Sturm, Ruger & Company, Inc. (RGR) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Third Quarter 2013 Sturm, Ruger Earnings Conference Call. [Operator Instructions] As a reminder, the conference call is being recorded today, Wednesday, 6th of November 2013. I will now turn the call over to Michael Fifer, President and CEO; and Thomas Dineen, VP, Treasurer and CFO. Over to you.

Welcome to the Sturm, Ruger & Co. Third Quarter 2013 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 third quarter. And then we can get right into your questions.

Thanks, Mike. We want to remind everyone that statements made in the course of this presentation 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, 2012, and Forms 10-Q for the first, second and third quarters of 2013. Copies of these documents may be obtained from the SEC or through the company's website at www.ruger.com. Furthermore, the company disclaims all responsibility to update forward-looking statements. Mike?

Thanks, Kevin. Financial results. For the third quarter of 2013, net sales were $170.9 million and fully-diluted earnings were $1.44 per share. For the corresponding period in 2012, net sales were $118.2 million and fully-diluted earnings were $0.88 per share. This represents year-over-year sales growth for the quarter of 45% and earnings growth of 64%. For the first 9 months of 2013, net sales were $506.4 million and fully-diluted earnings were $4.25 per share. For the corresponding period in 2012, net sales were $350.1 million and fully-diluted earnings were $2.58 per share. This represents year-over-year sales growth for the first 9 months of 45% and earnings growth of 65%. As we reported to you last quarter, a small portion of the roof at our Prescott, Arizona manufacturing facility was damaged during a severe thunderstorm on Thursday, July 25, causing us to temporarily shut down production in Prescott. Thanks to the hard work and dedication of our Prescott employees. Temporary repairs were completed over the following weekend, signed off by the structural engineers and production resumed on Monday. The cost to the repairs to the building and equipment was less than $500,000. New products. Our new product introductions remained a strong driver of demand and were up $146.6 million or 32% of firearm sales in the first 9 months of 2013. As a reminder, we define new products as only those that were introduced in the past 2 years and we include only major new products and not minor line extensions. New products introduced in the first 9 months of 2013 include the LC380 pistol, the SR45 pistol, the SR1911 commander and the Ruger American Rimfire Rifle. So far, in the fourth quarter, we have launched the SR-762 modern sporting rifle and the Red Label over and under shotgun. Sell-through. Demand for Ruger products in the third quarter of 2013 remain very strong as evidenced by the 31% year-over-year growth in estimated sell-through of Ruger products from the independent distributors to retailers. National Instant Criminal Background Check System background checks as adjusted by the National Shooting Sports Foundation in the third quarter were flat year-over-year. We believe the strong demand for our products was due to new shooters joining the ranks of gun owners, the company's continued practice of introducing innovative new products and increased manufacturing capacity and greater product availability for certain products and strong demand. Total unit production in the first 9 months of 2013 increased 32% from the first 9 months of 2012. This increase in unit production resulted from investment in incremental capacity for new product introductions and from the utilization of Lean methodologies for continuous improvement in our operations. We believe that both Ruger and our independent distributors would benefit by having more finished goods and inventory to allow for a rapid fulfillment of retail demand. For the first 12 months ending -- for the 12 months ending September 28, 2013, the distributors averaged approximately 30 inventory turns on a Ruger product, which significantly exceeds the 6 to 8 turns that the company deems appropriate for its distributors. At 6 to 8 turns, we believe the distributors should be holding about 300,000 units in inventory. Our goal is to replenish finished goods inventory throughout the channel to levels that will better serve the consumers. This includes building finished goods inventories at the company, which could increase the value of the company's finished good inventories by as much as $15 million from the current level. Our balance sheet at September 28, 2013 was strong. Our cash totaled $54 million, an increase of $23 million from December 31, 2012. Our current ratio was 1.8:1 and we have no debt. At September 28, 2013, stockholders' equity was $153 million, which equates to a book value of $7.89 per share, of which $2.80 per share was cash and equivalents. In the first 9 months of 2013, we generated $84 million of cash from operations. We reinvested $31 million of that back into the company in the form of capital expenditures. These capital expenditures allowed us to realize a 32% increase in production year-over-year. Currently, we estimate that capital expenditures in 2013 will approximate $40 million. In the first 9 months of 2013, we returned $30 million to our shareholders through the payment of dividends. An additional $11 million in dividends will be paid to shareholders on November 29, 2013, as our Board of Directors recently declared a $0.58 per share quarterly dividend. As a reminder, our practice is to pay a quarterly dividend of approximately 40% of net income. On September 3, 2013, we finalized the purchase of a 220,000 square-foot facility in Mayodan, North Carolina. This is the company's first major expansion in over 25 years, and production at the new facility is expected to begin in the first quarter of 2014. The costs associated with starting up Mayodan were insignificant in the third quarter. And we expect Mayodan to impact earnings by less than $0.05 per share in the fourth quarter of 2013 and to contribute positively for 2014. Those were the highlights of the third quarter. Now, I'd like to respond to your questions related to these results. Operator, can we please have the first question?

And the first question comes from the line of Scott Hamann of KeyBanc Capital Markets.

Mike, just on your comment on the inventory turns, can you give us the number for the third quarter versus the number you cited for the trailing 12 months?

I'm not sure what you're asking, inventories a 6 number, not a -- rephrase the question. Scott. I don't know what you're driving at.

Okay. Well, I guess, just in terms of the appetite by -- from the distributors to get the 6 to 8 turns, I'm not sure that they've ever held 300,000 units before. Is that something that they, I mean, you've discussed with them? Or what kind of time frame will you be looking at to get to those levels?

Frankly, I hope we never get to them. I hope demand is so great that no matter how fast our increased production, we can't get there. That's been the problem the past few years. You're right, there've never been at 300,000, but there have been times historically when they have been at 6 to 8 turns when our sales were a lot less. But as we continue to grow very quickly, they struggle to get there. The products have been selling through.

Okay. And then just do you have a sense of market share at a retail level? Just it seems like you're gaining share, but do you have a good feel for the retailers to the consumers in certain categories? Or, I mean, where you stack up?

No.

Okay. And then I guess just, finally, Cabela's kind of recently cited that they've seen a deceleration in some of the firearm demand throughout the third quarter. And I'm just curious what the orders and sales kind of look like on a cadence basis throughout the third quarter?

Scott, I must be falling behind on my financial terms, I haven't heard about a cadence basis before. What are you asking?

Well, no, I'm just trying to understand if -- what the sales and orders kind of look like? How they progressed throughout the quarter because I think we know that July was strong, but if retail was starting to slow down, did that impact the trend of orders in your shipments through the quarter and kind of into October?

Well, Scott, we only report quarterly numbers. We don't report monthly and I'm not about to start doing that. I don't think that would be helpful to anyone. And it's crazy enough as a public company to have you guys demanding earnings every quarter, much less wanting to know what they were every month or every week. So let's not waste time going there. But I did have, say, a meeting with all the wholesalers recently, last week, at the National Association of Sporting Goods Wholesalers, where I spoke very strongly to all of them about our expectations on what they do for orders, how they order against us, what their inventory levels should be. I mean, the fact that we have something like, I don't know, 1.8 million units on order is absolutely ridiculous. It means that it's harder to manage the business than if we only had a couple of 100,000 units on order. Frankly, we're focused on mixed model production, which was very helpful during the peak of the business because we kept selling through where some other manufacturers who focused only on what they perceived as their highest-volume products ran into slowdowns we didn't run into. For example, if you're company X and you're focused on making 1 and only that 1 1911, well as soon as the consumers have bought it, there's nothing more to buy from you, whereas we focused on mixed model production, and if in fact -- and these numbers are inaccurate, but they just illustrate the point. If I'm making 100% of my product line every quarter and say 75% or 80% of it every month, and 50% to 60% of it every week, frankly, I -- you don't need to have more than a couple of weeks’ worth of business on order with me. And it gives a greater visibility to what you really want, what we should really make, what's selling through at retail, that's a better way to run the business. So as I've told all of you many times, don't pay any attention to our orders. They are really kind of -- it's a dysfunctional system. Everybody is still hanging on to the old habits where they will place an order once a year, roughly around December 1, for the next 12 months and companies in our industry used to then schedule out production of that stuff and they'd make it at their own leisure and own schedule and sometimes you'd make component A for a product in December and you'd make component B for that product in January and by gosh, somewhere in the 11 months, you'd finally get the product finished and out the door. And that's not how we do business today.

[Operator Instructions] We have our next question from the line of Andrea James of Dougherty & Company. Andrea James - Dougherty & Company LLC, Research Division: Okay, so there are distributors who talk to Wall Street and they're saying it's going to be hard to grow their unit sell-through year-over-year in 2014, including on Ruger units. And I'm just curious if there's something they're missing, or there's a perspective that we're not getting from them you could offer?

I wasn't privy to that conversation, Andrea. So not knowing exactly what they said or how they said it, it's hard for me to read thoughts one way or the other. If you go back to what our core business strategy is, we introduce new products to drive demand and use Lean methodologies to fulfill that demand with ever less resources tied up to it. So, I'm not at all discouraged about 2014. I can't speak for individual distributors. Andrea James - Dougherty & Company LLC, Research Division: Okay. And then do you think you'd ever lever up or use stock to acquire Smith & Wesson?

I would be delighted to acquire them with stock. I'm not sure they would be as delighted, but if you know something I don't, let's talk afterwards. Andrea James - Dougherty & Company LLC, Research Division: No, I was just asking. And then any other thoughts on the use of cash? Have you guys -- does your Board get together and talk about that? Or do you have sort of a plan?

Well, we increased our dividend from roughly 25% of earnings to 40% of earnings because we were generating cash faster than we could responsibly use it. And by that, I mean, we model out our uses of cash for capital investment and through dividends, and then, hopefully, we're still generating a little bit of net cash, but I don't want to generate excessive cash. And as long as that works out, I would imagine that every now and then, we might consider a special dividend. Obviously, we don't have enough cash at the moment to do one, that would be kind of silly, but if we get back up north of where we were the last time we did it, and we don't have a good responsible use for that cash, by gosh, we'll give it back to our shareholders. It's their money.

Next question comes from the line of Brian Rafn of Morgan Dempsey Capital Management.

Can you talk a little bit, Mike, discuss on the Mayodan plant, what you guys -- where you are in machinery installation? Have you done anything construction-wise to the physical shell of the building?

We've done no construction per se to the physical shell of the building. We haven't done any major expansion or contraction or anything else, but we've done a lot of clean-up. We've made sure we had good secure power, clean water, put in a bluing line, put in a range. I would say, at this point, everything is well ahead of our original schedule. The folks out there are working 7 days a week, incredible hours. They're really excited, they're pumped up and they're producing some fantastic results. The inside of the factory is absolutely gorgeous. With all the new lighting and paint, you need to put sunglasses on to go in there, the glare is so bright from all the white walls. And I'm awfully proud of them. We were very hopeful that they would get the first gun produced sometime in the first quarter and by the end of the first quarter, we'd be shipping. And in fact, they -- I think working through the night finally finished 3:00 a.m. or something last Friday, they finished the first gun. And that's still a long way from regular steady production, but they are probably months ahead of schedule. They've done a fantastic job.

Well, Mike, what's been your experience in actually finding labor pool, design engineers in this new area of North Carolina for you guys?

Well, a lot of companies have been there before us. They've trained people very well. There's a really fantastic skilled workforce there. And we have literally hundreds of people applying for each opening we have. I believe we've hired somewhere between 40 and 50 people at this point, about half of which or maybe a little more are at our other factories training. The first production line that will eventually move down there right now is fully staffed by people from Mayodan. So they'll know the products and the equipment when they move it down. So we've made the decision primarily because the workforce and it has exceeded our expectations.

Okay. How many -- I know you want to be kind of careful of this, so I'll ask this as gingerly as I can. From the standpoint of design teams that you said -- you talked in the past about bottlenecks and not being able to get new product out because of the design. Just, are you going to sequentially install design teams or are you going to load multiple products into Mayodan? Give us a sense of how that rolls out into 2014.

I would hope to have more than one product line in there by the end of 2014. I would also hope to have at least one design team up and running. We've already hired some engineers and I'm very optimistic about that plan.

And we have the next question from Bob Sales [ph] of LMK Capital Management [ph].

Just a couple of questions. One is, you spoke about the backlog being 1.8 million units that's kind of a nonsensical number. I'm just curious, is there a process in place to work that down? Because I think your orders are, if I'm not mistaken, noncancelable? And what kind of level backlog do you hope to get your distributors at?

Let's go back to my discussion of mixed model production. I hoped to not only convince the distributors, but also my own sales team that we really are doing a good job at mixed model production and that neither my team needs to solicit nor the distributors need to give us these excessive quantities of orders so that we have a much smaller, tighter backlog, that's a lot more meaningful. Because remember, one of my commitments to the distributors is that I won't stuff the channel. I won't let them cancel the order, but let's say it hypothetically, we have distributor A and he's got $10 million invested in Ruger inventory. I want that to cover the full line, but I want it to be concentrated in those items that will sell through the fastest. There's no point in having $10 million sitting in his warehouse covered with dust, that doesn't do him any good or me any good or the retailers. So we do work with them very carefully. We rarely just ship them anything without checking their inventory first and making sure we're shipping them the optimal inventory to go through their warehouse. But it is pretty silly to have 1.8 million units on order. I mean, it's kind of crazy. But the problem is mostly with the distributors wanting to place these huge orders because that's the way the industry has run for decades and frankly, a couple of my salesmen sleep better at night knowing they've got hundreds of millions of dollars on order and I've got to convince them they don't need that much on order either.

Okay, understood. My next question is, when you look at the mix data, which is maybe not a precise, but it is a proxy for gun sales, you're going to start lapping mix year-on-year background checks that were up 81% in January of 2013 versus '12. And the combination of the election in 2012 and the Sandy Hook incident, I think, my understanding spurred a massive binge of gun buying. And when I look at your distributor data, your distributor inventory is up to 90 -- was it 96,000 units -- 95,000 units, which is higher than it's been and basically even year-on-year. So I'm just trying to understand and if you talk to retailers, the gun craze as we had early in 2013 is kind of over by their view. So, when you look at 2014, is it still your plan to grow the business given its expansion when you're entering -- when you're going against such difficult comps and you have the supply chain, the distribution chain of inventory, obviously, building up? I just want to get your thoughts on this.

One of the things I've pointed out to distributors is that their investment in Ruger inventory is probably the best investment they can make in any inventory in the industry. And there are several reasons for that. And one is that we've come out with so many new products that they really dominate our lines. Even those items we no longer count as new products, because they've been out more than 8 quarters, are still in an industry with very, very long product life cycles, are very new and very attractive to consumers. So any Ruger inventory they put in their warehouse is pretty new stuff and it's very non-perishable. The second reason is that Ruger has the single best price discipline of any company in the industry. And so a distributor doesn't have to worry about buying from Ruger and then having us devaluing their inventory down the road just to boost sales. We don't do that and they know it and they trust us and that makes our inventory awfully safe. And then look, next year is going to be an election year. And I'm sure the politicians will go at it on both sides and they'll talk about guns and that'll spur gun sales again. And none of these distributors have been able to sort of take market share from each other because we're very, very fair about allocating products when things are hard to get. And so if there's any easing off of demand, or demand gets a little closer to our ability to produce, that's the one and only chance they get and they only get that chance every few years to take market share from their competitors. And that's by putting more in inventory. And when the next spike hits, they can go ahead and fulfill that inventory and we replenish and allocate to them based on what their historical purchases have been. The last chance they had to do that was the summer of 2010, whereafter the very strong 2009 year, things eased off a little bit, still much higher than they'd ever been historically, but they eased off a little bit. And that was the one and only chance they've had in several years to take any market share from the other wholesalers. And I've pointed out to them that there is a possibility that could happen in '14 and this is their big chance to put some in their warehouse. They've got a long way to go. They've only got 95,000 units and they should be having 300,000 plus at the moment.

Your next question comes from the line of Peter Goodson of Eminence Capital.

I want to ask, so with the new plant coming on, the costs associated with the plant obviously will be covered by the extra sales out of the plant. I'm just trying to get a sense of for getting construction costs, one-time costs, kind of how much of an increase in your fixed cost base that plant will be?

Peter, I think, frankly, it will be fairly negligible. We have very little overhead there. We bought the building rights. Frankly, electricity is much cheaper in North Carolina than it is in New Hampshire. And we operate in a pretty lean. So I just don't see much impact.

Okay, that's very helpful. And then other questions have kind of already been answered, but just to confirm, it sounds like '14 you -- as you look forward, you're not seeing demand problems, you're seeing kind of stability, maybe even some growth as you have this new capacity in your ability to ship orders?

The one thing I cannot do and not just because I'm unwilling to do it, but I don't know anything more about the future than you guys do. So there's no point in my speculating on what the demand will be. We have seen -- if you go back to '09 and '10, once Mr. Obama was elected President, there was this huge spike in demand from November of '08 through, say, June of '09. And then that followed by things kind of stabilizing through '10. And one of the things you might experience or might observe is that retailers are still selling a lot of product but whereas, for example, maybe they were trying to carry 10 of each SKU, they might decide, well, just to be cautious, I'll take that down to 5 units of each SKU, S-K-U, but they're still selling 1 a week of each SKU. So their sell-through didn't really change, but they, out of caution, brought their inventory levels a little down at the store level and that results in a little bit of slowing at the distributor. And then as I've told you many times, the distributors grossly overreact, whatever direction demand is going, they overreact. They either grossly over order when there's a hint of strength, whereas they freeze up when there's -- when they fear that it might be slowing down. So to go back to that pattern in '09 and '10, you saw that the retailers were a lot more stable than the order patterns from distributors. That's why we focus on sell-through. We don't pay that much attention to the order pattern itself, but we focus on what's selling through from wholesale to retail. Keeping in mind that there may be times when the sell-through isn't as strong, but when you do channel checks and look at retail, they're still selling just fine. So I really have no idea what will happen in '14. It's quite possible that we'll have another very strong year. It's equally possible that we'll see some repeat of the pattern from '09 to '10. What I do know is that we've got some exciting new products coming out. We've got the capacity to handle those products on an incremental basis. And so there's potential for good solid growth from Ruger in the coming year, but I have no more idea than you do what's actually going to happen.

Okay, I appreciate it. I'd say you have slightly better idea than me, but that doesn't put you very far ahead.

[Operator Instructions] Okay. We have a next question from line of Scott Hamann of KeyBanc Capital Markets -- Robert Bennett of Dougherty & Company.

So you say new shooters are driving your quarter, how do you get a sense of who the end consumers are actually?

By getting our folks out into the retail stores and working the counters there both during regular promotions and also just sort of during ordinary days that -- where there's not a special promotion. And we try to get as many of our folks out as we can, not only the whole sales force, but a lot of folks from manufacturing. I go out and do it personally. And you just take the gauge of who you're selling product to. And we're still seeing just a huge number of folks coming in to get their very first firearm, and that's exciting to see. And we've got some great products, particularly some of our rimfire products that are ideal first firearms. And so we have a chance to get those people excited about shooting and, in particular, excited about shooting a Ruger. So we're delighted to see it.

Great. And then do you get a sense of whether these new shooters turn into repeat gun buyers?

I have a little less of a sense of that because it's really pretty obvious when you have, well, somebody buying their first firearm. It's harder to distinguish if they're buying their second or their 20th.

Next question is from the line of Terrence O'Connor of High Rise Partners.

This Red Label introduction is interesting. It's a pretty high-priced SKU for you guys. Could you remind us maybe or was there a normalized time when you could talk about what the volumes were of this product before you discontinued it a while back? Or how are you thinking about potential volume for that product line?

I think that product line will really have very minimal impact on our financial results. If we run these 2 long shifts, there still won't be very many units. And even though it's a higher average sale price, just it's not going to move the needle one way or the other. It really isn't. It's a wonderful gun to shoot. And I think it helps the Ruger brand tremendously and gets people excited about Ruger reentering the shotgun market. But it just won't make a difference one way or the other.

Next question is from the line of Scott Hanam (sic) [Hamann] of KeyBanc Capital Markets.

Yes, Mike. Just 2 quick follow-ups. On the orders that you took in the quarter, it looks like the ASP is pretty far down from where it's been historically. What -- is that a mix issue? Or what's driving that down?

Scott, it's primarily the introduction of the Rimfire American. Looks like many of our rimfire products have a lower average sale price than, say, centerfire products. And I think we took orders -- I don't know the exact number, but it's somewhere in the neighborhood of 150,000 units. And right off the bat, even though we try to get everybody to behave themselves and order only modestly, they order quite strongly. And so you get this big influx of orders for a lower than average ASP, and that knocks the number down a little bit. If we look at some prior quarters, particularly like if you look back in, I think it's in the MD&A, Q1 of 2012, we launched a couple of rimfire products then, including the SR22 pistol. That knocks the incoming order average sale price down, which quickly rebounded the next quarter, when you weren't introducing a rimfire product. But it didn't have much impact on the actual ASP of the order shipped.

Okay, got it. And then secondly, on accessories. Last quarter, you had a pretty sizable benefit. You expected that to kind of go back a little bit. Was there anything in the quarter around the accessories business kind of when it didn't revert back?

What we saw was a shift in accessory sales from our shopruger, which is a direct-to-consumer channel to distributors selling to retailers selling to consumers. And so we get lower margin per unit when we sell the accessories to the distributors. And so that had a modest impact on our gross margin in the quarter. The single biggest impact to the gross margin in the quarter was fewer work days. We had a 1-week plant shutdown in New Hampshire. We've got a lot of very capable and senior employees who have 4 or 5 weeks’ vacation. And if you live in New Hampshire, you like to take that vacation in the summer. But the accessories did have a modest impact on it.

Okay. Just -- I got one more, just on promotions. You've obviously been able to really pull back over the last couple of years, and Cabela's and some of the other retailers seem to be talking about having to pick up some of their promotional spending a bit. Is some of that going to fall back onto you guys at some point? Or are you going to have to increase that? Or -- I mean, how should we think about that going forward?

I believe you said that we've pulled back on promotions last couple of years, or maybe you said that we've been able to. We, in fact, have not reduced our promotions in the past couple of years. We've kept the same programs, the same ratios, whether it's buy 10, get 1 free or whatever it was. And so we spent just as heavily last year, I think, as in prior years. Actually, Tom Dineen has shown me a note here that we actually spent $4 million more on promotions in '13 than we did in '12. So we did not take advantage of the strong demand in terms of avoiding promotions or anything. We kind of just took the steady course. We've got all our retailers trained. They have a certain business model that they base around our promotions, so they know how to figure out their average cost in a product and how they can, in turn, run promotions at their stores. And we just kept it very steady. We didn't want to shift gears on them just because of a temporary spike. So I don't see us doing anything different going into '14. And at this time, we're planning the promotions for '14, and they look an awful lot like the ones in '13 and. The ones in '12 and the ones in '11.

Next question comes from the line of Eric Mendez of ECM (sic) [BCM].

I think part of my question has been answered already, but great quarter, by the way. Just curious on the days of production, how many days exactly were lost?

I don't know that offhand. Newport's easy. They had a 1-week shutdown. Typically, we do that over July 4. So you'd lose 4 days production. But it's essentially -- if you look year-over-year third quarter, it's pretty much the same. It's only sequential Q2 to Q3 that you see a big difference. And that happens most years, so it may vary by a day or 2, the difference, like actually I think looking at the '14 calendar, Q2 has the most days. I forget whether it's 64 production days or what it is exactly, but it may have been 1 more than it was in '13 and Q3 of '14 might be 1 day less than it was in '13. But we try to keep them, on a year-over-year basis, pretty close, so that we're not making it too hard for you to analyze our results.

Okay. So would you say that margins would have been comparable sequentially then?

No, Q3 is traditionally a quarter where you've got fewer people showing up to work. And we shut the plant down for a few days and -- in the summer, in New Hampshire. And things just aren't quite as robust as they are in January when it's cold outside and everybody is busy making guns. If you -- this is -- there's nothing unique about '13. Every year follows the same exact pattern.

Okay. And then just last question, it's a more general industry question. I wanted to get your views on the acquisition environment. We had ATK. We've seen a lot of acquisitions in the last 12 months. I'm just wondering what your thoughts where on acquisitions going forward in the industry in general.

The last time we saw a real spike in the business from previous levels was, again, when Mr. Obama was elected President the first time, and you had that huge spike up in '09. And a number of companies sort of made noise that they would be available for sale, but they waited and waited and waited until that spike in demand had started to ease. But they still remembered the theoretical maximum price they could have got during the busiest day of the spike. And so there weren't too many transactions done because people waited too long, and were too greedy on the sell side. And we've just had an amazing 2013, and I wouldn't be surprised to see the same pattern emerge. On the other hand, we were delighted to see some of our competitors get bought by big conglomerates because they were run really, really well before by entrepreneurs that were ultra-focused on the product and the customers, and now maybe when they're stuffed into a big conglomerate, it won't be quite as competitive.

Next question is from the line of Tassos Recachinas of Sophis Investments.

First, I'd like to say congratulations on a great quarter, and we very much appreciate the growth opportunity that currently exists at Ruger, and everything that you guys are doing, keeping busy with the operations. To that end, I wanted to just ask a question about capital allocation. We see capitals allocated to new facilities, and congratulations on coming ahead of expectations there with timing. But with respect to the dividend and the high cash flow generation you guys are producing, coupled with low interest rates available in your debt-free status, as well as your high volatility and stock price and opportunities that come along with that, whether you'd consider increasing your focus on potentially a stock buyback.

I can't remember if it was last year or a couple of years ago. I gave a talk at our annual meeting, where I went through very briefly some of the math involved with stock buybacks. And a lot of folks who have never actually run the math themselves have concluded that stock buybacks are good in terms of raising the price per share, but they forget that you've weakened the balance sheet when you do it. And it turns out that if you really run the math from the perspective of a shareholder who was there before the stock repurchase and wants to stay there long term beyond the stock repurchase, there's one and only one circumstance where that shareholder benefits, and that is if your trading multiple or their P/E multiple or EBITDA multiple or whatever, is trading below your historical average. So for example, if your historical average was 8 and you are trading at 5 or 6, that's a good time to repurchase shares, assuming your balance sheet can handle it. But if your trading multiple average is 8 and you're trading anywhere near 8 or above 8, then you are harming your shareholder to repurchase shares. And we kind of track that. I don't know exactly what our multiple is right now. But we kind of look at sort of a trailing 24- or 36-month average multiple. We've got it graphed out and look at where are we at with regard to that, and we're certainly in the zone of our historical average. And so therefore, it's not an optimum time to buy stock back now. Now if the market softens a little in '14 the way it softened a little bit in '10 and the stock market overreacts and drives our stock price down, I would imagine we would leap in with 2 feet. We've got the cash to do it. And we understand the math very carefully. And we are primarily interested in taking care of the shareholder who's with us today and will be with us tomorrow. And so the math all works. On the other hand, if we continue to grow and do fine, we'll just leave it outstanding.

I really appreciate that color. So it looks like you guys have evaluated it. As somebody who is very well versed in the mathematics behind and the valuation and all of that as a large long-term shareholder at Ruger, one of the biggest risks that we see is sometimes you have an entrenchment of use when you have a very secular shift in paradigm, and what we think is going on here as evidenced by the spike in your stock in '08 is that you have had that paradigm shift. And we think that even though Ruger has done exceptionally well in the last several years as a paradigm shift, so you've got a lot more where that came from. And you've got a high shortage risk, it's not tax advantageous to give the dividends to the shareholder. And I know that we would prefer to see other uses of that cash. You guys are [indiscernible] money, you're doing very well. We hope you stay at it, while the political pressure, and we're very supportive of you. We will just say that in all of the light of that to maybe take a step back and look at it a little different, does buyback really make a lot of sense here. And we think there's great times ahead. So thank you very much for all of your hard work and great job.

[Operator Instructions] We have -- next question from the line of Brian Rafn.

Mike, your sense when you're talking and you're trying to push a little religion down the wholesale channel and getting away from the old day plan business, are you getting the sense that you're the lone disciple on this discipline? Or are there other manufacturers that might be following soon?

What I haven't seen yet, but what I expect to see is that some of the other manufacturers will panic if they see slowdown, and they'll start offering deals again. One of our big competitors has actually kind of adopted our price discipline in the last year or so. But prior to that, I would have retailers call me up with great glee the week before their quarter ended and tell me what deals that manufacturer was offering, and they would -- those who had the cash would take great advantage of it. And I suspect, not necessarily that manufacturer, but some folks in the channel if they see a little softening with their sales, particularly probably the small manufacturers who might not have otherwise survived absent the spike. But they'll start offering deals. And so a big part of our chat with the distributors was to remind them not to get too excited about those deals and to focus on their core vendors like Ruger that have seen them through all this.

Okay. And then from the inventory standpoint, Mike, on your own kind of margin safety of $15 million number, are you going to look at all selectively at building inventory yourself at Ruger through 2014?

To the extent I can keep level production, it's better for the factory, better for the margins, and that could result in us increasing our inventory. I'm hopeful that our conversations with the wholesalers last week will convince them that they need to load up before it starts building in our warehouse, but we'll see. And the whole point of the $15 million comment is there's nothing scientific or exact about that number. It's just to -- as people are thinking about our capital allocation, understanding that some chunk of our cash could end up coming out of cash and going into inventory on our balance sheet, and it's just sort of a placeholder there. You noticed we haven't really changed the number in years. I think we put the $15 million number out there when we were doing $300 million in sales, and now our run rate, I'm sure, is north of $600 million. And we still have $15 million. So don't be overly exact about that number. That's just a placeholder to tell everybody, "Hey, keep in mind some of our cash could end up in inventory." And I'm kind of torn 2 ways. On the one hand, I hope we can build the distributor inventory, and I hope we can build a little on our own, so we can take a lot of share next time there's a spike. But on the other hand, I would -- I'd much rather we can't ever quite get there no matter how much we build because our demand continues strong.

Okay. Mike, what's the status on rolling out minimills up at Newport?

I'm glad -- Brian, I'm glad somebody asked that. We're working on #2, and we're also taking some of the lessons learned to the original old-fashioned kind of investment casting line. So we're seeing some efficiencies. Well, first off, the first minimill is exceeding our expectations than what we originally modeled, and then the main mill is also seeing some improvements that resulted from all our learnings on the first minimill. And then the second minimill is not in operation at all. We're just -- we've got all the component parts on order, but we expect that to make a good contribution. As you may have read in the fine print, we've started to terminate our relationships with many of our outside castings customers because rather than being worried about making, say, $5 on a part and I'm selling to an outside company, it's much better if I have that capacity, so I can make $150 margin on one of our own products. And we are right now relying on a number of outsourced castings for our own consumption, and that has had a modest drag on margins. And when we finally get to the point we can in-source all of the castings we consume, we'll be better off. And so we are working really hard on adding a new minimill and, perhaps, even we'll add another one after that, who knows.

Okay, okay, okay. Your sense -- you talked a little bit about the -- some of your anecdotal relationship with the new gun buyers, first gun buyers. Is it still the traditional rimfire guy to point to? Or are you actually selling some centerfire to some of these first buyers?

I think they usually come in looking for centerfires, Brian. And I'll just give you one, one example will be a couple that comes in, one spouse has been doing a bunch of shooting and is trying to introduce the other spouse, and they want to buy him the centerfire handgun or rifle that they think they'd like next. And that's usually not the most appropriate, one to start somebody off with. And I try to tell them when I'm selling that what you're looking for is not to get your spouse to get their first gun, and that's it, but you're looking to create a shooting buddy for life. So you want them to have -- their first firearm should be one that has modest noise, modest or no recoil and is just sheer fun to shoot. And after they shoot that for a little while, 1 day they'll look over to the next lane in the range at what you're shooting and want to try that out. And then boy, you've just -- you've scored a shooting buddy for life, and they'll buy a lot of guns in the future. So we often try to convince them not to buy the centerfire they came in looking for and, instead, to get a rimfire. It's just inexpensive, it's fun to shoot. I don't think there's anyone who has ever shot a rimfire for the first time in their life who didn't turn around with a huge smile on their face because it was so much fun.

And then next question comes from the line of Bob Sales [ph] of LMK Capital Management [ph].

Yes, just one question on mix. Have you -- anecdotally, I guess, we've seen -- we've heard that handguns remain relatively steady, while long guns have softened considerably. And I'm curious whether you've seen that mix change or whether some of that long rifle softness is applied to, perhaps, some of the assault rifles that haven't been as much of an emphasis for your company.

We're under the impression that the guns that went up the fastest in the spike, which includes the modern sporting rifle category, are the ones that would probably soften first. And we saw that in '09 and '10 where a lot of people, fearful of losing their second amendment rights, ran out and bought, perhaps, more modern sporting rifles than they could individually shoot. And so some of those came back in the summer of '10 as new inbox, otherwise used guns. And the retailers were delighted to get them because they basically had a brand new gun they could buy cheaper from a consumer, and then resell it rather than buying it from a wholesale distributor. And another part of that story is that when there's a softening in a category like that, it's all the guns that are in the middle of that category that tend to suffer first or the most, and that the most expensive guns in the category or the least expensive guns in that category -- their demand remain stronger for a longer period of time. And as you know, our piston operated SR-556, the SR-762, are really kind of high-end guns that your average consumer wouldn't run out and buy, but somebody who really knows what they're getting and can appreciate the value of it would buy that. And so we're actually adding capacity to that line now, whereas I suspect some of the folks who sell the gun in the middle, somebody who's selling, for example, an $800 or $900 gun maybe has seen their market soften. Somebody who's selling a $600 gun is still probably doing strong, and somebody who's selling a $1,400-and-up gun like ours is still doing very strong. And we're actually adding capacity to that category.

Our next question is from the line of Brian Rafn.

Is there any sense -- you talked a little bit about shopruger and actually expanding the accessories line or maybe co-branding some stuff with holsters, scopes, or something. Well, how do you view accessories relative to your business? Is it more of an adjunct? Is it a waste of time? What -- how do you look at it philosophically?

It's more of an adjunct with very high margins. And if we had a little more management bandwidth, I'm sure we put more attention to it. And shame on us for not doing so. But it is very high margin, and it's a nice to have business. When I joined the company, I think it was less than $1 million in sales, and it's substantially more than that now. And actually, we are moving it to Mayodan to take advantage of the extra space in Mayodan because we just ran out of room in Prescott, Arizona for it.

Okay. The plant at Mayodan, is that going to be -- are you going to focus specific gun lines there? Are you going to have -- like you've got a lot of pistol production out in Prescott, the rifles and revolvers in Newport. Does Mayodan get any or maybe new products? Does Mayodan get any classification? Or I mean, are you going to focus anything specifically at that plant from an organizational standpoint?

No, or at least as you've stated it, no. What we are doing there is the very first line that's in place now and has just produced its first unit, and hopefully, will be running full tilt come the middle of first quarter, is a duplication of a line that's running up in Newport, New Hampshire. It's an exact duplication. Instead of moving a line from New Hampshire down and hoping we could get it up and running again, we did an exact duplicate. We moved a few trained engineers from Newport down to help set up and get the first line running down in Mayodan. And as we look at future lines, we are looking at lines that are running exceptionally well that don't require a lot of daily manufacturing engineering input to keep them running. So you could assume that sort of real classic lines of hard to build products like steel double-action revolvers, they're probably never going to move to Mayodan. They're in place, don't screw with them. They're running. But some of the newer products as demand grows for those, we'll duplicate the lines. So we'll add increased capacity for those lines. But instead of adding it in place, we'll add it in Mayodan. And there's one very significant new product line that's under development that we've concluded. We just don't have enough room for it where we're originally designing it, and we'll just build it from day 1 in Mayodan. So probably Mayodan will have what I'd call newer or younger product lines on average than the other 2 plants. We're just not planning to move an older product line from one of the other plants. We're sort of growing new stuff there.

Okay. As you roll out, you've been very successful. You did well over 30% with the new products. What's been your experience, Mike, with kind of cannibalization or fall off in some of the older more mature lines?

We've really counted on cannibalization in the past to free up equipment, and we haven't actually ever had cannibalization. So we've always underestimated the amount of equipment we need to satisfy the demand on a new product. And I'll just give you one quick for example. When we introduced the LC9, we thought it would severely cannibalize the LCP, and it did not do that. If anything, it had the opposite impact as it got people focused back on what great products Ruger has for the concealed carry market. And both product lines went up instead of one being cannibalized. And there have been several other examples of that as well.

Okay. Anything, Mike -- it's just been kind of a dull mary [ph] in military or police sales? I know it's not been a huge focus for you guys. But is that -- going out next 4 or 5 years, is that something of interest or not?

It's always of interest, but the primary duty weapon market is one that we believe is not very profitable. And the reason is that typically you have to go into a, say, a police department and trade out all their weapons, trade out all their leather, provide lifetime warranties, provide expensive armor school, and I just can't believe the company is doing that or making any money on it. They've got to be doing it solely because they think it's a tremendous marketing opportunity for them. And to some degree, they're absolutely right. If you see what the cops in your town are carrying each day, you might want one of those. So we focus primarily on the backup weapon market, which are -- tends to be more of a full-margin opportunity than the primary duty weapon.

Ladies and gentlemen, that now concludes the Q&A session. I'd now like to hand the call back over to Michael Fifer. Over to you, Michael.

I want to thank all of you for joining us today and for your interest in Ruger, and we try very, very hard to keep our shareholders first and foremost in mind when we make our decisions and operate the business. And we're very proud of the results, and I hope you're pleased with them. And I look forward to talking to you in another quarter. Thank you.

Thank you. So ladies and gentlemen, that now concludes your presentation for today. You may now disconnect. Thank you.