Good morning, and welcome to the Q3 2021 Sturm, Ruger Earnings call. At this time, all participants are in a listen only mode. Later, we will conduct a question- and- answer session, and instructions will follow at that time. If anyone should require assistance during this conference, please press star then zero on your touchtone phone. 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.
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. 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 to your questions. Kevin.
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 the Form 10-K for the year ended December 31st, 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 on the company website at ruger.com/corporate, or of course, the SEC website at sec.gov.
We do reference non-GAAP EBITDA. Please notice that the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31st, 2020, and on our Form 10-Q for the third quarter of 2021, both of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward-looking statements. Chris.
Thank you, Kevin. Now Tom will discuss the company's third quarter 2021 results.
Thanks, Chris. For the third quarter of 2021, net sales were $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 workdays in the quarter to 59 compared to 64 workdays in Q2. This decrease in production reduced sales and resulted in some unfavorable deleveraging 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 lost production. Third, following six quarters of exceptional demand, accessory sales decreased from the second quarter, adversely impacting our overall profitability.
Our strong financial results yielded 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 2nd, 2021 remained strong. Our cash and short-term investments, which are invested in U.S. T- 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 share quarterly dividend for shareholders of record as of November 15th, 2021, payable on November 30th, 2021. Upon receiving this $0.79 quarterly dividend, shareholders will have received $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?
Thanks, Tom. Demand for our products has remained strong. Despite a moderation of overall industry demand, as reflected in the last two quarters of adjusted NICS, we shipped all the firearms that we built this quarter without the need to aggressively promote or discount any of our products. We have 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 unit sell-through of 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 NICS checks, decreased 11%.
The increase in the sell-through of the company's products compared favorably to the decrease in adjusted NICS background checks and may be 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 metric.
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 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. After the shutdown, we are 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 own 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 sq ft 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 doubles the size of our footprint in Mayodan and provides some room for expansion. We moved our finished goods inventory, our ShopRuger operations, and our customer service call center into the new facility. This freed up some 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?
Ladies and gentlemen, I apologize for the interruption. Please remain on hold while we retrieve the speaker line.
Deborah, can you hear us?
Yes, I can hear you now.
Can we get the first question, please?
All right, your first question comes from the line of Ryan Meyers with Lake Street Capital Markets.
Hey, guys. Thanks for taking my question this morning. So it 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 this 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.
Ryan, thanks for the question. I think as most of you that follow Ruger know, we don't pay as much attention to units ordered on a weekly or monthly basis. What we really look at is what our distributors are selling. When you think about it, I mean, we had a very full, and still have a very full order book when we entered Q3 and then when we exited Q3. We're still at 1.3 million units on order at the end of Q3. At some point, our distributors have enough on order. I mean, this is, we just met with our distributors at the National Association of Sporting Goods Wholesalers the show in Columbus, Ohio, last week, and that's a pretty healthy order book of 1.3 million units.
I think at some point, those, the incoming order rates slow. They know they've got enough orders on, in with Ruger. They know the orders with Ruger are non-cancelable, unlike some other companies. I think that's primarily the reason.
Okay, that makes sense. How are you guys thinking about pricing into the fourth quarter and then into 2022?
Yeah, good question. I don't anticipate you know, major changes in Q4. However, I think with 2022, we are likely going to need some additional pricing adjustment to really compensate for what we're seeing in the supply channel. 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 it will probably take a modest price increase on or about January 1.
Okay. I mean, just kind of looking at supply chain-wise, obviously, most of your guys' manufacturing is done here in the United States, which is a positive. Are you guys seeing any sort of challenges anywhere as far as sourcing, you know, certain components? Or just any sort of detail on, you know, how you guys might be impacted by the supply chain problems that seems like everybody's talking about?
Yeah, good question. I mean, 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 trucking industry to move things about. All of that factors in there. Our supply chain folks at the factories have done an amazing job navigating through that. So far, we've 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.
You know, we'll perhaps shift gears and make a different model 10/22 based on, you know, a shortage in one particular stock or one particular site. All that's been able to be worked through by our operations teams.
Okay, that's helpful. Is there any way that you can quantify the impact of the one-week shutdown as far as, you know, production units that you guys didn't think you were able to get out there? Any way you can quantify the actual shutdown itself?
Well, you know, it's when you look at the number of working days in a quarter, we use a four-four-five-week quarter. You've got basically five extra days that you weren't working. It's 7%-8% is typically what that impacts.
Okay. All right. That's all I got for you. Thank you.
Your next question comes from the line of Rommel Dionisio with Aegis Capital.
Yeah, good morning. Chris, just a couple of questions on the Mayodan expansion. First, you know, 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, you know, what it is in that particular part of the country? Is that an issue at all? Second, sorry if I missed this, but did you talk about the timing of, you know, just clearing out some of these or clearing out some room for additional expansion of manufacturing in the current facility and then you move? I wonder if you could just talk about the timing of all that. Thanks.
As I think you know, 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 as 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 the Marlin transaction was sent to Mayodan. Initially, it was moved to a staging area and then integrated into our main factory. 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, you know, strong management team down there. Frankly, our ability to hire folks has been pretty solid. You know, the workforce in Mayodan is a good one. The people like working for Ruger, and I think it provides us a lot of 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. It doesn't mean we're getting out of any of the other locations. It does give us significant opportunity, basically doubles our square footage. That plant is in the process of being upfitted as we speak to allow us that flexibility in manufacturing to move lines or add lines as needed.
Okay. Just to clarify, Chris, you'll be in good shape for the Marlin lever action launch here. It'll be done and ready for that in Mayodan?
Yeah. We're planning a mid-December launch of the Marlin product line. Now we'll be, you know, initially, as we just reviewed with our wholesalers down 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. We will launch it, probably on or about December 15th, somewhere in that time period, begin those shipments to distributors. I expect, you know, it'll be lots of calls and emails into me, saying, looking for more Marlins, because the first samples, frankly, were just outstanding.
The first sample that I saw came off the line a few weeks ago, and it was a beautiful Model 1895 in 45-70 caliber, and it just looked gorgeous. We're very excited about that, and we are on track for that end of Q4 launch.
Okay, that's great. Thanks very much.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Your next question is from Ryan Hamilton with Morgan Dempsey Capital Management.
Good morning, everyone. Congrats on another good quarter.
Thank you.
Yeah, you bet. You know, I always ask, could you walk us through the cadence of the quarter, kind of how July looked compared to June and so on?
Well, you know, we typically don't give, you know, information out on the monthly breakout, but we did start to see what we call the, I'll say this, a little bit of a summer slowdown. You know, typically, we see the seasonality come into our business. You know, typically, that slows down 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 dampening was more muted than we'd seen in the past. So while there was a little bit of that slowdown as we hit those warmer months, nothing like in some years past where that traffic really dies down at the store.
The interesting thing here was, you know, given there was so little inventory at retail, it was difficult to tell, you know, 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, you know, certain hunting rifle calibers in short supply, but our friends in the ammunition business are doing their best to get caught up. I think it's getting better, and we'll get better as we go into 2022.
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, but do, as a generalization, do rifles demand a higher margin than most pistols and revolvers?
Not necessarily. A lot of it, you know, margin in terms of percentage versus margin dollars, you know, we've got some relatively, you know, 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. It's really model and 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.
Sure. I guess where I'm going with this is I'm trying to model out, you know, what the impact on, you know, from Marlin should be or is going to be. I know you don't break this out, so that's kind of where I was going.
I got you. Yeah, we're still working through that. You know, I expect it would be in line. It's obviously gonna be incremental, but I expect it would be in line with our other rifle products that we build at Ruger. You know, we've got, we'll be making all the wood and laminate stocks for the Marlin product line. Those will be 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 Mayodan. I think it would be comparable to existing Ruger rifle products.
Will the Ruger name be stamped on the firearm somewhere, on the rifle?
No, it won't be. We're gonna maintain the Marlin brand. You know, we're very proud of the Marlin brand and its history. We've got a couple things that I think Marlin collectors will be very excited about as far as, you know, how we configure the serial numbers, some minor changes that we think collectors will enjoy seeing. Maintaining that Marlin legacy and the great things about Marlin, particularly the centerfire lever action guns with some, what we think are some great enhancements. 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 gonna have fun with it.
No, that sounds great. Last quarter, I believe you said you were roughly at 1900 as far as headcount goes. Where are you at today, roughly?
About a little more, probably about 1,950, if I recall the numbers from a few days ago, so about 1,950 folks.
I know that, you know, you really pushed the new products. Are you missing any key elements on the, you know, design and engineering, or is it mostly on manufacturing where you'd like more bodies?
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 who've been committed to the Marlin product line. You know, 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 and engineering positions, as well as lots of opportunities in our factories.
Just one more from me. I know you talked about the accessories business kinda slowing down a little bit. Is that maybe where you're seeing some of that normal summer slowdown, and then, you know, maybe a pickup back in the fall here?
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, I think, magazines, particularly things like BX-25, the Mini-14 magazines, et cetera. You know, we were trying to catch up on that for a while. Our supply chain ramped up. We got some of that. Again, I think, you know, the long-term demand is still gonna be just fine. It's just a little bit of a cyclicality in there.
Excellent. Thanks again for the time, guys.
All right. Thanks, Ryan.
Thank you.
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.
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.
This does conclude today's call. Thank you for your participation. You may now disconnect your line.