Nov 4, 2021
Operator
Good morning and welcome to the Q3 2021 Sturm Ruger Earnings Call. At this time, all participants are in listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. .
As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Chris Killoy please go ahead.
Christopher Killoy
Good morning and welcome to the Sturm Ruger & Company third quarter 2021 conference call. I would like to ask Kevin Reid our General Counsel to read the caution on forward-looking statements.
Then Tom Dineen, our Chief Financial Officer will give an overview of the third quarter 2021 financial results and then I will discuss our operations and the state of the market. After that, we'll get your question, Kevin?
Kevin Reid
Thanks, Chris. We 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, 2020, and of course, on the Form 10-Q for the third quarter of 2021, which we filed last night.
Copies of these documents may be obtained by contacting the company or the SEC or on the company website at ruger.com/corporate or of course the SEC website at sec.gov. We do 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, 2020, and on our Form 10-Q for the third quarter 2021, both of which are posted on our website. Furthermore, the company disclaims all responsibility to update forward-looking statements.
Chris?
Christopher Killoy
Thank you, Kevin. Now Tom will discuss the company third quarter 2021 results.
Thomas Dineen
Thanks Chris. For the third quarter of 2021, net sales are $178.2 million and diluted earnings were $1.98 per share.
For the comparable prior year period, net sales were $145.7 million and diluted earnings were $1.39 per share. For the first nine months of 2021, net sales were $562.7 million and diluted earnings were $6.64 per share.
For the corresponding period in 2020, net sales were $399.6 million and diluted earnings were $3.31 per share. The substantial increase in profitability for the third quarter, compared to the third quarter of 2020 was primarily attributable to the increase in sales and production resulting in favorable leveraging of fixed costs, including depreciation engineering and other indirect labor expenses.
Compared to the second quarter of 2021, profitability declined principally due to three factors; first, all of our firearms facilities took a very well-deserved shutdown week in July, which reduced the number of work days in the quarter to 59 compared to 64 work days in Q2. This decrease in production reduced sales and resulted in some unfavorable de-leveraging of fixed costs.
Second, after a relatively quiet second quarter, COVID positive cases in our plants more than tripled in the third quarter. This resulted in significant increases in loss production and third, following six quarters of exceptional demand, accessory sales decreased from the second quarter adversely impacting our overall profitability.
Our strong financial results delivered significant cash generation. During the first nine months of 2021, we generated $117 million of cash from operations.
We reinvested $15.6 million of that back into the company in the form of capital expenditures. We estimate that 2021 capital expenditures will be approximately $20 million predominantly related to new product development.
Our ability to shift manufacturing equipment between cells and between facilities improves our overall utilization and allows for reduced capital investment. Our balance sheet at October 2, 2021 remains strong.
Our cash and short-term investments, which are invested in UST bills totaled $192.7 million. Our current ratio was 3.8 to 1, and we had no debt.
Our stockholders' equity was $338.1 million, which equates to a book value of $19.21 per share of which $10.95 per share was cash and short-term investments. In the first nine months of 2021, we returned $45.2 million to our shareholders through the payment of dividends.
Our board of directors declared a $0.79 per year quarterly dividend for shareholders of record as of November 15, 2021 payable on November 30, 2021. Upon receiving the $0.79 quarterly dividend, shareholders will receive $3.36 of dividends per share in 2021.
As a reminder, our quarterly dividend is approximately 40% of net income and therefore it varies quarter to quarter. That's the financial update for the quarter, Chris?
Christopher Killoy
Thanks Tom. Demand for our products remained strong, despite a moderation of overall industry demand as reflected in the last two quarters of adjusted mix, we shipped all the firearms that we built this quarter without the need to aggressively promote or discount any of our products.
We've just begun to replenish the distributor and retail inventories that were largely depleted over the past 18 months, putting us in a great position as we head into the fourth quarter, which has traditionally been a period of strong demand. The estimated units sell through the company's products from the independent distributors to retailers increased 9% in the first nine months of 2021 compared to the prior year period.
For the same period, the national instant criminal background check system background checks as adjusted by the National Shooting Sports Foundation, commonly referred to as Nick's checks decreased 11%. The increase in the sell through of the company's products compared favorably to the decrease in adjusted Nick's background checks and maybe attributable to strong consumer demand for Ruger products, increased production in 2021 and the introduction of new products that have been met with strong demand.
New product development continues to drive results. The MAX-9 pistol and the Ruger LCP MAX pistol, which were both launched in 2021 remain in strong demand.
In the first nine months of 2021 new product sales represented $116 million or 22% of firearm sales compared to $88 million or 24% of firearm sales in the first nine months of 2020. As a reminder, we include only major products introduced in the past eight quarters in our new product sales metrics.
Derivatives product line, extensions of mature product families and models introduced more than two years ago are not included. We are hard at work on some exciting new product initiatives, including the return of Marlin lever action rifles, which we plan to begin shipping later in the fourth quarter.
Since March of 2020, our workforce has been strengthened by 370 folks, an increase of just over 20% and our quarterly unit production has increased by more than 160,000 units or 45% during that period. A 20% increase in personnel yielding a 45% increase in production, that is a tremendous accomplishment by our operations teams at all of our manufacturing plants.
Despite the growth in production at the end of third quarter 2021, our finished goods inventories remained near historic lows and distributor inventories of Ruger products were 150,000 units lower than they were at the end of 2019, the last time inventories were at what we would consider normal or expected pre COVID-19 levels. As Tom mentioned earlier, after an unprecedented 16 month run of seemingly insatiable product demand and continual monthly production increases, we took a one week shutdown during the first week of July.
This was our first shutdown in two years, which gave our workforce a very well-deserved break and allowed us to perform some routine maintenance and reconfigure some of our manufacturing operations. The shutdown reduced our third quarter production, sales and earnings, but that was a small price to pay.
It was the right thing to do and I'm glad we did it. Our dedicated and hardworking folks deserved and needed a break and after the shutdown, we were better prepared as we head into what we expect will be a busy fourth quarter and 2022.
Since the onset of the COVID-19 pandemic in March 2020, we have remained proactive in maintaining the health and safety of our employees and mitigating its impact on our business. We provide all hourly employees with additional paid time off and offer incentives to any employee who becomes vaccinated.
If practical, we allow employees to work remotely and we continue to follow robust cleaning, sanitizing and social distancing protocols to maintain a cleaner and safer workplace. With the United States, once again, seeing a rise in COVID-19 cases and positivity rates, we remain vigilant and are proactively adjusting our plan accordingly to keep our associates healthy and safe and to minimize any disruption to our business.
Our financial strength evidenced by our debt-free balance sheet provides financial security and flexibility as we manage through the challenges like COVID-19 and remain focused on our long-term goals and the creation of shareholder value. In the third quarter, we added a 225,000 square foot facility in Mayodan, North Carolina, about a mile and a half down the road from our original Mayodan building that we purchased in 2013.
This new facility doubled the size of our footprint in Mayodan provide some room for expansion. We moved our finished goods inventory, our shop Ruger operations and our customer service call center into the new facility.
This freed us the manufacturing space in our original building in addition to the overall, excuse me, to the available space in the new facility. Those are the highlights of the third quarter of 2021.
Operator, may we have the first question
Operator
All righty. And your first question comes from the line of Ryan Meyers with Lake Street Capital Markets.
Ryan Meyers
Again, thanks for taking my questions this morning. So looks like we saw units ordered come down a little bit to about 218,000 compared to the past several quarters, which is quite a bit lower.
Just wondering if you guys can unpack that a little bit and give us some commentary on what's going on there. If you're seeing retailers ordering less firearms or why this number was quite a bit lower than what it's been in the past several quarters.
Christopher Killoy
Ryan, thanks for the question. I think as most of you that follow Ruger know we don't pay as much attention to that orders -- units ordered on a weekly or monthly basis.
What we really look at is what our distributors are selling. When you think about it, we had a very full and still have a very full order book when we entered Q3 and then when we entered Q3, we're still at 1.3 million units on order at the end of Q3.
And at some point our distributors have enough on order. This is -- we just met with our distributors at the National Association of Sporting Goods Wholesalers show in Columbus, Ohio last week.
And that's a pretty healthy order book at 1.3 million units. So I think at some point the incoming order rates slow.
They know that they've got enough orders on in with Ruger. They know the orders would Ruger are non-cancellable unlike some other companies and so I think that's primarily the reason.
Ryan Meyers
Okay. That makes sense and then how are you guys thinking about pricing into the fourth quarter and then into 2022?
Christopher Killoy
Good question. I don't anticipate major changes in Q4.
However, I think with 2022, we are likely going to need some additional pricing adjustment to really to compensate for what we're seeing in supply channel. We're not -- we're not alone in that.
I think that's not unique to Ruger within the industry or within any industry right now between the commodities pricing, raw material and freight and everything else we use in commerce. Those prices or costs are increasing and I expect that we'll probably take a modest price increase on or about January 1.
Ryan Meyers
Okay. And then, just kind of looking at supply chain wise, obviously most of your guys manufacturing done here in the United States, which is a positive, are you guys seeing any challenges anywhere as far as sourcing, certain components or any sort of detail on how you guys might be impacted by the supply chain problems that seems like everybody's talking about?
Christopher Killoy
Good question. you're correct in that virtually everything that goes into a Ruger firearm is procured in the United States.
However, a lot of things like resins and some of those raw materials that our suppliers acquire may come in from offshore as well as just things like the cost of fuel for the shipping and trucking industry to move things about, all of that factors in there. But our supply chain folks at the factories have done an amazing job navigating through that.
So far, we've probably had some spot shortages where we've come close, but we haven't to my knowledge, I don't think we've shut anything down. We've been able to pivot a we'll perhaps make shift gears and make a different model 10-22 based on a shortage of one particular stock or one particular site, but all that's been able to been worked through by our operations teams.
Ryan Meyers
Okay. That's helpful.
And then, is there any way that you can quantify the impact of a one-week shutdown as far as production units that you guys didn't think you were able to get out there? Any way you can quantify the actual shutdown itself?
Christopher Killoy
Well, when you look at the number of working days in a quarter, you got, we use a four or five week quarter. So you've got basically five extra, five days that you weren't working.
So it's 7% to 8% is typically what that impacts.
Ryan Meyers
Okay. All right.
That's all I got for you. Thank you.
Operator
And your next question comes from the line of Rommel Dionisio with Aegis Capital.
Rommel Dionisio
Yeah. Good morning.
Chris just a couple of questions on the Mayodan expansion first, I know there's a lot of talk about labor shortages and difficulty procuring labor in many parts of the country. Could you just give us a feel for what it is in that particular part of the country?
Is that an issue at all? And second sort of, I missed this, but did you talk about what the timing of just clearing out some of these or clearing out some of the room for additional expansion of manufacturing in the current facility in the near move.
I wonder if you could just talk about the timing of all that. Thanks.
Christopher Killoy
Yeah. Well, as I think you Rommel, our three major manufacturing facilities are Newport, New Hampshire, Prescott, Arizona, and Mayodan, North Carolina.
Mayodan is the newest facility. We acquired that plant in 2013 and we've been steadily adding to that with new lines come in.
The team down there has done a great job. That's also the center of gravity for our Marlin acquisition.
Virtually everything we acquired from Remington on a Marlon transaction was sent to a Mayodan. Initially it was moved to a staging area and then integrated into our main factory.
And so what this allows us to do is really to expand our footprint in Mayodan. We're only a mile and a half down the road from our existing plant.
It allows us to use our same strong management team down there. And frankly, our ability to hire folks has been pretty solid.
The workforce in Mayodan is a good one. The people like working for Ruger and I think it provides us a lot of a future opportunity.
It doesn't mean we're trying to move anything or close anything from the other factories. On occasion, we may move one particular line or shift resources between factories.
But it doesn't mean we're getting out of it any other locations, but it does give us a significant opportunity, basically doubles our square footage. And that plant is in the process of being upfitted as we speak to allow us that flexibility in the manufacturing to move lines or add lines as needed.
Rommel Dionisio
Okay. But just to clarify Chris, you're going to be -- you'll be in good shape for the Marlin lever action launch here.
It'll be done and ready for that in Mayodan.
Christopher Killoy
Yeah. So we're planning a mid-December launch of the Marlin product line.
Now we'll be initially as we just reviewed with our wholesalers down at the at the NASGW meetings last week, it'll probably be less than the market wants. In fact, I'm sure based on the overwhelming demand we've seen from consumers and retailers, I'm sure it will be fewer guns and fewer SKUs than the market wants, but we will launch it probably on or about December 15, somewhere in that time period, begin those shipments to distributors.
And again I expect there'll be lots of calls and emails into the say looking for more Marlins because the first samples frankly, were just outstanding. The first sample that I saw was came off the line a few weeks ago and it was a beautiful model, 1895 in 45-70 caliber and it just looked gorgeous.
So we're very excited about that and we are on track to that into Q4 launch.
Operator
Your next question is from Ryan Hamilton with Morgan Dempsey Capital Management.
Ryan Hamilton
Good morning, everyone. Congrats on a good quarter.
Could you walk us through, I always ask, could you walk us through the cadence of the quarter, how July looks compared to June and so on?
Christopher Killoy
Well, we typically don't give information out on the monthly breakout, but we did start to see what we'd call I'll say this a little bit of a summer slowdown. Typically we see a seasonality come into our business, and typically that slows down and in May, June and July picks back up in August, as people get ready for hunting season.
We saw a little bit of that, but nothing like in years past. It was still the deafening was more muted than we'd seen in the past.
And so while there's a little bit of that slow down as we hit those warmer months nothing like in some years past with that traffic really dies down at the store. So the interesting thing here was, given there was so little inventory or retail, it was difficult to tell as far as what was that impact.
One of the things you're seeing right now we hear every day is ammo availability continues to impact many product categories. We've seen certain hunting rifle calibers in short supply, but our friends in the ammunition business are doing their best to get caught up.
And I think it's getting better and we'll get better as we go into 2022.
Ryan Hamilton
You just answered my next question. I think, you know me too well.
So refresh my memory, Chris, and I know that you don't break this out traditionally as a generalization, do rifles demand a higher margin than most pistols and revolvers?
Christopher Killoy
Not necessarily. A lot of it, margin in terms of percentage versus margin dollars, we've got some relatively, I'll say less expensive models that have great gross margin percentages.
But again, from a dollar standpoint are not as significant as some of the other ones. So it's really Marlin family specific and obviously depends a lot on the composition of materials we have in there.
The labor content and probably most significantly is the competition we face in the marketplace.
Ryan Hamilton
Sure. I'm trying to model out, what the impact from Marlin should be, or is going to be.
And I know you don't break this out, so that's kind of where I was going.
Christopher Killoy
I got your, yeah, we're still working through that. And, I expect it would be in line it's obviously going to be incremental, but it's I expect it would be in line with our other rifle products that we build at Ruger.
We've got -- we'll be making all the wood and laminate stocks with Marlin product line, those we made in our existing wood plant up in Newport, New Hampshire. The teams up there have been doing a great job working together with the folks in Maiden and, and so I think it would be comparable to existing Ruger rifle products.
Ryan Hamilton
Well, the Ruger name be stamped on the firearm somewhere on the rifle.
Christopher Killoy
No, it won't be. We're going to maintain the Marlin brand.
We're very proud of the Marlin brand and its history. We've got a couple of things.
I think Marlin collectors will be very excited about as far as how will we configure the serial numbers. Some minor changes that we think collectors will enjoy seeing but maintaining that Marlin legacy and the great things about Marlin, particularly the Sapphire lever action guns with some -- what we think are some great enhancements.
So more to come on that, but we're very excited about it. We've got a good team of operations and product and marketing folks working on that rollout and I think we're going to have fun with.
Ryan Hamilton
No, it sounds great. Last quarter, I believe you said you were roughly at 1900, as far as headcount goes, where are you at today roughly?
Christopher Killoy
A little, a little more, probably about 1,950 if I recall the numbers from few days ago, so about 1,950 folks,
Ryan Hamilton
And I know that really pushed the new products. So are you missing any key elements on a design engineering or is it mostly on manufacturing where you'd like more bodies?
Christopher Killoy
Well, we certainly need more folks in all three of our factories right now. That's for sure as far as building the guns.
But we're always on the lookout for great engineers. We've got a lot of those engineers have been committed to the Marlin product line.
And, so again, I think there's quite a few job postings. If you look at the Ruger website, ruger.com/careers, I think we've got a lot of salaried engineering positions as well as lots of opportunities in our factories.
Ryan Hamilton
And just one more for me, I know you talked about the accessories business kind of slowing down a little bit, is that -- maybe is that what you're seeing so that normal summer slowdown, and then expect maybe a pickup back in the fall here.
Christopher Killoy
It could have been some of that. I think really we caught up with some of that backlog on those accessories and primary driver of that is magazines, particularly things like the X25, the mini 14 magazines, etcetera.
We were trying to catch up on that for a while. Our supply chain ramped up.
We got some of that. And again, I think, the long-term demand is still going to be just fine.
It's just a little bit of a cyclicality in there.
Ryan Hamilton
Excellent. Thanks a lot for the time guys.
Operator
We have no further questions in queue at this time. So I'd like to turn the conference back over to management for any closing remarks.
Ryan Hamilton
Thanks operator. In closing, I would like to thank you for your continued interest in Ruger.
And I would like to thank the more than 1,950 members of the Ruger team that continue to put together and work hard to exceed our expectations and drive outstanding financial results. Thank you, again,
Operator
This does conclude today's call. Thank you for your participation.
You may now disconnect your lines.