of each year, we typically have a higher selling expense in that quarter than in other quarters because that's when we accrue for the spring programs. The accrual is based on the amount of inventory the distributors hold as of the end of the quarter, not based on how many total units we expect to sell, because the amount we sell will come both from the inventory they have in stock at the end of the quarter as well as the subsequent shipments to them.
And in this case you've seen the distributor inventory at the end of the quarter. It was a nice healthy number.
So we took a nice healthy accrual for the anticipated shipment of free goods in fulfillment of the summer programs and that – those shipments will occur probably after August and – because the retailers have – for the spring programs, they have January and February to place their order and they must receive the goods typically by the end of May to qualify. And we're doing the same thing this fall.
They have to place their orders in July or August and then there is, I think, through the end of November for us to fulfill them. And so it'll be the same pattern you see in the spring.
And that's why you saw the large selling expense that we just accrued. It's very comparable to the one we typically accrue in December.
Brian W. Ruttenbur - BB&T Securities LLC
Okay. So it – just a question about inventory that we should see – that you're comfortable with the level of inventory both internally and at distributors being maintained at these levels going forward or should they drop?
Michael O. Fifer - Chief Executive Officer & Director
First one, I'm very comfortable with the levels where they are now and I would expect the levels actually to peak sometime in mid-quarter, so you won't actually see them in the numbers, but that as the orders start to ship, probably the number at the end of Q3 will be less than the peak it hit somewhere in mid-Q3. And then my guess is that it will probably drop again significantly in Q4.
That's kind of the pattern you see. If we go back and look at the first half of this year, we had reasonably comparable inventory levels back on December 31.
Inventory dropped dramatically during Q1 as we received those spring orders and fulfilled those spring orders. And then we had a chance to rebuild it a little bit in Q2.
I wouldn't be surprised to see a similar pattern occur over Q3 and Q4.
Brian W. Ruttenbur - BB&T Securities LLC
Great. And then capacity, Mayodan, how much utilization are you putting through Mayodan at this point?
Michael O. Fifer - Chief Executive Officer & Director
The Mayodan guys are running full out, a lot of over time, and we're working hard to increase production there. It's a real success story.
Brian W. Ruttenbur - BB&T Securities LLC
That's outstanding. And then the last question is, number of new products that you plan to introduce in the second half of the year, including your Precision Rifle, will count that in the second half of the year?
Michael O. Fifer - Chief Executive Officer & Director
I'm not sure I understand the question, but we don't count new products until after they launch, that's correct.
Brian W. Ruttenbur - BB&T Securities LLC
Okay. Very good.
Thank you very much.
Operator
And your next question comes from the line of Brian Rafn from Morgan Dempsey Capital Management. Please go ahead.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Good morning, Mike.
Michael O. Fifer - Chief Executive Officer & Director
Good morning.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Relative to your new pipeline of products, if you looked at 2014 going into 2015, without – obviously we're not going to press you on getting (17:48) launches and that, obviously that's proprietary. But is there any color that you can kind of give us on maybe the pace of products coming on for 2015?
Is it – are we expecting kind of linear launches or clusters or is it just really too tough to describe?
Michael O. Fifer - Chief Executive Officer & Director
Brian, all our engineers are human, and guns are hard to design. It's really too hard to describe.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yeah. No, that's okay.
Let me ask from a new product launch, you guys did talk a little bit, Mike, about having some vertical integration being building and constructing some subcomponent assemblies such as, I think, the – that you talked about was the gun being ready and then figuring out that you needed a spring and that was on a four-month backlog. And you talked about not only being vertically integrated with parts but also enhancing what you call project management so that you could kind of – as you roll out that product, everybody was kind of on the same pace.
And I'm wondering as you're getting into 2015, have you made any additions or developments in either project management or vertical integration?
Michael O. Fifer - Chief Executive Officer & Director
I don't believe we've made any additions on the vertical integration side recently. We invested in metal injection molding business and that's been a big success for us.
And we've looked at from time to time vertically integrating some of the outsourced items, whether it's a heat treat or a finishing, and we've kind of deferred on those at the moment. We'll wait and see.
I think our approach is perhaps to launch new products, see how well it does, and if that new product is consuming a huge amount of outside resources, then to perhaps bring that resource in-house, but not to do it in anticipation. I think I've spent enough money on capital that sits around collecting dust, waiting for the project to finished.
I'm not going to do it anymore.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. Is that vertical integration?
Is that specific by plant, Newport versus Prescott, or is it more predominant in, say, rifles versus pistols, or revolvers versus pistols, or pistols versus something else?
Michael O. Fifer - Chief Executive Officer & Director
None of the above. For example, metal injection molding, we use it throughout our product line and in all our plants.
So it's been a big help to everybody. And remember, there's plenty of metal injection molding capacity outside available.
What this really does is accelerate the production of early parts and things. For example, if I can save six months of the development of a product because I can sort of force the priority list at out captive MIM house, that's worth a lot of money.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. All right.
Good enough. When you guys – you always talked I think in the past, you made some comments back about when you launch new products, obviously there is the whole testing cycle and prototyping and getting it right.
But you also talked about building inventory and making sure that when you created some buzz that you had good inventory. When you launch a product that looks like a fantastic product, the Precision Rifle, and your feature on a major gun magazine, Guns & Ammo or American Rifleman and you're on the cover.
Does that put an extra pressure on actually having that inventory day-one for that launch?
Michael O. Fifer - Chief Executive Officer & Director
It absolutely does. We've never yet had enough inventory on launch day.
But getting the cover of American Rifleman and all the wonderful other press and coverage we've gotten just exacerbates the problem. I've had a number of very happy consumers contact me about the gun because they got one, and a much larger number of consumers contact me very frustrated because they really, really want the gun and haven't been able to get it yet.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. All right.
That's good, and I appreciate the color on that. On the mini first mill side, number one and two up at Newport or two is coming online.
Can you give us any update on that?
Michael O. Fifer - Chief Executive Officer & Director
Number one and two are working fine. I haven't invested in number three yet because we did the analysis and concluded that adding three right now wouldn't let me turn off the legacy unit yet, but that day will come.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yeah. Okay.
I'll ask one more and then get back in line. Mike, can you just give us a sense of internal production in LC 2013, 2014 and 2015, you started off in 2013 with that big backlog, the lot of ghosting orders, guys who didn't have the credit for what they ordered, and kind of how you've modulated production, say, over the last 2.5 years and where you are today?
Michael O. Fifer - Chief Executive Officer & Director
Brian, first let me dispel the concept of guys not having enough credit for what they ordered. Actually our AR is in spectacular shape, as is our cash balance.
So our customers have really been very good to us. The challenge really has been that we announce a new product, we show it to them, they get excited, they put in a big order, and frankly, the old habits of ordering more than I really want or need hoping I'll actually get a bigger allocation if the limited guns are available.
So if really want 1,000, maybe if order 10,000, I'll end up getting 1,000.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Right.
Michael O. Fifer - Chief Executive Officer & Director
And we haven't really quite broken that cycle yet, but I am working hard on these more recent product launches to encourage sort of what I would call a rational order. We'll figure out how many we can really build in the next 90 days, I'll tell you that, and you place an order for a reasonable allocation of that production rather than placing just silly orders.
I mean, it – if we go back to the launch of the LCP some years ago, I think in the first 24 hours or 48 hours, we received orders for more than 100,000 units. And at that time, I think we were building 300 a day.
There was no prayer we were going to fulfill 100,000 units anytime too soon. So – and that was the old habit.
And we're trying to break that and we're not quite there yet, but we're working on it.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
That's good. And then on the production levels, Mike, where you – internal production, say, that has flowed through 2013, 2014 and now into 2015?
Michael O. Fifer - Chief Executive Officer & Director
Well, as you recall, 2013, literally any firearms manufacturer could pretty much sell anything they could build and get out the door. And I think we did a very good job in 2013 of cranking up our production.
I don't remember this percentage increase, but it – several years they're in a row where we probably want increased production more than 30% a year. And in mid-2014, we dramatically cut back production.
I think we cut it by more than 40% from the first half of the year to the second half of the year. And then you'll see that here in the beginning of 2015, we've raised it up.
We started raising it in Q1, and Q2 was 32% higher than Q1.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. Good.
Thanks, Mike.
Michael O. Fifer - Chief Executive Officer & Director
Okay.
Operator
And your next question comes from the line of Andrea James from Dougherty & Company. Please go ahead.
Andrea Susan James - Dougherty & Co. LLC
Hi, thanks for taking my questions. Good morning.
Michael O. Fifer - Chief Executive Officer & Director
Good morning.
Andrea Susan James - Dougherty & Co. LLC
So your recent releases, you've had some really strong ASPs. You've reported strong ASPs.
Do you think that continues or do you think things return back with some of the summer programs?
Michael O. Fifer - Chief Executive Officer & Director
It's very much tied to new product launches, and when you launch something like the Precision Rifle, which obviously wasn't in second quarter, right after it, that has a pretty high ASP. So that's going to temporarily jack those numbers up a little bit.
The AR-556 rifle did that as well. On the other hand, if I were to launch a new product like the LCP, which is at the other end of the spectrum, that would bring it down.
And then in fulfillment of the programs, we ship free goods, and the units for the free goods show up in units ordered, but because they are free good, there is no revenue. So, that, on the other hand, would drive the ASP down.
So there's some offsetting factors. Nothing material or significant is hidden in those numbers, and I wouldn't get too excited whether they go up or down $20 a quarter.
It's not that critical. The business hasn't changed.
Andrea Susan James - Dougherty & Co. LLC
Interesting. Thank you for that.
And there's been a lot of talk about the new product. You've had some real – it looks like real successes.
Are you happy with the product rollout, like, in terms of what you're telling your team, are the cracking the champagne or is it we're still kind of behind on what we had wanted to do that next year, let's keep – last year, let's just keep going?
Michael O. Fifer - Chief Executive Officer & Director
When you look at the actual products, I'm thrilled with them. They're really good guns, readily reliable, fun to shoot, and should do very well in the marketplace.
When you look at the timing, most of them have been in the budget more than once before they actually produce revenue, and that's kind of frustrating and sort of a never-ending challenge to try to improve our processes. And in fact, we have devoted a lot of effort this year to try to reexamine our engineering processes from the ground up with the thought that if we keep doing things the way we have been doing them, the results aren't going change in terms of timing of new products.
So we're looking for ways to improve our processes so that we can accelerate the development cycles.
Andrea Susan James - Dougherty & Co. LLC
Thanks. And then just one more.
Mike, from your seat, what's your take on the overall regulatory landscape? I saw in the news yesterday the L.A.
City Council has got a 10-round magazine ban. I'm not sure California affects you guys too much, but I'm just curious about your take on the whole country and all the moving parts and different laws?
Michael O. Fifer - Chief Executive Officer & Director
I think you can understand my feelings about it by our 2 Million Gun Challenge to support the ILA division of the NRA. And that's their legislative group that fights on behalf of our rights.
And I think it sets a never-ending battle. You can't ever let your guard down.
Every election cycle, certain number of politicians will support you and a certain number, even if they personally have guns and like them and some of the worst anti-gun politicians have carry permits of their own that they don't want publicized. And they're still going to just pick one side of the political battle and cause you trouble.
So we can't let our vigilance down and we have to be ever cautious and try to protect our rights. Now, I would say, as an industry, we were probably very reactive for a long time, and fortunately, we've got much proactive in recent years.
And so hopefully that bodes well for the future.
Andrea Susan James - Dougherty & Co. LLC
Thanks, Mike.
Operator
And your next question comes from the line of Colin Moran from Abdiel. Please go ahead.
Colin Moran - Abdiel Capital LP
Hi, Mike. Can you talk about what you think the key product features of the Precision Rifle are that are going to appeal to the consumer?
And I'm particularly interested in anything, say, about its accuracy.
Michael O. Fifer - Chief Executive Officer & Director
Okay. I don't want to get in too much details.
I'm not sure how many of the investors and analysts want to know the details of the product. I will say that there is extensive information available on our website as well as links to many magazine articles, blog articles and videos.
But the key to one of these rifles is accuracy, and this is definitely a sub-minute-of-angle accurate gun. And I – out at FTW Ranch, which you'll see in some of the videos, I had no trouble shooting it right out to 1,600 yards and shooting the center of a one-inch plate at 1,600 yards.
Now, the caveat is I had a very good wind collar because that plays a big role. But it's a very, very accurate rifle.
One of the keys to that is adjustability, to adjust the stock and everything to fit you perfectly so that you shoot well. And this is an extremely adjustable gun as well as having a fantastic barrel with good rifling.
This gun doesn't require betting at all. So it's a pure in line recoil.
I don't want to get into too much technical detail, so I'll kind of stop there. But for the folks who would appreciate that, they know and recognize what these features bring to them, and so they get very excited about it.
And remember there's two groups who we're really trying to appeal to here. One is the group that actually has access to long-distance ranges and can enjoy the benefits of this gun out to very long distances, and the other group are folks who really don't.
They're limited to a 100-yard range. But on the other hand, they can outshoot all their buddies if they have this gun, and that's kind of fun too.
Colin Moran - Abdiel Capital LP
Got you. And when you think about the capacity you built out for this gun relative to, let's say, maybe the Rimfire, just kind of sizing, is this – did you build out the ability to produce more of these, less of these, comparable?
Michael O. Fifer - Chief Executive Officer & Director
Well, I think if you can sort of picture in your mind a pyramid and your lower-priced items are at the bottom of the pyramid where the base is very wide and your higher-priced items are at the top of the pyramid, this is one of the most expensive products from Ruger even though it's probably about 25% the cost of a comparable custom gun. So it's a fantastic value, but nonetheless, the number of people who can afford a $1,000 rifle is much, much smaller than the number of people who can afford a $200 rifle.
So the base for things like a Rimfire is much, much broader and we make a lot more of them per day than we'll make of this gun.
Colin Moran - Abdiel Capital LP
Got you. Okay.
And I'm interested also just in how you'd characterize the degree of sort of discounting and price pressure from your competitors, particularly thinking about comments made by Smith & Wesson about how aggressive they want to be using price to take share?
Michael O. Fifer - Chief Executive Officer & Director
Well, sticking with the Precision Rifle, they have no comparable product. So it's irrelevant.
Where they're going to try to compete probably is in the somewhat crowded small semi-automatic pistol market. And there are a lot of competitors offering guns.
Smith has a fairly healthy share of that market. We have a healthy share of that market.
The other major brands that you would expect like Glock and Springfield Armory and SIG and – I hope I don't forget too many names or my competitors will get annoyed at me for not mentioning them, but that's a crowded field. That's like saying a full-size semi luxury car.
There's a lot of brands out there. If they drive by too quickly, they all look the same, and it's hard to differentiate yourself and – but the very best ones, we know which ones those are and the features are outstanding, and they command a higher price point.
And the ones that just aren't quite there, they're fighting and scrambling based on price. And I would say the small semi-automatic pistol market is not that much different from autos as an analogy.
But when you get something like the Precision Rifle, there's just nothing like it.
Colin Moran - Abdiel Capital LP
Okay. And then just – is there much kind of accessory follow-on to a product like the Precision Rifle?
I'm thinking of scopes, but just how significant is the opportunity of products that kind of are related to it?
Michael O. Fifer - Chief Executive Officer & Director
Well, if you look at the 10/22 rifle, which has been around for a long time, and extremely popular. We're selling more of them than ever these days.
That's the gun that's very customizable. Hope that's a proper word there.
And there's a whole industry of small vendors providing sort of neat add-on accessories for that gun. And shame on us, it's the accessory market that we largely ignored for decades.
And then finally we came out with the BX-25 magazine and sort of shut down our competitors in that category and we really dominate that now, and it's proven to be extremely profitable for the company and a great investment. So then we followed on with the BX-Trigger and that's off to a great start.
But still there's so many accessories out there for that gun and so many little vendors with cool new features and things that it's thriving. I could see the Precision Rifle being similar because it uses so many – or it can accept so many mil-spec standard AR or M4 type products, whether it's a butt stock, a grip, heat shield, whatever – sight, scopes.
So there's a lot of opportunity. Now the only two accessories that I can think of off the top of my head there, we have some pop-up sites that are terrific for an M4 or AR style gun, but this is a Precision Rifle and you're probably not going to shoot 800-yard targets with open sights unless you've got 14-year-old eyes.
You are certainly not doing it with eyes my old – as old as mine. And then we have the 452 Elite trigger.
And that's the kind of product you might buy for your AR and put it in and make it much more fun to shoot, but on the other hand, this Precision Rifle already has a really spectacular trigger. So you're probably not going to upgrade that trigger.
So, as time develops, we will look for opportunities for accessories for it, but I think a little cottage industry will grow up around it and provide a lot of products.
Colin Moran - Abdiel Capital LP
Got it. Thanks.
Operator
And your next question comes from the line of Scott Hamann from KeyBanc Capital Markets. Please go ahead.
Scott W. Hamann - KeyBanc Capital Markets, Inc.
Thank you. Good morning, guys.
Just in terms of the inventory dynamic, the turns are at levels where they've come on below the threshold that you've identified as ideal. And I'm just curious on the commentary for the back half of the year that absolute inventory levels go down.
I mean, are we – is the assumption that retail is going to accelerate at the back half of the year or how should we think about – are you shipping on a one-for-one replenishment basis, or how are you thinking about that for the balance of the year?
Michael O. Fifer - Chief Executive Officer & Director
I think it's not so much an issue of retail accelerating the back half of the year, but it's in comparison to last year when retail decelerated dramatically in the back half of the year, where – if you try to analyze last year why did retailers sign up for so many programs from Ruger in the first quarter of last year, because they're optimistic, Ruger products were still selling through dramatically, 2013 was continuing on. Nobody – if I can't time markets in your business, well, it's pretty hard to time markets in the firearms business too if you're a firearms retailer.
And then it started to slow down in Q2 and just sort of fell off the map in the latter half of 2014, finally picking up very late in the year and through Q1. We got a lot of anecdotal reports back that things were improving.
But last year was very, very tough for the retailers. And it was probably tougher for them with their Ruger product in the second half than it may have been for some of the other brands, and one of the reasons was our price discipline.
And so the retailers were okay with holding the inventory. They knew it wouldn't be devalued, but if they got a special buy on a competitor's gun, they could pass that through, they could entice the consumer into their store and cause the transaction to happen.
But it wasn't necessarily a Ruger transaction because we didn't lower prices. So, relative to last year, I would expect that the retailers are in a better inventory position now.
They're not feeling overstocked the way they were a year ago that they expect to sell more Rugers at the consumer level than they did a year ago. And that's less an issue of accelerating from the first half of the year.
I have no idea how it's going to do compared to the first half of this year. But they all feel much better about the Ruger inventory position and how they're going to sell Rugers in the second half compared to last year's second half.
Scott W. Hamann - KeyBanc Capital Markets, Inc.
Okay. And just thinking about the industry and you just touched on some of the competitors, when you kind of think about the pricing dynamic that seemingly weakened a little bit towards the end of last year, inventories are back at higher levels this time of year than they were earlier in the year.
So – I mean, what do you think the strategy is on part of a lot of players in the industry. Have we seen a bottom in pricing or do you think they will continue in some of these categories, like you just talked about the smaller caliber handgun category that we might continue to see more aggressive pricing to drive demand?
Michael O. Fifer - Chief Executive Officer & Director
Well, first off, I struggle to forecast anything about Ruger and then taking that one step further to forecast my competitor, that's really beyond my ability. But there are – normally, seasonally, there are the buying group meetings typically held I think in August and maybe early September.
And pretty much the other manufacturers have always participated in those and Ruger never had participated in those. So I imagine they'll do it again this year and they'll offer some programs again this year.
But that's not new or it's not unusual. It's happened every year.
The big difference this year is that for the first time, certainly in my tenure, we're going to offer summer programs and see how they do. It's a bit of an experiment.
Well – and if they work well, I'm sure we'll do it again in the future, and if they don't accomplish anything meaningful in incremental sales, I would probably won't do it again.
Scott W. Hamann - KeyBanc Capital Markets, Inc.
Okay. Can you give some context around what these programs look like?
I mean, are they similar to what you would do at the distributor shows at the beginning of the year?
Michael O. Fifer - Chief Executive Officer & Director
Identical.
Scott W. Hamann - KeyBanc Capital Markets, Inc.
Okay. And then last question on ASP.
It seems like accessories were a bigger part of the mix here in the second quarter. I'm curious what level of accessory sales you have or maybe another way what the ASPs have looked like and had you not included some of the accessories in there that seemed like they are making that growth look higher?
Thanks.
Michael O. Fifer - Chief Executive Officer & Director
Yeah. We don't actually separate that information out.
I don't have it and can't provide it. But we have, as I said, started to monitor how accessory sales are doing, and obviously they peaked, I think it was mid-2013 during the big political crisis.
And then I think they declined a good bit particularly in the second half of 2014. And then remember, in January, we launched a bunch of new accessories.
They've done well. Some of the older accessories that had slowed down a little bit in 2014 like the BX-25 magazine have kicked back up.
And we're pleased with it, and they're showing signs of life again.
Operator
And your next question is from the line of Adam Starr from Gulfside Asset Management. Please go ahead.
Adam L. Starr - Gulfside Asset Management LLC
Hi. Two quick questions, I know the last two years have been kind of distorted or last few years, but is there typically a seasonality with more drawdown in the second half because of hunting season and holidays of that.
Is that a typical pattern in a normal environment?
Michael O. Fifer - Chief Executive Officer & Director
Adam, there is definitely some seasonality in the business. Ideally it would be leveled throughout the year because manufacturing plants operate best one level loaded.
But there is both seasonality of the consumer behavior and then there is seasonality of retailer buying behavior. The retailer buying behavior isn't necessarily the same as the consumer buying behavior.
The retailers tend to respond to the buying seasons, whether it's the distributor shows in the spring, where the buying groups, they have a set of shows in the spring and a set of shows in late summer, whereas the consumers respond more to literally weather sports when school gets out. Vacation schedule, the start of hunting season, and you can sort of track those different things in different segments of the market.
For example, the self-defense market may be driven more by a new cycle. The hunting market is literally driven by, nuts, it's Friday before hunting season, I'd better get a new rifle and get a scope mounted on it tonight because tomorrow morning I'm going to be in a deer blind.
So they are a little bit different, but I'd say the retailers mostly respond to the buying programs set by the distributors and the buying groups, probably more than – and the consumers, they just respond to a whole lot of different inputs.
Adam L. Starr - Gulfside Asset Management LLC
Are the retailers weighted towards certain parts of the year than the second half versus the first half or third quarters? I know the new cycle is really distorted with the political interference in the last year.
Michael O. Fifer - Chief Executive Officer & Director
Yes. I mean, there's definitely some seasonality on the order pattern for retailers.
For example, there is heavy, heavy ordering in January and February. And then those participating in the buying groups, there was heavy ordering in sort of late August and in September, which isn't necessarily the same as describing when those orders got fulfilled.
Remember our spring buying programs given two months to place the order, but then five months for the distributor to fulfill the order to them. And then really in a few cases in the past, we didn't cut it off cleanly always on May 31, sometimes some of those orders dribbled into the third quarter.
We were still fulfilling those. More recently, we've shown a little more discipline in that category, especially knowing that we were planning to do summer programs for the first time, we did – we were a lot more disciplined about cutting off the spring program fulfillment.
Adam L. Starr - Gulfside Asset Management LLC
Thank you. And then my other question was, you showed a big improvement in the operating margin and the gross margin this quarter, with sales up and cost of good sold down.
Was that a function of the mix and the more accessories, and is that a sustainable improvement?
Michael O. Fifer - Chief Executive Officer & Director
It was not really a function of mix as much as it was a function of volume. Literally, the simplest way to put it is, a busy factory is a happy factory.
When the guys have a lot of overtime, they're really happy. They may grumble and complain about the amount of overtime, but they're very happy.
When you cut their overtime and thereby really cut their income, they're very unhappy, and folks, even though we haven't done layoff, people would still get nervous about it during the slowdown like we had in the second half of last year. And being humans, say, everybody slows down a little bit, something that may have taken them 32 seconds to do on the production line before certainly is 45 seconds to do.
And then when you crank it up and there's sort of more work than they can get done, now are down to 28 seconds to get that task done. It's just more efficiency.
A busy factory is a happy factory.
Adam L. Starr - Gulfside Asset Management LLC
Now, looking versus the first quarter in absolute dollars, your cost of goods sold was down. Is that strictly a function of happiness?
I mean, you were actually spending less money.
Michael O. Fifer - Chief Executive Officer & Director
Hold on. Tom Dineen is grabbing the financials and trying to look at what you're looking at here.
We'll see if we can answer on the fly, if not, we may have to - Tom is giving me a little bit of absorption language here on the side here. I'll tell you, we do another measure that we don't typically publish, which is we measure the sales value of what we produce.
We call it sales value of production. And that sort of takes out the distortion of putting goods in inventory or of taking goods out of inventory.
And our production cost as a percentage of the sales value of production has declined quarter-over-quarter, which is a result of that happy factory. Any other particular distortions are, you're absorbing a little bit of inventory in Q2, but in Q1 you actually pulled a lot of – a lot of your sales came from inventory.
We had a significant inventory reduction in Q1 offset almost unit-for-unit in inventory build in Q2. We have gotten more efficient.
Adam L. Starr - Gulfside Asset Management LLC
And so you would look at the current margins as being fairly sustainable then?
Michael O. Fifer - Chief Executive Officer & Director
I would say, at this production rate -
Adam L. Starr - Gulfside Asset Management LLC
Yeah.
Michael O. Fifer - Chief Executive Officer & Director
– the current margin is sustainable, but if we were to go back to the old production rate, then probably those margins would be more indicative. (50:57) if you grab our MD&A out of the 10-Q and you look at the section on overhead rates and labor rates, we sort of explain in there what's happening to the efficiency, and that really drives what happens to those rates and they charge it to the P&L from those items.
So, for example, when we're becoming more efficient, we have to take a charge against all our inventory. We have to take an expense against it.
And have to call this goofy accounting, but if you become less efficient, you actually show income. It's legitimate GAAP accounting although it does sort of make you scratch your head.
Read that section of the MD&A.
Adam L. Starr - Gulfside Asset Management LLC
Thank you very much.
Michael O. Fifer - Chief Executive Officer & Director
Okay.
Operator
And your next question comes from the line of Brian Ruttenbur from BB&T. Please go ahead.
Brian W. Ruttenbur - BB&T Securities LLC
Yeah. Just a quick follow-up.
I wanted to know what your priority of your building cash balance is? Dividends, share repurchases, acquisitions, can you just give me a rank order of what you think the priority of your cash building return to shareholders is?
Michael O. Fifer - Chief Executive Officer & Director
I would say we're more opportunistic rather than having set a particular priority. As you saw when the stock got to levels in hindsight seemed very low, we bought a bunch of stock back.
When the stock is at prices that seem close enough to reasonable that the market can determine the outcome, we stay out of it. If the stock price ever gets ridiculously silly on the high side, maybe I'd entertain doing a secondary.
Acquisitions, we keep looking and we have not found a reasonably-priced opportunity. Remember, we're not a PE firm; we're not worried about dressing it up and flipping it in five years.
We buy something, it's to keep it forever and it has to pay for itself through its own cash flow. And right now, that deal doesn't exist out there.
And as you've seen from our prior behavior, I kind of like dividends and I particularly like special dividends. And so, at $61 million, we're a long way from a special dividend, but if we get back up in the zone where we were before, north of $100 million and no immediate opportunities and a reasonable stock price, I might just recommend to the board that we consider one again.
Operator
And your next question comes from the line of Brian Rafn from Morgan Dempsey Capital Management. Please go ahead.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Talk a little bit about carrying a little more inventory. You had a safety stock inventory number of about $15 million you talked about.
Are we well north of that as you go into 2015?
Michael O. Fifer - Chief Executive Officer & Director
So you want to know the inventory level of finished goods? Is that what you're asking?
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Yeah. Yeah.
I'm just looking at – yeah, your finished goods. I guess it's more a safety stock maybe by different lines.
Are you comfortable with where you're at and per your comments about certainly 2010 into 2011?
Michael O. Fifer - Chief Executive Officer & Director
All right. Well, for everyone on the call, if you would take a look at Note 3 to the financial statements on page nine of the Q, it actually breaks it down and our inventory of finished goods at FIFO is right now – or on June 27, it was $16.5 million compared to $20 million at December 31, 2014.
So it's actually down a little bit. But I think that $16 million to $20 million is a comfortable zone for us.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. Okay.
On your – you talked about your engineering teams are putting five to six guys together – mechanical, a couple of manufacturing engineers. When you develop products, Mike, do you reconstitute those teams or do those engineering design teams stay fixed and it's fixed in a specific by rifle, by pistol, by revolver?
Michael O. Fifer - Chief Executive Officer & Director
No, we rotate guys all around and move them in and out of projects.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay.
Michael O. Fifer - Chief Executive Officer & Director
It's good for their development and good to have a fresh set of eyes and new ideas. Yeah, we move the guys around a lot.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Good, good. At Mayodan, how many lines and what – let's say, what percentage of the floor space footprint would be occupied now?
Michael O. Fifer - Chief Executive Officer & Director
I think we have four lines there, which are the Rimfire bolt-action rifle, the Rimfire American. We have the SR22 pistol.
We have the SR line of modern sporting rifles, which is the piston-driven rifles. We have the AR-556 line, which is the gas impingement modern sporting rifle.
So those are the four lines. We have a new product line that I would say is through at least all the initial design stages but is on hold at the moment because every engineer in Mayodan is hard at work on increasing capacity on several lines down there.
And this is kind of a swag, but I think we're less than half the building at this point.
Brian Gary Rafn - Morgan Dempsey Capital Management LLC
Okay. All right.
Good.
Operator
And your next question is from the line of Andrea James. Please go ahead.
Andrea Susan James - Dougherty & Co. LLC
Thanks for taking my follow-up. There is a lot of industry chatter about this new army sidearm upgrade.
And I just wanted to ask, do you plan on throwing a pistol into the ring, and then also in general, what's your take on the pros and cons of going after the professional market? Thank you.
Michael O. Fifer - Chief Executive Officer & Director
Quick take on the pros and cons, Andrea, is that there's enormous cause to participate and an extremely low likelihood for any one company of winning it. And there's been a lot of talk now that maybe they don't need to change caliber that maybe 9 millimeter is okay.
And if that really becomes the driving force, and from a budget perspective, it probably will, especially as the military considers use of hollow point ammo instead of strictly ball ammo, that makes the 9 millimeter phenomenally more effective as the stopping weapon. I think it's highly likely that Berreta (57:45) would get to keep it.
They'd find a way to do a little cost reduction, a little bit of product improvement. And from a logistics perspective, which drives a huge portion of their budget, they're going to be nuts to change.
They'd be much better off, pretty much with what they've got. And so, that adds to the risk factor of putting the huge investment of time, people and money into competing for something that there's really very low likelihood of winning even if you have a much better product.
And so those are kind of the pros and cons right there. If you win it, obviously you're in the capital receipt for the next 25 years, but I have a feeling competing for it's going to be a little bit like being hit against a brick wall, and you'll feel real good when you stop.
Andrea Susan James - Dougherty & Co. LLC
Appreciate it. Thanks.
Operator
I would now like to turn the call back over to Michael Fifer for closing remarks.
Michael O. Fifer - Chief Executive Officer & Director
Thank you, everyone, for participating. I appreciate your continued interest in Ruger, and I'd also like to thank our 2,200 dedicated folks at the Ruger team who work at heart everyday to deliver rugged reliable products to our very loyal customers.
Thank you, all.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Thank you very much, and have a very good day.