Sturm, Ruger & Company, Inc. (RGR) Q2 2014 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Second Quarter 2014 Sturm, Ruger Earnings Conference Call. My name is Kim and I’ll be your conference operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Michael Fifer, Chief Executive Officer, please proceed.

Welcome to the Sturm, Ruger & Company second quarter 2014 conference call. I’d like to ask Kevin Reid, our General Counsel, to read the caution on forward-looking statements, which will be followed by a quick overview of the second quarter and then we can get into your questions. Kevin?

Thanks Mike. 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 31st, 2013 and Form 10-Q for the quarter ended June 28, 2014. Copies of these documents may be obtained by contacting the company or the SEC or on the company’s website at www.ruger.com/corporate or of course the SEC website at www.sec.gov. We do we reference non-GAAP EBITDA. Please note that the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31st 2013. And our Form 10-Q for the quarter ended June 28, 2014 which are also posted to our website. Furthermore the company disclaims all responsibility to update forward-looking statements. Mike?

Thank you, Kevin. First the financial results for the second quarter of 2014, net sales were $153.7 million and fully diluted earnings were $1.12 per share. For the corresponding period in 2013, net sales were $179.5 million and fully diluted earnings were $1.63 per share. For the first half of 2014, net sales were at $323.5 million and fully diluted earnings were $2.34 per share. For the corresponding period in 2013, net sales were $335.4 million and fully diluted earnings were $2.83 per share. The second quarter of 2013 that’s last year was the high water mark in the company’s history and frankly we are facing tough year-over-year comparisons now. Our sales decreased 14% from the second quarter of 2013 due to a reduction in demand for firearms and firearms accessories. Our earnings decreased 31% and our EBITDA decreased 25% from the second quarter of 2013. The main drivers of the reduced operating margins where the reduced sales of firearms and firearms accessories an increased depreciation expense, the impact on earnings of the reduced firearm sales and reduced firearm accessory sales were about equal offset somewhat by our 2014 price increase for firearms. Last year our firearm accessory sales were the highest they’ve ever been and as a category they are our most profitable products. As we’ve discussed before with respect to depreciation, at the end of 2013, the company lowered its estimate of the useful life of machinery and equipment from 10 years to seven years to be more in line with our experience in the factories. This change, which became effective December 31, 2013, resulted in increased depreciation expense of $2 million in the second quarter and $4 million in the first half of 2014. We also have more depreciation expense because we’ve been adding equipment to support our rapid growth in recent years. Demand, during the first half of 2014 there was a significant industry-wide reduction in firearms demand. We’ve reported to you after the first quarter that Ruger was not as adversely affected as the whole industry. In the second quarter, however, the reduction in firearms demand affected Ruger too with Ruger experiencing a 31% year-over-year reduction in the estimated sell-through of Ruger products from independent distributors to retailers. During the same period the NICS Background Checks decreased 12%. As a reminder, NICS refer to the National Instant Criminal Background Check Systems numbers as adjusted by the National Shooting Sports Foundations. The estimated sell-through of our products and distributors to retailers in the second quarter was adversely impacted by three main factors. First, the reduction in overall industry demand; second, the aggressive price discounting of many of our competitors while we maintained our price discipline and third the absence of significant new product introductions from Ruger in the first half of the year. While demand in the second quarter was disappointing it is important to note that the estimated sell-through of our products for the first half of the year was the second highest in the company’s history exceeding even the estimated sell-through from the first half of 2012 by 83,100 units or 10%. New products, we believe that new product introductions are strong driver of demand and were $57.1 million or 18% of firearm sales in the first half of 2014. As a reminder we defined new products as only those were introduced in the past two years and we include only major new products and not minor line expansions. We did not launch any significant new products in the first half of 2014 however yesterday we launched the new LC9F our new striker fire light weight compact pistol. Several distributors have already called in and reported to us that they have sold through all of the units that we shipped them for the launch. That just reinforces our belief that new product development generates the highest return on investments but only after the new products are launched. We are in the phase now where we have been making significant investments in R&D and capital expenditure to develop and support new products that we’ve been experiencing delays and have not met our planned launch schedules. We remained committed to new products we will not cut costs or work hours for short-term gains or risk jeopardizing our long-term strategy of driving demand through innovation. Inventory and production, total unit production in the first half of 2014 increased 7% from the first half of 2013 although in the second quarter production rates where reduced several times in response to the decline in estimated sell-through of our products from the independent distributors to retailers. We review this sell-through for each of our product families twice a month and an effort to regulate production and mitigate increases in inventory. Recently, each of those review has typically resulted in further incremental reductions to one or more product lines however at our most recent review and for the first time in many months, in addition to a few more reductions we also increased production rates on one of our major product lines, the Ruger American Rifle. The company’s finished goods inventory increased by 75,400 units during the first half of 2014. This is the first significant replenishment of finished goods inventory in several years. Additional replenishment of finished goods inventory could increase the FIFO value of finished goods inventory by much as $10 million. Distributor inventories of the company’s products increased by 120,800 units during the first half of 2014, and we believe they now approximate a reasonable level to support rapid fulfillment of retailer demand. As demand began to slow in the second quarter, the company managed its labor expense by limiting the hiring of new employees, reducing overtime hours and allowing attrition to reduce its total employee base. These efforts continue. Furthermore, the company’s compensation structure includes a significant performance-based incentive components for all of employees. During a period of declining demand and results this will further reduce labor expense. Balance sheet and cash flows. Our balance sheet at June 28, 2014 was strong. Our cash totaled $47 million. Our current ratio is 2.3 to 1 and we have no debt. On June 28, 2014 stockholders’ equity was $207.1 million, which equates to a book value of $10.67 per share of which $2.44 per share was cash. In the first half of 2014 we generated $36 million of cash from operations. We reinvested $23 million of that back into the company in the form of capital expenditures. With the slowdown in demand we have recently started to curtail capital investments by cancellation or delay of purchase orders and the redeployment of manufacturing equipment from mature production lines to new production lines for products currently in development. We estimate that the capital expenditures in 2014 will approximate $40 million as we continue to prioritize new product development. Cash return to shareholders, in the first half of 2014 we return $20 million to our shareholders to the payment of dividend and additional $9 million in dividends will be paid to shareholders on August 29, 2014 as our Board of Directors yesterday declared a $0.45 per share quarterly dividend. As a reminder our dividend varies each quarter as our practices to pay a dividend of approximately 40% of net income. Stock repurchase authorization, yesterday the Board of Directors expanded this authorization to repurchase shares of common stock from $25 million to $100 million. It is important to note that raising the repurchase authorization to $100 million does not mean we are committed to buying $100 million of stock. We believe that the market should set the price of the stock and if it is trading in the range of its average historical earnings multiples than the company should sit on the sideline. Shareholders interest in purchasing stock should not have to compete with the company to acquire more shares. But if the stock price drops below the average of historical earnings multiple then it is appropriate for the company to step in and opportunistically repurchase shares. The key is to create value for current and future shareholders too and not just for the existing shareholders. Those are the highlights of the second quarter. I’d now like to respond to your questions to these results as I have mentioned before. Please don’t spend a lot of time asking forward looking questions because I am very unlikely to answer them I don’t know anything more about the future than you do, but I am happy to discuss the results that we’ve reported. Operator, can we please have the first question.

[Operator Instructions]. Your first question comes from the line of Andrea James from Dougherty & Company. Please proceed. Andrea James – Dougherty & Company: Good morning. Thanks for the acknowledgment to ask anything forward-looking. Mike can you talk about what’s going on with some of the delays in your new product introduction? You’ve historically have been really good at that. It sounds like you’ve been having some trouble since the beginning of the year?

Andrea, I don’t think the troubles or challenges we faced are any different than any other new product introduction. Just all the sign ways have merged together and we’ve unfortunately missed the plan the launches we had for first and second quarter. However, we got a lot of great products stacked up and we are pleased to launch the LC9F yesterday. I noticed that on all the forms and boards it’s getting a lot attention. People are pretty excited about it especially when they see the graph of the dramatic improvement in trigger pull. And keep in mind that Ruger is known for very rugged and reliable products. They are safe, they operate well. We are very proud of them. And we do extensive testing that I think goes well beyond anything our competitors do and in the process of that testing we find things to improve. And we want to improve them before the consumers lined them and decide to improve them. As you may know, one of our large competitors just had a very unfortunate and embarrassing situation where they had to be call in entire pistol product line and they don’t have to fix for it and they are promising may be some months in the future they will send a replacement, gun to each person who owned one. We are not going to do that. We are avoiding that by really putting these guns to the ringer. You may recall from an earlier conference call, I said there was one gun we launched only a year after we’d originally plan and only after an additional 600,000 rounds of testing went on. So we make dot [ph] on sure our guns are ready for market when they come out. Andrea James – Dougherty & Company: Thank you for the color there. And then your sell through dropped by more than a NICS, is there a market share we through there do you think?

Absolutely. We did a very good job with our promotions in the spring, retailers bought in a lot of Ruger product. And I think you could probably say that in Q1 we probably picked up some shelf space. But what happened in Q2 was that there was a lot of frankly panic from our competitors. Their price yields that we hear about each week, I’m loving, it’s just they’re staggering to hear, hard to believe. And we have had retailers call us up and say I’ve got to cost average my product, I got to take this deal from competitor X or competitor Y, they’re embarrassed, they’re apologetic and they say don’t worry about it you’ll get all the shelf space back when this foolishness ends. And I believe them. Andrea James – Dougherty & Company: You are just refusing to raise to the bottom on the pricing then?

Correct. Because I don’t think we need to with our products. I think they are really good and very important is we have trained the wholesale distributors and the retailers that they are investment in Ruger inventory is safe. They don’t have worry about buying the Ruger today and then next week we’ll panic and cut the price by 20%. They know, say by Ruger its safe, they can keep it on the shelf they don’t have to worry about it. Right now you went through kind of a classic phase in the down market where the competitors started pulling out small deals and then they put out medium size deals and retailers responded by buying them and now the deals in some cases that’s so stupid the retailers won’t buy at any price because they’re terrified about what comes next. They don’t want any inventory from some of the competitors. That hasn’t happened once with Ruger. Andrea James – Dougherty & Company: I am sorry to hop the line, one final and then I’ll hop back. So your you have a large backlog that you’re driving down a plan, the sales surprised me a little bit lower in the quarter than I expected, because I thought, you could still continue to sale against that backlog, is it that you’re giving the folks more time to take delivery on the hyper orders that they had placed or sort of what’s going on with the backlog, I guess, I’d like to better understand.

Remember we don’t manage the business by backlog in fact – to pay a whole lot of attention to it. We focus on sale through and inventory levels and for years now, we’ve been trying to get the wholesalers to stock inventory to a level where they have six turns maybe eight turns at the high side. And frankly for years, it was double-digits and reached almost 40 turns at one point, year and a half ago. And so we watch very carefully SKU by SKU what their inventory is, what their turns are, and we manage to that. We want them to carry our every product. We want them to carry reasonable amount of it and we don’t want to stop the channel and we don’t want to tie up dollars and slow moving inventory. There is no point me taking them from six turns to three turns, because then if I come out with a new product they don’t have any cash to buy. So we are – it’s kind of a golden rule thing, where we treat them in the way we’d want to be treated we’re very, very respectful of their inventory dollars. And we probably work as harder, harder than they do to manage those inventory dollars. We want them to have a good representation of Ruger, but not too much and now if you see just like we did in 2010, we are calibrating our production rates to manage that inventory to distribution. So we don’t care what the backlog is. I’m not – just because I got the order on the book doesn’t mean I’m going to chip it and stuff down their throat. Andrea James – Dougherty & Company: Thank you.

Your next question comes from the line of Brian Ruttenbur from CRT Capital. Please proceed. Brian Ruttenbur – CRT Capital: Thank you very much. Couple of questions around gross margins, trying to understand in the quarter you talked about gross margins were down sequentially year-over-year for a variety of reasons. And its mix of business, its accessories, depreciation, can you maybe breakdown in the quarter how much of that was mix versus accessories versus depreciation and with any that’s one time?

The only better that, that you could consider one-time, although it is going to occur few more times before it’s over perhaps is the depreciation. Remember when we change the estimated useful lines, there were its from 10 to seven we had pieces of equipment out there that had 7.5, 8 years, 8.5, 9 years and so there we had to – I think the word would be accelerated or depreciation somewhat. So in addition to – if you look at our depreciation I think it was up in the range of about $4 million for the quarter. Half of that was directly attributable to the change in estimated useful life and I’ve disclosed that number each quarter to see you could understand and account for however if you want to and then understand the difference the balance, it’s just because I’ve been buying a lot more equipment in recent years to support this incredible growth rate we’ve shown you. Now, and I sort of get your arms around depreciation and as I just said a minute ago, the rest of it was largely reduction in firearms units sold and reduction in accessories. Now our accessories business is much, much smaller than our firearms business and last year, however, it spiked because why, because the politicians were all trying to grab a headline and so they were going to – everybody’s going to run out and limit magazine sales for example. And so what did the consumers do, they went out of their way to buy every magazine they could get their hands on for fear that it would be out of lot and when they get them so they could be grandfathered. And frankly the margins on magazines are spectacular. And they spiked to all time record high and therefore we’re a big driver in addition to the firearms volume of earnings. So, this year, with the year-over-year comparison you have a decline of magazines to sort of more normal level. And they are not creating that huge booster earnings. And so, when viewed in a year-over-year comparison before I take into account the firearms price increase, the decline in firearms sales and the decline in accessory sales, although from a revenue perspective they’re a completely magnitudes from an earnings perspective they are really nearly identical. So really the big story here is the difference in the firearms accessories and primarily magazines. And to a lesser degree it’s the kind of expected reduction from – and a little bit of de-leveraging from the firearm sales. Brian Ruttenbur – CRT Capital: Okay, and then as a follow-up to try and further understand the market, you’re refusing the lower prices what are the competitors giving as an example if you buy ex-amount there’s a 20% discount, what kind of discounts are going on out there that are going to either A, the distributors or B, the end retailers?

Well example for example there’s a fairly large company that’s offering $100 cash rebate back on its guns, And I believe at one point both the consumer got a 100 bucks back and the retailer got a 100 bucks back. And I can’t believe they had that much margin in the guns power so means to me that’s just real panic that, that they’re just trying to trade dollars and convert that inventory to cash. We’ve got strong balance sheet. We don’t’ have to do that kind of portion. Brian Ruttenbur – CRT Capital: Okay and then last question in terms of I guess it’s a little bit on visibility and I’m trying not to ask forward looking question yet ask one. Is to try and to understand your visibility in terms of your units, you only, units ordered in the quarter were 145,000 yet you produced 552,000 is this kind of one-time event and that’s a big dip – big differential between units ordered and units produce, do you anticipate that going forward? Or is this one-time in nature?

Again I don’t pay any attention to what was order so the comparison you’d want to do is units produced to units sold through from distributors to retailers. And the unit sold through is substantially more than the units they ordered. And I certainly hope it’s a low water mark but I don’t know that it is. I mean typically the third quarter is a low water mark in normal year but even if the NICS check started to rebound here found here say on August 1st this is hypothetical you got I believe fair amount of inventory at the retailer level. You’ve got healthy inventories at the wholesale level so the retail to consumer sale through is going to pick up before the wholesale to retail, retailer sale through picks up and that will pick up before the wholesalers come back to the manufactures and ask more products. So even if that all rebounded a mile there is going to be some lag before the wholesalers get to enjoy it and then a little bit more lag before the manufacturer’s get to enjoy that’s just typical. And so I wouldn’t be at all surprise to see that the, even if the sale through starts to pick up that it will be a little while before wholesalers ask for lot of product. Remember we had to basically force them to get into that six to eight turn range and they like 20 turn. They would much rather cross stock product and take orders and it’s not a natural act to go back to actually selling products and warehousing products and running credits its I don’t know anybody to be a wholesaler it can’t be that much fun. Brian Ruttenbur – CRT Capital: Last question, the – do you have any further plans to shift production from the North East to the South is that something that you’re saying your costs advantage I see a lot Freedom Group others are moving more production down South, is that a plan that you are going to pursue further or you’re going to increase your production where the growth is going to be in your Southern manufacturing?

No. But as the company grows, which I fully expected to with more new products coming down to the pipe, some of that growth will occur – probably most of the growth net growth will occur down in the South. But there are some cases where we might move a product line from one of the more mature factories down to the south, but only to make room for a new product in one of those factories. We try to keep the new products where they develop because you’ve got all the engineers there and the support for it and the knowledge. And we try only to move mature products that are pretty stable. But we are actually have product development teams at all three factories. And expect new products from all of them in the coming years. Brian Ruttenbur – CRT Capital: Great. Thank you very much.

Okay.

Your next question comes from the line of Brian Rafn from Morgan Dempsey Capital Management. Please proceed. Brian Rafn – Morgan Dempsey Capital Management: Good morning, Mike.

Good morning. Brian Rafn – Morgan Dempsey Capital Management: Give me a sense from the standpoint, now that we’re seeing a little more have been flow and more about kind of maybe a normalized demand in the cycle. How does that effect any plans to move from the integrated furnace to some of the mini furnaces or that kind of long haul is still kind of in the testing?

What we actually gone a little bit of an opportunity when we discontinue the P95, which use the lot of castings. And before some of our new products come on that we will also use a number of castings, we’ve got a little dip in the capacity requirements. And so we use that to bring on mini foundry number two, and actually shutdown mini foundry number one. So we could move it and take advantage of some lesson learned and make it yet more efficient. And we’ve got a small window here, I think a month or two to finish that work before we get many foundry number one back-up hopefully coincident with getting some new products starting to move. And so I think we’ve got a bright future on the foundry side. Brian Rafn – Morgan Dempsey Capital Management: Okay. Mike, is there any plans sometime in the future for putting a foundry down in [indiscernible]?

I think if we run out of capacity up north which has all the infrastructure build, then it would make sense to do one down South because we have the space and we have lower utility cost there. But foundries are bit unique and they have enormous amount of infrastructure overhead to support them. And so they come in kind of big increments they don’t come in small ones and while you might say, that the utilities and lower labor cost and space cost in the south were justified all, it’s a lot more complicated than that and you’ve got to take into account how much overhead. So it’s still for now anyway cheaper to keep an incremental mini foundry up North and it is take it down South. Brian Rafn – Morgan Dempsey Capital Management: Yeah. Okay. Okay. What is your sense and you’ve talked about this in the past though of kind of motivating the wholesales dealers back to a sense of religion relative to six to eight turns of the whole inventory that do credits. What is kind of your ability I mean you guys have always maintained that discipline and I think you are looking for rest of processes there what – how much effect you really have?

So far I think we’re doing pretty good. These sellers have made a lot money Ruger was either their most profitable line for many years now. And they, I don’t think they’ve forgotten that. And they are not worried about the value of their investment in Ruger inventory and that means a lot to them as well. And I think it’s a pretty good, pretty strong relationship and they count on us. And we’ve let them down a little bit on new products but they’ve seen their business grow tremendously with each of our new product introductions. And in fact on LC9F guys have already been calling this morning wanting more of them, they’re upset about the amount, we built thousands of guns before we launch well they’ve already sold through there allocation they’ve said they want more because this is a sort of bright light right now and otherwise in period they love new products and Ruger has probably been the most successful company in the industry viewed over several years in terms of launching new products. And they know we’ve got, we’re fairly sure more engineers than anybody else and we are spending more on it. We are more committed to it and so they know what side their bread’s buttered on. They are pretty happy with Ruger. Brian Rafn – Morgan Dempsey Capital Management: Okay. And then from the standpoint of it…

Actually Brian let me throw one more thing and it’s really, really important. Brian Rafn – Morgan Dempsey Capital Management: Okay.

We are one of the only manufactures that’s true two state we don’t scrum, we don’t sell direct, we don’t go around them, we are not also selling the buying groups we are committed to wholesale and I think that matters to them as well. Brian Rafn – Morgan Dempsey Capital Management: Okay, No, good point. Mike relative to staffing engineers you got many other now – are you looking at building anymore design teams as you go into 2014 here?

Absolutely. The more bad news I hear from our competitors, lots of knowing in the short-term, it makes a heck of an opportunity to accept resignation of best engineers. Brian Rafn – Morgan Dempsey Capital Management: Okay. And then I ask one more. Are you seeing any commodity raw materials feedstock inflation? Wood to steel, casting ceramics anything?

No. You just have the usual inflation on steel as the overall worldwide economy improves steel gets a little more expensive, the lead times go out a little bit. But at this point it’s not a problem at all. And then we actually got some wood there was a head towards one of our competitors and we wanted it and we are able to snag it. Brian Rafn – Morgan Dempsey Capital Management: That’s good. I’ll get back in line. Thanks Mike.

Your next question comes from the line of Scott Hamann from KeyBanc Capital Markets. Please proceed. Scott Hamann – KeyBanc Capital Markets: Yeah. Hey, thanks. Good morning guys. Just in terms of what you are seeing out there in the industry you talked about some of the promos, due to the excess inventory competitors had, have you seen some of the overall competitive inventory levels come down to the promotions start to ease at this point or is that still going on?

I don’t really have an update on competitor’s inventory to comment. I really don’t. Scott Hamann – KeyBanc Capital Markets: Okay. And then is the – do you have those thousand shipments in the second quarter of LCP9S or was that it came at early third quarter?

That was early third quarter what we typically will do is we will tell the distributors 10 days ahead of telling the public. We will tell them what their allocation of the new product is and without exception, they are all hungry to get it. Then we ship it to them, so that they – in their warehouse when we tell the retailers and then they immediately solicit orders from the retailers. And the key is so that once the retailers find out its starts to leak and we want to have it at the retail stores for that weekend. So that somebody who learns on 20MC about the LC9S it can raise out to a store on Friday afternoon or Saturday morning and it’s there waiting for. So that’s our whole plan so we wait not to the very last minute to ship but pretty close. Scott Hamann – KeyBanc Capital Markets: Okay. And can you give us a sense on the cost structure as we kind of think about the breakdown between fixed and variable cost and maybe how that kind of flows through cogs and the operating expenses?

That’s an – general question. I honestly…. Scott Hamann – KeyBanc Capital Markets: [Indiscernible] like may be X percent is kind of fixed I mean any?

It’s kind of too much detail for somebody like me to have it at finger tips here. there is some de-leveraging as things come down and also hidden in there might look like de-leveraging but it isn’t really is the amount we are investing in new products. Some of its capitalized but not much really does the equipment and the rest August expense. And new products as I mentioned are absolutely our highest return on investments but not until you start shipping them. While they are in development and they are in testing they are just a big ordering. Scott Hamann – KeyBanc Capital Markets: Okay. And then just finally on the inventory question, at the distributor level, I think you highlighted a target maybe it was last quarter and it seems like you got closer but maybe not quite there, but I think the industry is maybe been little bit softer. So do you feel like you are at the appropriate level right now with that distributor inventory such that you don’t need to get to that, I think the number was 360 and correct me if I am wrong going forward?

Yes. Scott Hamann – KeyBanc Capital Markets: Okay. Thanks.

Your next question comes from the line of [indiscernible] from Cohen. Please proceed.

Thank you very much for taking my questions. Mike, could you give us some color on the split in your business between long guns and handguns in terms of sales what you’re seeing in terms of discounting and maybe in terms of inventory levels?

We don’t actually disclose that information in terms of sales or specific inventory levels, but both had been major contributors. It’s funny even that goes in cycle when I first got to the company I think long guns were a larger contributor. And then there was a period of time after we started introducing small concealed carry firearms that the handguns kind of took the lead. And then we came out with some new exiting long guns and then they came back in and so both are significant contributors. They’re both are important to our business. In terms of inventory levels we go right down at the specific SKU. We dramatically emphasis mix model production, look a year ago all you had to do was produce as many guns as you could and we actually took some families and we eliminated SKUs so that we would be more efficient and produce more units. But as the market shifted and there started to be decline in demand certainly the most important thing you could do for a retailer was given a whole variety of guns, rather than just a whole lot of say four SKUs he need 12 SKUs in that family. And so we shifted gears away from just chasing volume to really focusing on mix model production. And we look at it literally down to the individual SKU in a first and item on order which a wholesale doesn’t have an inventory we’re building that product. We’re going to make sure they have it available to and so we really carefully manage the production and the inventory of every single item.

I guess – the point of question was that the next data looks like it’s been coming of much more from long-guns than hand guns can you give us any color without obviously disclosing percentage changes just general color in terms of relative strength of one or the other of those two sectors?

Perhaps I can give you another way of looking at it. If you look at the last cycle we went through which was a huge run up in early ‘09 and then a big let off in late 2009 and then kind of the slower recovery in ‘10, our observation during that period was that the long guns particularly MSRs ran up the fastest in early 2009, and then they declined the fastest. And the handguns seem to be much less effective. They didn’t climb as fast and they didn’t decline as fast either. And a difference that we are observing now is that I would say both categories are behaving in a more similar fashion. Again, MSRs did go up the fastest last year and so they did come down the fastest. But handguns saw little bit of a two unlike in the 2009, 2010 when we did not observe that on a handgun side.

Terrific. And last one; can you give us any color in terms of the increasing availability of ammo what impact has that have on your business?

Well, the unavailability is will that impacts us and 22 long rifle still continues to be the biggest challenge for us. We still have people telling us, consumers telling us they are differing purchases of our Rimfire products because they are still struggling to find ammo, but certainly on other center firing ammos, whether it’s 223 for the rifles or nine millimeter for the handguns that appears becoming much more available and the prices seem to be coming off their peak. But we still need Rimfire ammo out there.

Thank you very much.

Your next question comes from the line of David Bornstein from KKB Capital. Please proceed. David Bornstein – KKB Capital: Good morning. I was to that last comment on ammo got me thinking a little bit. Could elaborate more on ammo availability and its effect on overall demand for firearms in the industry and is this going to be a – I mean is this a real structural problem going forward? Or is this something that ammo will become available in the near future, what’s going on in the industry as far as the ammo requirement?

I’m not sure I can add much color to what I already gave. I would say that, there certainly was the period when Ranges were complaining bitterly that they couldn’t get the ammo to support all their guests coming to the range. And I haven’t really heard those complaints recently, I still hear complaints about Rimfire ammunition and I think now we are really stretching way beyond any expertise into come conjecture here, but I think that the ammo manufactures have been somewhat reluctant to increase their capacity for Rimfire ammunition because it was historically their lowest margin product. And so they’ve all been a little bit reluctant but ammo is ultimately a bit of commodity and most commodity markets respond to demand. And so I have actually no idea what the firearms manufactures I mean the ammo manufactures are planning I wouldn’t be shocked as if at someday a new Rimfire line comes online. I mean – it will be against human nature if they manage to resist forever. David Bornstein – KKB Capital: Okay. The other question I have relates to market share, I’ve listened in and obviously new product introductions are extremely important in terms of product mix another thing is that, is accessories are very important in product mix. It’s in terms of accessories of you mentioned that people stock up on accessories do you have any feel for when – are you starting to see that their stock declining a little bit an increasing or is it still soft and you have an idea of what the cycle might be in terms of accessory recovery?

We don’t have the experience actually to answer that question. We frankly didn’t even separate our accessory sales from the firearm sales they are all lumped together and because it was a small part of our business. And then during the huge run up last summer we actually just thought we were smart efficient operators doing a good job. And it wasn’t until the decline in the accessory sales and we started to digging in deeper that we realize that we had to pay more attention to their impact. This historically has been a small part of our business. It surprised us very pleasantly last year, how strong it was. It’s been frustrating how weak it is this year, which is frankly back more than normal levels, historical levels for us. And I – based on that one data point I cannot possibly tell you what it’s going to do in the future. I don’t know. David Bornstein – KKB Capital: Got it, got it. So basically going at one data point so you don’t really have a trend or feel that’s okay.

I, I would certainly will be thrilled and pleased if it happens again, but who knows? David Bornstein – KKB Capital: Yeah. In terms of your competitiveness against your competitors would you say that you are stable in terms of market share or declining or increasing market share?

Well, as I said in Q1 it appeared that we gained market share. Our spring promotions were very well received. And in Q2, and it was deal of the minute. And wait till tomorrow it’s an even better deal. And the inventory you bought yesterday is now been diminished in value. We certainly lost some market share there and not just by the big numbers, but by retailers telling us that we’ve got little less shelf space because they got this load of XYZ product at such a detail and now they got to convert it to cash because tomorrow it will be worthless. And so, those are the two data points I have. I don’t know what’s going to happen tomorrow. David Bornstein – KKB Capital: Great, great. Okay. Well, I appreciate it. Thank you.

Your next question comes from the line of Andrea James from Dougherty & Company. Please proceed. Andrea James – Dougherty & Company: Thanks for taking my follow-up. Mike, you’re obviously handling the questions just great this morning, but I am just wondering if you do and have in fact has Tom with you on the call today?

I have all kinds of support staff excluding Tom, Chris Killoy, Kevin Reid.

Good morning. Andrea James – Dougherty & Company: Okay good morning. I didn’t know if you were out or what was going on there you had been so quiet okay. The other thing is I was thinking through the share buyback authorization are you guys willing to go to a net debt position if the multiple did contract to point where it made sense to buy back shares? And then what’s your kind of I guess you are comfortable that EBITDA ratio so?

Answer to the first question is yes. The answer to the second question on what ratio is comfortable with us that’s an evolving question we haven’t formally decided but I am sure it will be much less than most other companies out there. We are really conservative cash is king and we really like a strong balance sheet. As you’ve noticed over the past few years. Andrea James – Dougherty & Company: Thank you for taking my follow up.

Tom’s nodding his head yes.

Your next question comes from the line of [Indiscernible]. Please proceed.

Hi good morning. If I strip out the depreciation impact that you talk about and I look at your gross margin this year compared to last year for the second quarter. It implies that for every dollar loss sales you’ve lost about $0.70 of gross profit. Could you help clarify how much of that really comes from the de-leveraging and on average what your incremental margin should be for product sales that you either pick up or lose?

No I certainly don’t have it analyzed to that many decimal places. But I think if you look at our broad overall margins in the 30s, anybody with manufacturing experience will probably predict and estimate that the contribution margin is probably 10 points higher anyway and maybe a little bit more so within that margin in the 30s, sometimes low 30s, sometimes high 30s. You all assume there’s a variety of products ranging from 25% margins up to 75% margins, but the weighted average is there in the mid-30s and so the weighted average, the contribution margin, and by that I mean, just the incremental raw material cost and labor cost and energy cost. And ignoring all the overhead absorption is probably good 10, 12 points higher than that, and that’s what you are observing. And remember, I said the far and away, the highest margin products we have is accessory for firearms, typically magazine.

What’s the magnitude of the accessories, I know you mentioned this year a much more normal environment, but in terms of percentage of your – of the overall revenue, what sort of – what’s the accessory impact in a normal year?

Small.

Okay. Thank you.

Your next question comes from the line of Brian Rafn from Morgan Dempsey Capital Market – Management. Please proceed. Brian Rafn – Morgan Dempsey Capital Management: Thanks. Let me ask Mike, I wasn’t be able to attend your Annual Meeting for the first quarter, but from the standpoint of you talking in the past about acquisitions being needle Morse would you entertain there’s been so much incremental development in apparel relative to the fire arms industry, the 5/11 tactical guys, the Blackhawk guys and it’s there’s a whole ensemble of shooters, outfits and all of that type of thing kind of running around the normal, the gun and the ammunition business. Would that be something that you guys would entertain in talking about margins and accessories or is that something that’s a little beyond your scope?

I’d have to say that’s way beyond our skill set. I mean, you’ve met me and Tom Dineen and Chris Killoy, you’ve seen how we address ROI comes here to check us in the morning we’re in real trouble. Brian Rafn – Morgan Dempsey Capital Management: Okay. As you guys kind of go forward and you get again a little more normalized demand, you talked about building a $15 million safety stock. Should I use average price to wholesaler or should I use your cost to good sold to get that back into the units?

Cost to good sold. And if you’ll note in the current MD&A I think we talked about perhaps incremental trend from where we are today. That sort of will be the upper limit of my comfort level. Brian Rafn – Morgan Dempsey Capital Management: Okay. As you go forward Mike and you now have three plants Newport, Prescott and Mayodan. Do you structure production or development focus that those different plants up in Newport being just – are you going through segment by types or there are specific specialties, obviously some plant sales, the boundaries, some made and some not, how do you structure kind of your production footprint going out over the next few years?

Sorry Brian, I missed about half the question, but what – because you cut out there, but what I think you’re asking, is each factory going to specialize in specific product lines. And the answer is in two parts. At the moment, revolvers or perhaps particularly double action revolvers are perhaps the most complicated kind of product we make. And that is currently in Newport, New Hampshire and it’s a lot of really skilled long time employees doing those. And there’s no compelling reason to move it out because that’s not a rapidly growing market anyway. So there’s plenty of floor space and equipment availability and people availability in Newport. So there’s no economic reason to move it out of Newport. But with regards to a variety of long guns and handguns, we are already doing it at all three locations. So it will just be wary about the skill sets, of the engineers are, who develop new products and sometimes that has to do with what the engineers really want to do and have some special expertise and sometimes it has to do with – that’s the next project on our long-term product planning list. And this is the team that just came off a project and so we can assign them. So it’s a little bit of luck on who gets what project, and also a little bit of responding to their unique skills. It’s a mixture of both. So with the exception of revolvers, particularly double action revolvers, we’re pretty much going to sell all kinds of products at every plant. Brian Rafn – Morgan Dempsey Capital Management: Okay. Alright! When you look at new product development Mike, do you think as you go forward in 2014 and 2015, you will have – you always talked about guys vetting ideas and designs and prototypes, are you going to have more capacity to field more prototype designs going forward?

I think in terms of product development teams, and so we have a long list of products we want to get to. And I’m always a little bit juggling that priority list and we’re also looking to see what teams are becoming available. And we try to mix up the teams, a perfect world as two teams become available at the same time and I kind of shift the guys around so they’re working with an entirely new group of guys and learning new things. Because engineers feed off each other, engineers – single engineer can atrophy, engineers phrase I like to use is they come in units of five, then they feed off each other, they get excited, they compete with each other and good things come out of that kind of mix. And so we sort of look to see who’s becoming available, how they got the skill sets and the aptitude forward and what’s next on the project list and that’s how we assign it. And are we going to have more capacity? I don’t know. We have very good retention of our engineers, and they’re just getting better every year. And we have an enormous commitment to training our engineers and cross training them and sharing information, learn one project with guys at other plants on other projects. And we’re getting a little bit better at that every year. And so that means the guys who are juniors on a team two years ago, can be a leader on a new team and we can bring in some more underneath. And we also have a huge engineering intern program that we – you know a downturn like this, we keep it going strong. So, and we’re playing for the long game here not the short game. I really care that much about next quarter. I care about the products we can bring out, over the next five years. So intuitively, my feeling is that we’re going to have a little more capacity just from our own people. And then we are getting resumes from competitors that are – those people working in those other companies, they’re getting nervous. And so they’re starting to pass resumes towards Ruger and we’re digging through them, I wouldn’t be surprised if we added some more. Brian Rafn – Morgan Dempsey Capital Management: Okay. Michael Fifer: Yeah. We are in this for the long haul. So, I’m not shy about hiring another half dozen engineers during the downturn. Brian Rafn – Morgan Dempsey Capital Management: Okay, all right. Can you comment Mike, what is the size of your engineering pool? Is it 50, 60 guys, 80 guys, 100, where would you be?

The order of magnitude is 100. Brian Rafn – Morgan Dempsey Capital Management: Okay. All right. And then just kind of finally what are you guys kind of running labor shifts at the three different plants right now, as you kind of move into the third quarter?

I believe in most plants it hasn’t changed a lot. We tend to run machines three shifts. And we tend to run assembly on a single shift. And that ratio really hasn’t changed much. What we’re doing is, instead of stretching to reach production rates with overtime, we said well, I don’t need 500 a day of product X, 350 or 400 will be plenty. And so, we’re cutting out the overtime that was producing those elevated numbers. Brian Rafn – Morgan Dempsey Capital Management: All right, sounds good. Okay. Thanks Mike. Appreciate all the comments.

Thanks.

Your next question comes from the line of Scott Hamann from KeyBanc Capital Markets. Please proceed. Scott Hamann – KeyBanc Capital Markets: Thanks. Mike in terms of Mayodan, where are you now with the ramp of that facility versus where you were last quarter beginning of the year?

We are – versus where we were about 90 days ago? Well, we’re moving in the right direction, we’ve got a – we’ve got one product line which is the Ruger American Rimfire rifle running very well. And we believe measured on an incremental basis that that product line is profitable now in that facility. We also have a new hammer forging barrel operation up and running there. We have – well, we hope will someday be a very significant new product line under development there. And then we have to get the next one after that that has been started as well. So I would say, more than half our activity there now is dedicated to new products, which went up on shipping in that facility. We also have ShopRuger there and that’s up and running we move that out from Arizona to free up space for more production in Arizona for new product line. So I’m pretty pleased, it’s come along well. Scott Hamann – KeyBanc Capital Markets: Okay. Thanks. And then in terms of the accessories business, what’s the margin differential between that and the firearms piece? Michael Fifer: Huge. Scott Hamann – KeyBanc Capital Markets: Like double?

Yeah. Scott Hamann – KeyBanc Capital Markets: Okay.

And it depends what channel I sell to. Look, for example early last year, I would say through Q2 of last year, we sold most of our accessory magazines to the direct to consumer online channel. And we sold them at full MSRP. Then, in the third quarter last year as the direct to-consumer channel cooled off, the wholesalers who had been screaming bloody murder to get those accessories, we are finally able to fulfill them, but that’s, it’s a substantially lower margin because again they have to two step to the retailer, and there has to be enough margin for that guy to sell it at or below MSRP. So the unit volumes didn’t change dramatically from second quarter to third quarter last year, but the margins changed dramatically on those magazines. So Q2 last year, again was the high-water market, was the highest unit volumes we’ve ever seen and way beyond our dreams of what we can do on accessories and it was primarily sold to the highest margin channel at the time. So now it’s kind of back to normal. We sell a few online. We sell a few more to wholesale to two step, but in either case it’s totally a big number. Scott Hamann – KeyBanc Capital Markets: Okay. And then Tom on the tax rate you know, being a little bit lower this quarter, can you kind of speak to what was the reason for that and what we should expect going forward?

Yes. The cause in the change in the tax rate this quarter was we trued up the 2013 domestic production activities production. We had unrecognized that in our 2013 financials. As we drafted the 2013 return, realize that production should be higher and we record it and recognize it in this quarter, otherwise nothing else has changed. Scott Hamann – KeyBanc Capital Markets: So the next couple of quarters should go back to what the first quarter rate looked like?

Yes. Scott Hamann – KeyBanc Capital Markets: Okay. And then Mike maybe you know just kind of speak to – I mean, how you think about buybacks and historic multiple, can you kind of give us a sense as to you know what that multiple looks like?

I can’t add any color to the analysis. You can – you guys can do yourselves and I’m not disclosing what we think as a reasonable price. I think I’ve given enough color there. But we’re going to – our plan is to file a 10b5-1 stick it out there with a tranche at a – what I believe to be a below market multiple. Another tranche at a bit more below market multiple and another tranche at a – are you kidding me, kind of multiple. And opportunistically look its, this – I know this comes a shock to you guys, but my feeling is that the stock market over reacts, all the time. It over reacts high, it over reacts low, I went to school and learned about efficient markets and I’ve been stunned with the amount of a motional markets rather than efficient market. I have observed, and so if the stock price gets substantially below what I feel is reasonable for our long-term outlook for earnings. Then we are going to opportunistically buy stock, but if it’s anywhere within a reasonable multiple I am not going to compete with our shareholders. Let them do it, I’d rather save up the money and give them good dividend down the road. Scott Hamann – KeyBanc Capital Markets: Okay Fair enough. Thanks Mike.

Okay.

Ladies and gentlemen that concludes our question-and-answer session. I would now turn the conference back to Michael Fifer.

Thank you very much. And I look forward to talking to you in about 90 days.