Ruger, Largest Gun Maker, Might See Profits Hit From Revenue Rule

The Accounting Policy & Practice Report ® provides financial accounting policy makers, advisors, and practitioners with the latest news, expert insights, and guidance on emerging, evolving,...

By Denise Lugo

Sturm Ruger & Co., the nation’s biggest supplier of hunting and assault rifles, might see a 5 percent decline in first-quarter profits from adopting new revenue accounting rules—the effects of which it will report in May.

The company will record for the first quarter $7 million in liabilities from sales promotions tied to free firearm perks it provides to its customers, according to its most recent Securities and Exchange Commission filing this year.

Those millions of dollars in liabilities could cause profits for that quarter to decline by about 5 or 6 percent if revenues are similar to patterns from earlier periods, accountants told Bloomberg Tax.

Ruger reported $118.2 million in fourth-quarter earnings last year, and about $167 million in last year’s first quarter.

A decline in quarterly earnings could mean less cash available on hand for shareholders’ dividends, which are often paid on a quarterly basis.

Overall, the new revenue rules won’t have a material impact on the company’s total financial results, cash flows, or financial position, “but may have a material impact on the company’s financial results for a particular period,” Ruger disclosed in the SEC filing.

Ruger didn’t return a request for comment. The company will report first-quarter 2018 earnings results May 14.

Rules Contract Based

New revenue accounting rules, which took effect in January for public companies, change the way they evaluate and report contracts with customers. Investors will be able to determine, for the first time, how the rules affect gun-makers’ earnings.

The rules also come with robust footnote disclosure requirements, which would provide more details about the company’s revenue streams.

“It is important for companies and investors to consider both quarter and annual figures,” Cathy Rozanski McNamara, audit partner at BDO International Ltd. in Detroit, said. “It is much more likely an amount would have a notable financial impact for a quarter than the full year.”

Ruger, headquartered in Southport, Conn., produces bolt-action, semi-automatic, and single-shot rifles; shotguns, semi-automatic pistols, and single and double action revolvers. Of the thousands of makers of civilian firearms operating in the U.S. from 1986-2010, Ruger led the industry with 15.3 million firearms, according to Small Arms Survey, an independent global research group located at the Graduate Institute of International and Development Studies in Geneva, Switzerland.

Result of New Rule

In addition to the $7 million in liabilities stemming from adoption of the new revenue rules, some promotional expenses recorded as selling expenses will now be recorded as cost of products sold in future periods, Ruger said in the SEC filing.

“They appear to have been accounting for certain sales promotion activities as part of single transaction under legacy accounting guidance,” Matthew Derba, senior manager at CohnReznick LLP in New York, told Bloomberg Tax.

Under the new revenue rules, those same transactions appear to have multiple performance obligations, said Derba. “This could result in the revenue for the promotional activities being recognized in a different reporting period than the one in which revenue was recognized for other products or services in the same contract,” he said.

Gun Demand Softens

The revenue rules come at a time when gun demand is projected to remain soft in the first half of 2018, but could pick up in the latter half of the year, according to a report by Moody’s Investors Service. Gun demand has dwindled because fear of increased near-term firearm regulation has decreased, Moody’s said. “We expect that demand will gradually increase in later half 2018 due to the fundamental growth in the use of ownership of firearms,” Kevin Cassidy, vice president- senior credit officer at Moody’s, said.

“If gun owners believe that their ability to purchase guns or ammunition will be restricted or taken away, many will accelerate gun related purchases,” Cassidy said.In addition to Ruger, the largest public firearm manufacturers in the U.S. include American Outdoor Brands Corp., Olin Corp., which makes firearms through its Winchester division, Remington Outdoor Co. Inc., which reportedly filed for bankruptcy, and Vista Outdoor Inc.

Gun Makers Still Evaluating Rules

American Outdoor Brands Corp., Springfield, Mass., which owns 18 brands including Smith & Wesson, is still evaluating the effects of the new revenue rules. The company said it put together an internal project team and engaged third-party specialists to help evaluate the impact the new revenue rules.

AOBC can’t estimate the impact the new standard will have on its condensed consolidated financial statements at this time, the company said in footnote disclosures filed with the SEC earlier this year. The company didn’t return a request for comment.

Understanding all contracts manufacturers have can be challenging, accountants said. “Often the accountants aren’t always understanding every single agreement that the sales people have,” McNamara told Bloomberg Tax.

“So what we’ve suggested is getting the contracts they have and going through them in detail to understand, are they offering anything other than a gun for these free products or sample products?” McNamara said. “So it’s really just getting the information.”

To contact the reporter on this story: Denise Lugo in New York at dlugo@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Try Accounting Policy & Practice Report ®