Thursday, August 1, 2013

News On The Business Of Guns

There are a number of news items from the last few days regarding the firearms industry that are worthy of attention.

First, ArmaLite of Geneseo, Illinois was bought out by Strategic Armory Corps (SAC) of Phoenix, Arizona. SAC was formed in 2011 as an acquisition vehicle with which to buy out firearms and firearms related companies. In addition to ArmaLite, SAC owns high-end tactical bolt-rifle maker Surgeon Rifles, suppressor maker AWC Systems Technology, and AWC Ammo. The head of SAC had this to say on the acquisition.
"ArmaLite is a tremendous addition to our group of outstanding companies and broadens our product line so we can better meet the needs of our customers", said Mark Johnson, SAC President and CEO. "The history of Mark Westrom over his 19 years of leading ArmaLite will provide a wealth of industry knowledge to our leadership team and allow us to further expand our ability to meet the ever increasing demands for the highest quality products by our customers and the marketplace."
News comes that longtime tactical and military equipment retailer US Cavalry which declared bankruptcy in March has been purchased by ERMC Corporation of Chattanooga, TN.
US Cavalry Retail Ownership Announcement

Chattanooga based ERMC Corporation, the parent company of Modern Firearms and ASR Uniforms announced today the acquisition of U. S. Cavalry Stores. ERMC purchased all U. S. Cavalry assets to include personnel, inventory and retail stores. I will be working with others in the company to integrate Modern Firearms, ASR Uniforms and U.S. Cavalry into a top notch provider of Military, Police, Fire and EMS uniforms, equipment and firearms.
Public companies are starting to report their sales and profits for the second quarter. Both ATK and Ruger reported their sales and earnings in the last couple of days.

ATK's business is composed of three segments: aerospace group, defense group, and the sporting group. For me, it is the sporting group of companies that is of the most interest. While the overall sales for ATK were flat for the second quarter of 2013, the sporting group saw a 28.4% increase or $79,346,000. In terms of profit, the sporting group led ATK with a 112.2% increase compared to a single digit increase for the aerospace group and a loss for their defense group. This increase from the sporting group allowed them to beat stock analysts' expectations of profits.

With the purchase of Savage Arms, the sporting group is now more than just ammo, reloading components and equipment, and other firearms related accessories. It appears that the company leadership also recognizes the importance of Savage to their bottom line. ATK's President and CEO Mark DeYoung had this to say about Savage.
"The Company's completion of the Savage acquisition builds upon strong Sporting Group performance and market leadership with a well-respected and recognized brand in the long guns market. We are well underway with the integration of Savage and I am confident our wholesalers, retailers, distributors and consumers will find value in our robust portfolio of product offerings."
 Ruger had another stellar quarter. Their earnings increased 79% for the second quarter when compared to the same quarter a year earlier. The earnings increase was driven by a 50% increase in sales for the quarter compared to a year earlier. Sales for the quarter were $179.5 million and the earnings per share were $1.63 per share. Both of these numbers blew away analysts' expectations. Ruger was forecast to have earned $1.18 per share in profits on sales of $154.7 million.

New product sales accounted for 31% of sales in the quarter. New introductions include both the LC380 and SR45 pistols.

Ruger expects to spend upwards of $35 million on capital expenditures during 2013. Much of that will be related to new products and production capacity expansion. I'm sure part of that money will go to getting the Mayodan plant up and running after the expansion plans are finalized. The company is waiting on the tax incentives and grants package from North Carolina to be completed.

CEO Mike Fifer held a conference call today to discuss the company's second quarter results. Fifer said he expected the third quarter to slow down as things start to return to more normal growth. As reported by CNN Money:
While the trend continued in the second quarter, Ruger CEO Mike Fifer said gun demand appears to be returning to "more normalized growth rates."

"We haven't seen any slowing in demand for Ruger products," Fifer told analysts during a conference call. "But we have heard anecdotally that the normal seasonal slowdown is starting."

He said sales in the current quarter could represent a "reset from the huge surge" that began late last year.
He was also asked about the damage to the Prescott plant. He said he thinks the total cost to Ruger will be less than $5 million in terms of damage to the roof, equipment, and lost production. They resumed production on Monday. The machinery that got soaked was not being used in current production and was intended for future projects.

Fifer was asked about the new Mayodan plant and what was needed to get it ready. He said that with the exception of adding a section for bluing and for heat treating they only needed to move in the new machinery. He was very complimentary towards the workforce in the Rockingham County area. He said the caliber of the potential employees was "really impressive." He said the firearms to be produced in Mayodan would be new introductions so he couldn't discuss what they were yet.

If the overall market demand is starting to slow, I'm going to go out on a limb and say we should expect to see a number of new product introductions from not only Ruger but the rest of the industry. SHOT 2014 should be interesting in that regard.

UPDATE: Steve at The Firearm Blog listened in on the ATK conference call for analysts. He has a review of it here. A couple of points from his review. First, Savage Arms is expected to make ATK around $25-28 million in profits. Second, Steve believes that ATK is in the market to pick up other firearms companies.

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