UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-10435
STURM, RUGER & COMPANY, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0633559
---------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Lacey Place, Southport, Connecticut 06890
---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip code)
(203) 259-7843
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "accelerated filer", "large accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of the issuer's common stock as of
September 27, 2008: Common Stock, $1 par value -19,458,943.
Page 1 of 34
INDEX
STURM, RUGER & COMPANY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed balance sheets - September 27, 2008 and December 31, 2007 3
Condensed statements of operations - Three and nine months ended September 27, 2008 and
September 30, 2007 5
Condensed statement of stockholders' equity - Nine months ended September 27, 2008 6
Condensed statements of cash flows - Nine months ended September 27, 2008 and September 30, 2007 7
Notes to condensed financial statements - September 27, 2008 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits 33
SIGNATURES 34
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
September 27, 2008 December 31, 2007
-------------------------------------------------------------------------------------------------
(Note)
Assets
Current Assets
Cash and cash equivalents $ 2,580 $ 5,106
Short-term investments 20,035 30,504
Trade receivables, net 19,504 15,636
Gross inventories 67,667 64,330
Less LIFO reserve (47,454) (46,890)
Less excess and obsolescence reserve (3,383) (4,143)
-------------------------------------------------------------------------------------------------
Net inventories 16,830 13,297
-------------------------------------------------------------------------------------------------
Deferred income taxes 5,829 5,878
Prepaid expenses and other current assets 3,830 3,091
-------------------------------------------------------------------------------------------------
Total current assets 68,608 73,512
Property, plant and equipment 125,407 126,496
Less allowances for depreciation (100,467) (104,418)
-------------------------------------------------------------------------------------------------
Net property, plant and equipment 24,940 22,078
-------------------------------------------------------------------------------------------------
Deferred income taxes 3,542 3,626
Other assets 2,921 2,666
-------------------------------------------------------------------------------------------------
Total Assets $ 100,011 $ 101,882
=================================================================================================
Note:
The balance sheet at December 31, 2007 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements.
See notes to condensed financial statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
September 27, 2008 December 31, 2007
------------------------------------------------------------------------------------------------------
(Note)
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable and accrued expenses $ 10,927 $ 8,102
Product liability 1,034 1,208
Employee compensation and benefits 5,753 4,860
Workers' compensation 5,003 5,667
Income taxes payable 1,743 411
------------------------------------------------------------------------------------------------------
Total current liabilities 24,460 20,248
Accrued pension liability 2,721 4,840
Product liability accrual 637 725
Contingent liabilities - Note 8 -- --
Stockholders' Equity
Common Stock, non-voting, par value $1:
Authorized shares 50,000; none issued -- --
Common Stock, par value $1: Authorized shares
40,000,000; 22,798,732 issued and
19,458,943 and 20,571,817
outstanding 22,799 22,788
Additional paid-in capital 2,394 1,836
Retained earnings 87,741 84,834
Less: Treasury stock - 3,339,789 and 2,215,995 shares, at (27,352) (20,000)
cost
Accumulated other comprehensive loss (13,389) (13,389)
------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 72,193 76,069
------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 100,011 $ 101,882
======================================================================================================
Note:
The balance sheet at December 31, 2007 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements.
See notes to condensed financial statements.
4
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 27, September 30, September 27, September 30,
2008 2007 2008 2007
------------------------------ ------------------------------
Net firearms sales $ 40,318 $ 29,298 $ 117,186 $ 112,535
Net castings sales 1,504 2,565 5,806 9,892
--------------------------------------------------------------------------------------------------------
Total net sales 41,822 31,863 122,992 122,427
Cost of products sold 34,964 26,268 96,985 88,140
--------------------------------------------------------------------------------------------------------
Gross profit 6,858 5,595 26,007 34,287
--------------------------------------------------------------------------------------------------------
Expenses:
Selling 3,864 3,853 12,350 10,747
General and administrative 2,615 2,675 9,524 10,510
Pension plan curtailment charge -- 1,143 -- 1,143
Other operating expenses, net -- 489 -- 489
--------------------------------------------------------------------------------------------------------
Total expenses 6,479 8,160 21,874 22,889
--------------------------------------------------------------------------------------------------------
Operating income (loss) 379 (2,565) 4,133 11,398
--------------------------------------------------------------------------------------------------------
Other income:
Gain on sale of real estate -- -- -- 7,085
Interest income 72 772 352 1,966
Other income (expense), net 150 51 204 (168)
--------------------------------------------------------------------------------------------------------
Total other income, net 222 823 556 8,883
--------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 601 (1,742) 4,689 20,281
Income taxes (benefit) 229 (1,125) 1,782 7,707
--------------------------------------------------------------------------------------------------------
Net income (loss) $ 372 ($ 617) $ 2,907 $ 12,574
========================================================================================================
Earnings (loss) per share
Basic $ 0.02 ($ 0.03) $ 0.14 $ 0.55
============= ============= ============= =============
Diluted $ 0.02 ($ 0.03) $ 0.14 $ 0.55
============= ============= ============= =============
Average shares outstanding
Basic 20,047 22,759 20,398 22,686
============= ============= ============= =============
Diluted 20,054 22,759 20,429 23,030
============= ============= ============= =============
See notes to condensed financial statements.
5
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in thousands)
Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive
Stock Capital Earnings Stock Loss Total
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $ 22,788 $ 1,836 $ 84,834 $ (20,000) $ (13,389) $ 76,069
Net income and
comprehensive income -- -- 2,907 -- -- 2,907
Stock-based compensation,
net of tax 11 558 -- -- -- 569
Repurchase of 1,123,794 shares of
common stock -- -- -- (7,352) -- (7,352)
===================================================================================================================================
Balance at September 27, 2008 $ 22,799 $ 2,394 $ 87,741 $ (27,352) $ (13,389) $ 72,193
===================================================================================================================================
See notes to condensed financial statements.
6
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Nine Months Ended
---------------------------------------------------------------------------------------------------------
September 27, 2008 September 30, 2007
---------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 2,907 $ 12,574
Adjustments to reconcile net income to cash (used for)
provided by operating activities:
Depreciation 3,518 3,126
Slow moving inventory valuation adjustment 280 (1,590)
Asset impairment charge -- 489
Pension plan curtailment charge -- 1,143
Stock option expense 419 297
Gain on sale of assets (95) (7,141)
Deferred income taxes 133 4,705
Changes in operating assets and liabilities:
Trade receivables (3,868) 2,941
Inventories (3,813) 14,515
Trade accounts payable and accrued expenses 3,054 (3,546)
Product liability (263) 282
Prepaid expenses, other assets and other liabilities (2,963) (1,665)
Income taxes 1,333 (196)
---------------------------------------------------------------------------------------------------------
Cash provided by operating activities 642 25,934
---------------------------------------------------------------------------------------------------------
Investing Activities
Property, plant and equipment additions (6,380) (3,128)
Proceeds from the sale of assets 95 12,542
Purchases of short-term investments (21,931) (49,832)
Proceeds from maturities of short-term investments 32,400 11,000
---------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities 4,184 (29,418)
---------------------------------------------------------------------------------------------------------
Financing Activities
Payments of employee withholding tax for cashless
exercise of stock options -- (1,126)
Repurchase of common stock (7,352) --
---------------------------------------------------------------------------------------------------------
Cash (used for) financing activities (7,352) (1,126)
---------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (2,526) (4,610)
Cash and cash equivalents at beginning of period 5,106 7,316
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,580 $ 2,706
=========================================================================================================
See notes to condensed financial statements.
7
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of management, the accompanying unaudited condensed
financial statements include all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the results of the
interim periods. Operating results for the nine months ended September 27, 2008
are not indicative of the results to be expected for the full year ending
December 31, 2008. These financial statements have been prepared on a basis that
is substantially consistent with the accounting principles applied in our Annual
Report on Form 10-K for the year ended December 31, 2007.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Organization:
Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the
design, manufacture, and sale of firearms to domestic customers. Approximately
95% of the Company's total sales for the third quarter and nine months ended
September 27, 2008 and September 30, 2007 were firearms sales, and 5% were
investment castings sales. Export sales represent less than 7% of total sales.
The Company's design and manufacturing operations are located in the United
States and substantially all product content is domestic. The Company's firearms
are sold through a select number of independent wholesale distributors
principally to the commercial sporting market.
The Company manufactures investment castings made from steel alloys for
internal use in its firearms and utilizes available investment casting capacity
to manufacture and sell castings to outside customers.
Change in Interim Fiscal Reporting:
In 2008, the Company is now reporting its first three fiscal quarters
ending on the last Saturday of March, June and September, respectively. Each of
these fiscal quarters will be comprised of thirteen complete weeks. For 2008,
the three quarters will end on March 29, 2008, June 28, 2008, and September 27,
2008. This change was made to provide a better comparison of the Company's
reported results with those reported in prior years. The Company's fiscal year
end remains December 31. The impact of this change on results of operations for
the nine months ended September 27, 2008 is not significant.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
8
Reclassifications:
Certain prior period balances have been reclassified to conform with
current year presentation.
Recent Accounting Pronouncements:
In September 2006, FASB issued FAS No. 157, "Fair Value Measurements" (FAS
157). FAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for the fiscal year beginning January 1, 2008. The FASB has deferred
the implementation of FAS 157 by one year for certain non-financial assets and
liabilities such as this will be effective for the fiscal year beginning January
1, 2009. The adoption of FAS 157 did not have a material impact on the Company's
financial position, results of operations and cash flows, nor is it expected to
have any such impact upon final implementation.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("FAS 141R"). FAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. FAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. FAS 141R is effective for the fiscal year
beginning January 1, 2009, and will be adopted by the Company in the first
quarter of 2009. The adoption of FAS 141R is not expected to have a material
impact on the Company's financial position, results of operations and cash
flows.
NOTE 3 - INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method. An
actual valuation of inventory under the LIFO method can be made only at the end
of each year based on the inventory levels and costs existing at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many factors beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
Inventories consist of the following (in thousands):
September 27, 2008 December 31, 2007
-------------------------------------------------------------------------------------
Inventory at FIFO
Finished products $ 8,015 $ 8,413
Materials and work in process 59,652 55,917
-------------------------------------------------------------------------------------
Gross inventories 67,667 64,330
Less: LIFO reserve (47,454) (46,890)
Less: excess and obsolescence reserve (3,383) (4,143)
-------------------------------------------------------------------------------------
Net inventories $ 16,830 $ 13,297
=====================================================================================
The excess and obsolescence reserve decreased as a result of the
disposition of previously reserved inventory.
Effective April 1, 2008, the Company changed its methodology for
estimating standard direct labor rates for its firearms. This change in
estimation resulted in an increase to gross inventories of $1.9 million
(approximately $0.5 million after the impact of the LIFO reserve) in the nine
months ended September 27, 2008, and a corresponding reduction in cost of sales.
9
NOTE 4 - INCOME TAXES
The Company's 2008 effective tax rate differs from the statutory tax rate
due principally to state income taxes partially offset by tax benefits related
to the American Jobs Creation Act of 2004. The Company's 2008 effective tax rate
differs from the statutory tax rate due principally to state income taxes. The
effective income tax rate for the nine months ended September 27, 2008 and
September 30, 2007 is 38.0%. The Company has not been required to make income
tax payments in either the third quarter or nine months ended September 27, 2008
because of overpayments of estimated taxes in 2007. Income tax payments in the
third quarter and nine months ended September 30, 2007 totaled $1.1 million and
$4.8 million, respectively.
The Company files income tax returns in the U.S. Federal jurisdiction and
various state jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal and state income tax examinations by tax authorities for
years before 2005. In the third quarter of 2007, the Internal Revenue Service
(IRS) completed an examination of the Company's Federal income tax return for
2005. The IRS did not propose any adjustments as a result of this examination
and has accepted the Company's return as filed. In the first quarter of 2008,
the IRS commenced an audit of the Company's 2006 Federal income tax return,
which is still on-going. The Company anticipates that the IRS will complete this
examination by the end of 2008. The Company does not anticipate that adjustments
resulting from this examination, if any, would result in a material change to
its financial position or results of operations.
The Company adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes," ("FIN 48") on January 1, 2007.
Upon the adoption of FIN 48, the Company commenced a review of all open tax
years in all jurisdictions. The Company does not believe it has included any
"uncertain tax positions" in its Federal income tax return or any of the state
income tax returns it is currently filing. The Company has made an evaluation of
the potential impact of additional state taxes being assessed by jurisdictions
in which the Company does not currently consider itself liable. The Company does
not anticipate that such additional taxes, if any, would result in a material
change to its financial position. However, the Company anticipates that it is
more likely than not that additional state tax liabilities in the range of $0.4
to $0.7 million exist. The Company has recorded $0.4 million relating to these
additional state income taxes, including approximately $0.2 million for the
payment of interest and penalties. This amount is included in income taxes
payable at September 27, 2008. In connection with the adoption of FIN 48, the
Company will include interest and penalties related to uncertain tax positions
as a component of its provision for taxes.
NOTE 5 - PENSION PLANS
The Company is shifting its retirement benefit focus from defined benefit
pension plans to defined contribution retirement plans, utilizing its current
401(k) plan.
In the third quarter of 2007, the Company amended its hourly and salaried
defined benefit pension plans so that employees no longer accrue benefits under
them effective December 31, 2007. This action froze benefits for all employees
effective December 31, 2007 and prevents future hires from joining the plans.
Starting January 1, 2008, the Company provides supplemental discretionary
contributions to substantially all employees' individual 401(k) accounts.
In late 2007, after authorizing the "freeze" amendment to its hourly and
salaried defined benefit pension plans, the Company contributed an additional $5
million to these plans. The intent of this discretionary contribution was to
reduce the amount of time that the Company will be required to continue to
operate the frozen plans. The ongoing cost of running the plans (even if frozen)
is approximately $0.2 million per year, which includes PBGC premiums, actuary
and audit fees, and other expenses.
10
In 2008 and future years, the Company may be required to make cash
contributions to the two defined benefit pension plans according to the new
rules of the Pension Protection Act of 2006. The annual contributions will be
based on the amount of the unfunded plan liabilities derived from the frozen
benefits and will not include liabilities for any future accrued benefits for
any new or existing participants. The total amount of these future cash
contributions will be dependent on the investment returns generated by the
plans' assets and the then-applicable discount rates used to calculate the
plans' liabilities. There is no minimum required cash contribution for the
defined benefit plans for 2008, but there may be such a requirement in 2009
because of recent market volatility which has adversely affected investment
returns for the plans' assets.
The total annual cash outlays for retirement benefits, which include the
continuing discretionary funding of the two defined benefit pension plans and
supplemental discretionary 401(k) contributions, are intended to be comparable
to the previous retirement benefit cash funding levels of approximately $2
million per year. This intended annual discretionary funding level is subject to
future review based on any changes in the minimum required funding for the
defined benefit plans and other business conditions.
In February 2008, the Company made lump sum benefit payments to two
participants in its only non-qualified defined benefit plan, the Supplemental
Executive Retirement Plan. These payments, which totaled $2.1 million,
represented the actuarial present value of the participants' accrued benefit as
of the date of payment. Only one, retired participant remains in this plan.
The estimated cost of the defined benefit plans is summarized below (in
thousands):
Three Months Ended Nine Months Ended
---------------------------------------------------------------------------------------------------------
September 27, September 30, September 27, September 30,
2008 2007 2008 2007
---------------------------------------------------------------------------------------------------------
Service cost $ -- $ 339 $ -- $ 1,090
Interest cost 997 700 2,991 2,249
Expected return on plan assets (1,277) (861) (3,831) (2,765)
Amortization of prior service cost -- 33 -- 105
Recognized actuarial gains 303 253 909 812
---------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 23 $ 464 $ 69 $ 1,491
=========================================================================================================
Costs attributable to the discretionary supplemental 401(k) plan totaled
$0.3 million and $1.0 million for the three and nine months ended September 27,
2008, respectively. The Company plans to contribute an additional $0.3 million
to the plan during the remainder of 2008.
NOTE 6 - SHARE BASED PAYMENTS
In 1998, the Company adopted, and in May 1999 the shareholders approved,
the 1998 Stock Incentive Plan (the "1998 Plan") under which employees were
granted options to purchase shares of the Company's Common Stock and stock
appreciation rights. The Company reserved 2,000,000 shares for issuance under
the 1998 Plan. These options have an exercise price equal to the fair market
value of the shares of the Company at the date of grant, become vested ratably
over five years, and expire ten years from the date of grant. In April 2007, all
reserved shares for which a stock option had not been granted under the 1998
Plan were deregistered. No further stock options or stock will be granted under
the 1998 Plan.
11
On December 18, 2000, the Company adopted, and in May 2001 the
shareholders approved, the 2001 Stock Option Plan for Non-Employee Directors
(the "2001 Plan") under which non-employee directors were granted options to
purchase shares of the Company's authorized but unissued stock. The Company
reserved 200,000 shares for issuance under the 2001 Plan. Options granted under
the 2001 Plan have an exercise price equal to the fair market value of the
shares of the Company at the date of grant and expire ten years from the date of
grant. Twenty-five percent of the options vest immediately upon grant and the
remaining options vest ratably over three years. In April 2007, all reserved
shares for which a stock option had not been granted under the 2001 Plan were
deregistered. No further stock options or stock will be granted under the 2001
Plan.
In April 2007, the Company adopted and the shareholders approved the 2007
Stock Incentive Plan (the "2007 SIP") under which employees, independent
contractors, and non-employee directors may be granted stock options, restricted
stock, deferred stock awards, and stock appreciation rights, any of which may or
may not require the satisfaction of performance objectives. Vesting requirements
will be determined by the Compensation Committee or the Board of Directors. The
Company has reserved 2,550,000 shares for issuance under the 2007 SIP.
In 2007, a total of 10,920 deferred stock awards were issued to
non-employee directors, which vested in April 2008. Compensation expense related
to these awards was amortized ratably over the vesting period. The total
compensation expense related to these awards was $0.2 million. In April 2008, a
total of 18,222 deferred stock awards were issued to non-employee directors,
which will vest in April 2009. Compensation expense related to these awards is
being amortized ratably over the vesting period. The total compensation expense
related to these awards was $0.2 million.
A summary of changes in options outstanding under the Plans is summarized
below:
Weighted Average Grant Date
Shares Exercise Price Fair Value
--------------------------------------------------------------------------------
Outstanding at December 31, 2007 1,091,250 $ 9.44 $ 3.91
Granted 359,000 $ 8.10 4.39
Exercised -- -- --
Expired -- -- --
--------------------------------------------------------------------------------
Outstanding September 27, 2008 1,450,250 $ 9.11 $ 4.03
--------------------------------------------------------------------------------
The aggregate intrinsic value (mean market price at September 27, 2008
less the weighted average exercise price) of options outstanding under the Plans
was approximately $0.6 million.
The aggregate compensation expense for the options granted in the third
quarter and nine months ended September 27, 2008, calculated using the
Black-Scholes option-pricing model, was $0.2 million and $0.4 million,
respectively. This expense, which is a non-cash item, is being amortized in the
Company's statements of operations over the vesting periods. Compensation costs
related to all share-based payments recognized in the statements of operations
aggregated $0.2 million and $0.5 million for the third quarter and nine months
ended September 27, 2008, respectively and $0.2 million and $0.5 million for the
third quarter and nine months ended September 27, 2007, respectively.
The Company has adopted a policy to pay 25% of all officers' annual
incentive compensation in restricted stock. As of September 27, 2008, no
restricted stock has been awarded to officers under this policy.
12
NOTE 7 - BASIC AND DILUTED EARNINGS PER SHARE
Weighted average shares outstanding for the third quarter and nine months
ended September 27, 2008 were 20,047,000 and 20,398,000, respectively. Weighted
average shares outstanding for the third quarter and nine months ended September
30, 2007 were 22,759,000 and 22,686,000, respectively.
Diluted earnings per share reflect the impact of options outstanding using
the treasury stock method, when applicable. This resulted in diluted
weighted-average shares outstanding for the third quarter and nine months ended
September 27, 2008 of 20,054,000 and 20,429,000 shares, respectively. Diluted
weighted-average shares outstanding for the third quarter and nine months ended
September 30, 2007 were 22,759,000 and 23,030,000, respectively.
NOTE 8 - CONTINGENT LIABILITIES
As of September 27, 2008, the Company is a defendant in approximately 5
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into one of the two following categories:
(i) Those that claim damages from the Company related to allegedly
defective product design which stem from a specific incident.
Pending lawsuits and claims are based principally on the
theory of "strict liability" but also may be based on
negligence, breach of warranty, and other legal theories.
(ii) Those brought by cities or other governmental entities, and
individuals against firearms manufacturers, distributors and
retailers seeking to recover damages allegedly arising out of
the misuse of firearms by third-parties in the commission of
homicides, suicides and other shootings involving juveniles
and adults. The complaints by municipalities seek damages,
among other things, for the costs of medical care, police and
emergency services, public health services, and the
maintenance of courts, prisons, and other services. In certain
instances, the plaintiffs seek to recover for decreases in
property values and loss of business within the city due to
criminal violence. In addition, nuisance abatement and/or
injunctive relief is sought to change the design, manufacture,
marketing and distribution practices of the various
defendants. These suits allege, among other claims, strict
liability or negligence in the design of products, public
nuisance, negligent entrustment, negligent distribution,
deceptive or fraudulent advertising, violation of consumer
protection statutes and conspiracy or concert of action
theories. Most of these cases do not allege a specific injury
to a specific individual as a result of the misuse or use of
any of the Company's products.
The Company has expended significant amounts of financial resources and
management time in connection with product liability litigation. Management
believes that, in every case involving firearms, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses to the suits brought by
governmental entities further exist based on, among other things, the Protection
of Lawful Commerce in Arms Act, established state law precluding recovery for
essential government services, the remoteness of the claims, the types of
damages sought to be recovered, and limitations on the extraterritorial
authority which may be exerted by a city, municipality, county or state under
state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a constitutional
jury, Hamilton, et al. v. Accu-tek, et al., resulted in a defense verdict in
favor of the Company on February 11, 1999. In that case, numerous firearms
manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and "industry-wide" liability. The Company and
its marketing and distribution practices were exonerated from any claims of
negligence in each of the seven cases decided by the jury. In subsequent
proceedings involving other defendants, the New York Court of Appeals
13
as a matter of law confirmed that 1) no legal duty existed under the
circumstances to prevent or investigate criminal misuses of a manufacturer's
lawfully made products; and 2) liability of firearms manufacturers could not be
apportioned under a market share theory. More recently, the New York Court of
Appeals on October 21, 2003 declined to hear the appeal from the decision of the
New York Supreme Court, Appellate Division, affirming the dismissal of New York
Attorney General Eliot Spitzer's public nuisance suit against the Company and
other manufacturers and distributors of firearms. In its decision, the Appellate
Division relied heavily on Hamilton in concluding that it was "legally
inappropriate," "impractical," "unrealistic" and "unfair" to attempt to hold
firearms manufacturers responsible under theories of public nuisance for the
criminal acts of others.
Of the lawsuits brought by municipalities, counties or a state Attorney
General, twenty have been concluded: Atlanta - dismissal by intermediate
Appellate Court, no further appeal; Bridgeport - dismissal affirmed by
Connecticut Supreme Court; County of Camden - dismissal affirmed by U.S. Third
Circuit Court of Appeals; Miami - dismissal affirmed by intermediate appellate
court, Florida Supreme Court declined review; New Orleans - dismissed by
Louisiana Supreme Court, United States Supreme Court declined review;
Philadelphia - U.S. Third Circuit Court of Appeals affirmed dismissal, no
further appeal; Wilmington - dismissed by trial court, no appeal; Boston -
voluntary dismissal with prejudice by the City at the close of fact discovery;
Cincinnati - voluntarily withdrawn after a unanimous vote of the city council;
Detroit - dismissed by Michigan Court of Appeals, no appeal; Wayne County -
dismissed by Michigan Court of Appeals, no appeal; New York State - Court of
Appeals denied plaintiff's petition for leave to appeal the Intermediate
Appellate Court's dismissal, no further appeal; Newark - Superior Court of New
Jersey Law Division for Essex County dismissed the case with prejudice; City of
Camden - dismissed on July 7, 2003, not reopened; Jersey City - voluntarily
dismissed and not re-filed; St. Louis - Missouri Supreme Court denied
plaintiffs' motion to appeal Missouri Appellate Court's affirmation of
dismissal; Chicago - Illinois Supreme Court affirmed trial court's dismissal;
and Los Angeles City, Los Angeles County, San Francisco - Appellate Court
affirmed summary judgment in favor of defendants, no further appeal; and
Cleveland - dismissed on January 24, 2006 for lack of prosecution.
The dismissal of the Washington, D.C. municipal lawsuit was sustained on
appeal, but individual plaintiffs were permitted to proceed to discovery and
attempt to identify the manufacturers of the firearms used in their shootings as
"machine guns" under the city's "strict liability" law. On April 21, 2005, the
D.C. Court of Appeals, in an en banc hearing, unanimously dismissed all
negligence and public nuisance claims, but let stand individual claims based
upon a Washington, D.C. act imposing "strict liability" for manufacturers of
"machine guns." Based on present information, none of the Company's products has
been identified with any of the criminal assaults which form the basis of the
individual claims. The writ of certiorari to the United States Supreme Court
regarding the constitutionality of the Washington, D.C. act was denied and the
case was remanded to the trial court for further proceedings. The defendants
subsequently moved to dismiss the case based upon the Protection of Lawful
Commerce in Arms Act ("PLCAA"), which motion was granted on May 22, 2006. The
individual plaintiffs and the District of Columbia, which has subrogation claims
in regard to the individual plaintiffs, appealed. On January 10, 2008, the
District of Columbia Court of Appeals unanimously upheld the dismissal. On
February 22, 2008, the District and the individual plaintiffs filed petitions
for rehearing or rehearing en banc. On June 9, 2008, the court denied the
petition. On October 23, 2008, the District and the individual plaintiffs filed
a Petition for writ of certiorari in the United States Supreme Court.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by
the trial court, but the Indiana Supreme Court reversed this dismissal and
remanded the case for discovery proceedings on December 23, 2003. Gary is
scheduled to begin trial in 2009. The defendants filed a motion to dismiss
pursuant to the PLCAA. The state court judge held the PLCAA unconstitutional and
the defendants filed a motion with the Indiana Court of Appeals asking it to
accept interlocutory appeal on the issue, which appeal was accepted on February
5, 2007. On October 29, 2007, the Indiana Appellate Court affirmed, holding that
the PLCAA does not apply to the City's claims. A petition for rehearing was
filed in the Appellate Court and denied on January 9, 2008. On February 8, 2008,
a Petition to Transfer the appeal to the Supreme Court of Indiana was filed,
which has not yet been ruled upon. The case is set for trial on June 15, 2009.
14
In the previously reported New York City municipal case, the defendants
moved to dismiss the suit pursuant to the PLCAA. The trial judge found the PLCAA
to be constitutional, but denied the defendants' motion to dismiss the case, on
the basis that the Act was not applicable to the suit. The defendants were given
leave to appeal to the U.S. Court of Appeals for the Second Circuit. The Second
Circuit affirmed the constitutionality of the PLCAA and reversed on
applicability, holding that the PLCAA did apply. The case was remanded for
dismissal. On June 16, 2008, the City filed a petition for rehearing or
rehearing en banc. On August 20, 2008, the City's petition was denied by the
Second Circuit. On October 20, 2008, the City filed a Petition for writ of
certiorari in the United States Supreme Court.
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict
rejecting the NAACP's claims. On July 21, 2003, Judge Jack B. Weinstein entered
an order dismissing the NAACP lawsuit, but this order contained lengthy dicta
which defendants believe are contrary to law and fact. Appeals by both sides
were filed, but plaintiffs withdrew their appeal. On August 3, 2004, the United
States Court of Appeals for the Second Circuit granted the NAACP's motion to
dismiss the defendants' appeal of Judge Weinstein's order denying defendants'
motion to strike his dicta made in his order dismissing the NAACP's case, and
the defendants' motion for summary disposition was denied as moot. The ruling of
the Second Circuit effectively confirmed the decision in favor of defendants and
brought this matter to a conclusion.
Legislation has been passed in approximately 34 states precluding suits of
the type brought by the municipalities mentioned above. On the Federal level,
the "Protection of Lawful Commerce in A rms Act" was signed by President Bush on
October 26, 2005. The Act requires dismissal of suits against manufacturers
arising out of the lawful sale of their products for harm resulting from the
criminal or unlawful misuse of a firearm by a third party. The Company is
pursuing dismissal of each action involving such claims, including the municipal
cases described above.
Punitive damages, as well as compensatory damages, are demanded in certain
of the lawsuits and claims. Aggregate claimed amounts presently exceed product
liability accruals and applicable insurance coverage. For claims made after July
10, 2000, coverage is provided on an annual basis for losses exceeding $5
million per claim, or an aggregate maximum loss of $10 million annually, except
for certain new claims which might be brought by governments or municipalities
after July 10, 2000, which are excluded from coverage.
Product liability claim payments are made when appropriate if, as, and
when claimants and the Company reach agreement upon an amount to finally resolve
all claims. Legal costs are paid as the lawsuits and claims develop, the timing
of which may vary greatly from case to case. A time schedule cannot be
determined in advance with any reliability concerning when payments will be made
in any given case.
Provision is made for product liability claims based upon many factors
related to the severity of the alleged injury and potential liability exposure,
based upon prior claim experience. Because our experience in defending these
lawsuits and claims is that unfavorable outcomes are typically not probable or
estimable, only in rare cases is an accrual established for such costs. In most
cases, an accrual is established only for estimated legal defense costs. Product
liability accruals are periodically reviewed to reflect then-current estimates
of possible liabilities and expenses incurred to date and reasonably anticipated
in the future. Threatened product liability claims are reflected in our product
liability accrual on the same basis as actual claims; i.e., an accrual is made
for reasonably anticipated possible liability and claims-handling expenses on an
ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes
cannot be made. However, in product liability cases in which a dollar amount of
damages is claimed, the amount of damages claimed, which totaled $5.0 million
and $0.0 at December 31, 2007 and 2006, respectively, are set forth as an
indication of possible maximum liability that the Company might be required to
incur in these cases (regardless of the likelihood or reasonable probability of
any or all of this amount being awarded to claimants) as a result of adverse
judgments that are sustained on appeal.
15
The Company management monitors the status of known claims and the product
liability accrual, which includes amounts for asserted and unasserted claims.
While it is not possible to forecast the outcome of litigation or the timing of
costs, in the opinion of management, after consultation with special and
corporate counsel, it is not probable and is unlikely that litigation, including
punitive damage claims, will have a material adverse effect on the financial
position of the Company, but may have a material impact on the Company's
financial results for a particular period.
The Company has reported all cases instituted against it through June 28,
2008 and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports to which reference is hereby made.
NOTE 9 - RELATED PARTY TRANSACTIONS
In February 2008, the Company made a lump sum pension benefit payment to
William B. Ruger, Jr., the former Chairman and Chief Executive Officer of the
Company. This payment totaled $1.1 million which represented the actuarially
determined present value of Mr. Ruger's accrued benefit as of the date of
payment.
In March 2007, the Company sold 42 parcels of non-manufacturing real
property held for investment for $7.3 million to William B. Ruger, Jr. The sales
price was based upon an independent appraisal. The sale included substantially
all of the Company's raw land real property assets in New Hampshire. The Company
recognized a gain of $5.2 million on the sale. Also in March 2007, the Company
sold several pieces of artwork to members of the Ruger family for $0.1 million
and recognized insignificant gains from these sales.
16
NOTE 10 - OPERATING SEGMENT INFORMATION
The Company has two reportable segments: firearms and investment castings.
The firearms segment manufactures and sells rifles, pistols, revolvers, and
shotguns principally to a select number of independent wholesale distributors
primarily located in the United States. The investment castings segment
manufactures and sells steel investment castings. Selected operating segment
financial information follows (in thousands):
Three Months Ended Nine Months Ended
------------------------------------------------------------------------------------------------
September 27, September 30, September 27, September 30,
2008 2007 2008 2007
------------------------------------------------------------------------------------------------
Net Sales
Firearms $ 40,318 $ 29,298 $ 117,186 $ 112,535
Castings
Unaffiliated 1,504 2,565 5,806 9,892
Intersegment 1,886 2,639 7,532 6,719
------------------------------------------------------------------------------------------------
3,390 5,204 13,338 16,611
Eliminations (1,886) (2,639) (7,532) (6,719)
------------------------------------------------------------------------------------------------
$ 41,822 $ 31,863 $ 122,992 $ 122,427
------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes
Firearms $ 3,498 $ 4,228 $ 10,025 $ 20,952
Castings (701) (915) (2,487) (2,568)
Corporate (2,196) (5,055) (2,849) 1,897
------------------------------------------------------------------------------------------------
$ 601 ($ 1,742) $ 4,689 $ 20,281
------------------------------------------------------------------------------------------------
September 27, December 31,
2008 2007
------------------------------------------------------------------------------------------------
Identifiable Assets
Firearms $ 59,701 $ 47,870
Castings 5,051 6,165
Corporate 35,259 47,847
------------------------------------------------------------------------------------------------
$ 100,011 $ 101,882
------------------------------------------------------------------------------------------------
NOTE 11 - STOCK REPURCHASE
In April 2008, the Company announced that its Board of Directors
authorized a stock repurchase program. During the third quarter of 2008, the
Company repurchased approximately 1,124,000 shares of its common stock under a
10b5-1 program, representing 5.5% of the outstanding shares, in the open market
at an average price of $6.50 per share. These purchases were made with cash held
by the Company and no debt was incurred. At September 27, 2008, $2.6 million
remained available for share repurchases under this repurchase program.
NOTE 12 - LINE OF CREDIT
In December 2007, the Company secured a $25 million credit facility with a
bank which terminates on December 13, 2008. Borrowings under this facility bear
interest at LIBOR plus 100 basis points. The unused fee is 25 basis points per
year on the unused portion of the credit facility. This credit facility remained
unused at September 27, 2008. See note 13 - Subsequent Events.
17
NOTE 13 - SUBSEQUENT EVENTS
Recently, the Company has received a small number of reports from the
field that its LCP pistols can discharge if dropped onto a hard surface.
Although no injuries were reported, the Company began recalling all LCP pistols
in October 2008 to offer free safety upgrades. The estimated cost of this
retrofit program of approximately $2.3 million was recorded in the third quarter
of 2008. This safety upgrade program is expected to be in effect for several
years.
After the end of the third quarter of 2008 and through October 17, 2008
when its 10b5-1 program expired, the Company repurchased an additional 364,200
shares of its common stock, representing 1.8% of the outstanding shares, in the
open market at an average price of $6.87 per share. In total, the Company
repurchased 1.5 million shares of its common stock for $9.9 million,
representing 7.2% of the outstanding shares, at an average price per share of
$6.59. These purchases were made with cash held by the Company and no debt was
incurred. At October 20, 2008, 19.1 million shares remained outstanding.
In October 2008, the Company drew down $1 million from its $25 million
credit facility to provide additional working capital. The credit facility
expires on December 13, 2008, at which time the Company intends on renewing the
credit facility for another year, subject to bank approval. The Company plans to
use this credit facility to fund its operational cash needs until the financial
and credit markets stabilize.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Company Overview
Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the
design, manufacture, and sale of firearms to domestic customers. Approximately
95% of the Company's total sales for the three and nine months ended September
27, 2008 were firearms sales, and 5% were investment castings sales. Export
sales represent less than 7% of total sales. The Company's design and
manufacturing operations are located in the United States and almost all product
content is domestic. The Company's firearms are sold through a select number of
independent wholesale distributors principally to the commercial sporting
market.
The Company manufactures investment castings made from steel alloys for
internal use in its firearms and utilizes available investment casting capacity
to manufacture and sell castings to outside customers.
Because most of the Company's competitors are not subject to public filing
requirements and industry-wide data is generally not available in a timely
manner, the Company is unable to compare its performance to other companies or
specific current industry trends. Instead, the Company measures itself against
its own historical results.
The Company does not consider its overall firearms business to be
predictably seasonal; however, sales of many models of firearms are usually
lower in the third quarter of the year.
18
Results of Operations
Summary Unit Data
Firearms unit data for orders, production, shipments and ending inventory
for the last seven quarters are as follows:
2008 2007
-------------------------------- --------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------- --------------------------------------------
Units Ordered 125,700 120,300 260,100 113,100 80,900 115,300 175,700
Units Produced 158,900 150,600 124,000 104,900 100,800 132,000 127,200
Units Shipped 146,000 136,700 135,700 111,900 98,600 129,600 141,700
Average Sales Price $ 276 $ 270 $ 296 $ 283 $ 297 $ 306 $ 308
Units on Backorder 115,300 137,700 157,100 36,500 35,700 53,400 68,300
Units - Company Inventory
52,600 40,200 24,900 38,300 45,300 43,100 40,700
Units - Distributor
Inventory
(Note 1) 65,800 62,900 61,800 62,000 70,500 78,800 60,000
Note 1: Distributor ending inventory as provided by the Company's
distributors.
Orders Received and Ending Backlog
The gross value of orders received and ending backlog for the trailing
seven quarters are as follows (in millions except average unit value, including
Federal Excise Tax):
2008 2007
------------------------------------ --------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1
------------------------------------ --------------------------
Orders Received $ 33.5 $ 37.0 $ 73.8 $ 32.8 $ 25.4 $ 39.1 $ 58.9
Average Unit Value of
Orders Received $ 267 $ 275 $ 257 $ 262 $ 284 $ 307 $ 303
Ending Backlog $ 27.9 $ 33.7 $ 40.7 $ 17.9 $ 16.2 $ 23.3 $ 27.9
Average Unit Value of
Ending Backlog $ 242 $ 245 $ 234 $ 444 $ 411 $ 395 $ 370
Note: Average unit value for orders received and ending backlog is net of
Federal Excise Tax of 10% for handguns and 11% for long guns.
19
The product mix of orders received in the third quarter of 2008 continued
to show a decline of demand for firearms related to hunting and sporting uses
and an increase in demand for firearms related to self defense, including the
LCP pistol. Certain product lines have been on backorder during the third
quarter of 2008, and this may have the effect of causing the incoming order rate
to be less than actual demand for those products. Future demand for the popular
LCP pistols may be adversely impacted by the LCP pistol recall that was
announced in October of 2008.
The decrease in the average sales price of the units in backlog in 2008 is
due to the large quantity of new products on the backlog with lower unit sales
prices and a reduction in backlog for certain rifle products where production
has increased to meet demand.
Orders for certain discontinued models totaling $3.7 million at the end of
2007 were cancelled and have been eliminated from the 2008 backlog information.
These orders were included in the backlog for 2007, and their elimination had a
significant impact on the change in average unit value of the ending backlog
from 2007 to 2008.
Production
Production rates, which started to increase late in 2007, have continued
to improve throughout 2008. This allowed for a 58% increase in unit production
in the third quarter of 2008 compared to the third quarter of 2007 and a 6%
increase compared to the second quarter of 2008. Inventories of several product
lines have grown to the point of satisfying safety stock requirements and
production rates for those products were cut during the third quarter to the
level of their current demand. The resources that will be dedicated to the LCP
pistol recall, which was announced in October of 2008, will result in a
reduction to the quantity of LCP pistols that will be produced in the fourth
quarter of 2008.
The Company continues to work on the transition from large-scale batch
production to lean manufacturing, with an emphasis on setting up manufacturing
cells that facilitate flow production and pull systems. The focus now is on
establishing single-piece flow cells for new products and for small parts
manufacturing, developing pull systems, and managing vendors. There is also
considerable, on-going engineering work in process to re-engineer existing
product designs for improved manufacturability.
An increase in firearm unit shipments in near-term future periods will be
more dependent on new product introductions and changes in demand for
established products rather than on the Company's ability to increase unit
production.
Inventories
The Company's finished goods unit inventory levels increased in the third
quarter of 2008 as improvements in manufacturing capacity allowed for the
production of finished goods safety stocks for many products, especially those
expected to be in higher demand in the fourth quarter of 2008 and first quarter
of 2009.
Finished goods inventories are expected to increase further during the
fourth quarter of 2008 as safety stock levels are built in anticipation of
increased demand during the first quarter of 2009. Demand is typically strongest
during the first quarter of the year.
Sales
Consolidated net sales were $41.8 million for the three months ended
September 27, 2008. This represents an increase of $9.9 million or 31.3% from
consolidated net sales of $31.9 million in the comparable prior year period.
For the nine months ended September 27, 2008, consolidated net sales were
$123.0 million, an increase of $0.6 million or 0.5% from sales of $122.4 million
in the comparable 2007 period.
20
Firearms net sales were $40.3 million for the three months ended September
27, 2008. This represents an increase of $11.0 million or 37.6% from firearms
net sales of $29.3 million in the comparable prior year period.
For the nine months ended September 27, 2008, firearms net sales were
$117.2 million. This represents an increase of $4.7 million or 4.1% from
firearms net sales of $112.5 million in the comparable 2007 period.
Firearms unit shipments increased 48.1% for the three months ended
September 27, 2008 when compared to the third quarter of 2007 due principally to
the introduction of new products during 2008 (including the LCP pistol) and, to
a lesser degree, to an increase in production of established products. A shift
in product demand toward firearms with lower unit sales prices, including some
new products, resulted in the decrease in average sales price of units shipped
in the third quarter of 2008 compared to the third quarter of 2007.
For the nine months ended September 27, 2008, firearms unit shipments
increased 13.1% from units shipped during the comparable 2007 period, in spite
of reduced inventories at the start of the period in 2008, due principally to
the introduction of new products during 2008 (including the LCP pistol) and, to
a lesser degree, to an increase in production of established products. A shift
in product demand toward firearms with lower unit sales prices, including some
new products, resulted in the decrease in average sales price of units shipped
in the nine months ended September 27, 2008 compared to the comparable period of
2007.
The three and nine months ended September 27, 2008 benefited from a $0.7
million initial-stocking-order shipment that was made to a new distributor in
September. An additional, smaller, initial stocking order shipment was made in
early October to a second new distributor. These two new distributors are
replacing two previous distributors.
The resources that will be dedicated to the LCP pistol recall, which was
announced in October of 2008, will result in a reduction to the quantity of LCP
pistols that will be produced, and therefore available for shipment, in the
fourth quarter of 2008. Also, the recall may cause a decline in future demand
for LCP pistols.
Casting net sales were $1.5 million for the three months ended September
27, 2008. This represents a decrease of $1.1 million or 41.4% from casting sales
of $2.6 million in the comparable prior year period.
For the nine months ended September 27, 2008, casting segment net sales
were $5.8 million. This represents a decrease of $4.1 million or 41.3% from
casting sales of $9.9 million in the comparable prior year period.
The casting sales decrease in the three and nine months ended September
27, 2008 reflects the cessation of titanium casting operations in 2007, as
previously announced by the Company in July 2006. Titanium casting sales
accounted for $0.5 million or 20%, and $3.2 million or 32% of casting sales for
third quarter and nine months ended September 30, 2007, respectively.
Cost of Products Sold and Gross Margin
Consolidated cost of products sold was $35.0 million for the three months
ended September 27, 2008. This represents an increase of $8.7 million or 33.1%
from consolidated cost of products sold of $26.3 million in the comparable prior
year period.
For the nine months ended September 27, 2008, consolidated cost of
products sold was $97.0 million. This represents an increase of $8.9 million or
10.1% from consolidated cost of products sold of $88.1 million in the comparable
prior year period.
21
Gross margin as a percent of sales was 16.4% and 21.2% for the three and
nine months ended September 27, 2008. These represent an increase from the gross
margin of 17.6% in the third quarter of 2007 and a decrease from 28.0% in the
first nine months of 2007 as illustrated below (in thousands):
Three Months Ended
---------------------------------------------------------------------------------------------------
September 27, 2008 September 30, 2007
---------------------------------------------------------------------------------------------------
Net sales $ 41,822 100.0% $ 31,863 100.0%
Cost of products sold, before LIFO, overhead and
labor rate adjustments to inventory,
product liability, and product recall 30,372 72.6% 25,462 79.9%
LIFO expense (income) 1,577 3.8% (237) (0.7)%
Overhead rate adjustments to inventory 48 0.1% 760 2.3%
Labor rate adjustments to inventory 569 1.4% -- --
Product liability 129 0.3% 283 0.9%
Product Recall 2,269 5.4% -- --
---------------------------------------------------------------------------------------------------
Total cost of products sold 34,964 83.6% 26,268 82.4%
---------------------------------------------------------------------------------------------------
Gross margin $ 6,858 16.4% $ 5,595 17.6%
===================================================================================================
Nine Months Ended
---------------------------------------------------------------------------------------------------
September 27, 2008 September 30, 2007
---------------------------------------------------------------------------------------------------
Net sales $122,992 100.0% $122,427 100.0%
Cost of products sold, before LIFO, overhead and
labor rate adjustments to inventory,
product liability, and product recall 91,995 74.8% 92,504 75.6%
LIFO expense (income) 3,807 3.1% (10,805) (8.8)%
Overhead rate adjustments to inventory (1,479) (1.2)% 4,986 4.0%
Labor rate adjustments to inventory (1,311) (1.1)% -- --
Product liability 496 0.4% 1,455 1.2%
Product recalls 3,477 2.8% -- --
---------------------------------------------------------------------------------------------------
Total cost of products sold 96,985 78.8% 88,140 72.0%
---------------------------------------------------------------------------------------------------
Gross margin $ 26,007 21.2% $ 34,287 28.0%
===================================================================================================
22
Cost of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability, and product recall-- During the three and nine
months ended September 27, 2008, cost of products sold, before LIFO, overhead
rate, and labor rate adjustments to inventory, product liability, and product
recall decreased as a percentage of sales by 7.3% and 0.8%, respectively,
compared to the comparable 2007 periods. The decrease in the third quarter was
primarily related to increased comparable period sales while holding
fixed-overhead expenses fairly stable and decreases in non-personnel
variable-overhead spending. The slight decrease in the nine months ended
September 27, 2008 is attributable to decreases in non-personnel
variable-overhead spending.
LIFO-- During the three and nine months ended September 27, 2008, gross
inventories increased by $0.4 million and $3.3 million, respectively compared to
decreases in gross inventories of $0.4 million and $26.6 million in the
comparable 2007 periods. These inventory fluctuations were caused, in part, by
the overhead and direct labor rate adjustments to inventory in the respective
periods, as discussed below. The 2008 inventory increases resulted in LIFO
expense and increased cost of products sold of $1.6 million and $3.8 million for
the three and nine months ended September 27, 2008 compared to LIFO income and
decreased cost of products sold of $0.2 million and $10.8 million in the
comparable 2007 periods.
Finished goods inventories are expected to further increase in the fourth
quarter of 2008 as safety stock levels of certain models are built in
anticipation of increased demand during the first quarter of 2009. Demand is
typically strongest during the first quarter of the year.
Overhead Rate Adjustments-- During the three and nine months ended September 27,
2008, the change in inventory value resulting from the change in the overhead
rates used to absorb overhead expenses into inventory were a decrease of $48,000
and an increase of $1.5 million, respectively. The decrease in inventory value
in the third quarter of 2008 resulted in an increase to cost of products sold.
The increase in inventory during the nine months ended September 27, 2008
resulted in a decrease to cost of sales. During the comparable 2007 periods, the
change in inventory value resulting from the change in the overhead rate used to
absorb overhead expenses into inventory were decreases of $0.8 million and $5.0
million, respectively. These decreases in inventory values resulted in increases
to cost of products sold.
Labor Rate Adjustments-- Effective April 1, 2008, the Company changed its
methodology for estimating standard direct labor rates for its firearms. This
change in estimation resulted in an increase to gross inventories of $1.9
million (approximately $0.5 million after the impact of the LIFO reserve) at
June 28, 2008, and a corresponding reduction in cost of sales in the second
quarter of 2008. For the third quarter of 2008, the change in inventory value
resulting from the change in the labor rates used to absorb overhead expenses
into inventory was a decrease of $0.6 million, reflecting continued improvement
of labor efficiency during the quarter. This decrease in inventory value
resulted in an increase to cost of sales. For the nine months ended September
27, 2008, the change in inventory value resulting from the change in the labor
rates used to absorb overhead expenses into inventory was an increase of $1.3
million, reflecting the second quarter one-time change in methodology and the
third quarter rate change. This increase in inventory value resulted in a
decrease to cost of sales.
Product Liability--During the three and nine months ended September 27, 2008,
the Company incurred product liability expense of $0.1 million and $0.5 million,
respectively, which includes the cost of outside legal fees, insurance, and
other expenses incurred in the management and defense of product liability
matters. For the comparable 2007 periods, product liability expenses totaled
$0.3 million and $1.5 million, respectively.
Product Recalls--Recently the Company has received a small number of reports
from the field that its LCP pistols can discharge if dropped onto a hard
surface. Although no injuries were reported, the Company began recalling all LCP
pistols in October 2008 to offer free safety upgrades. The estimated cost of
this retrofit program of approximately $2.3 million was recorded in the third
quarter of 2008. This safety upgrade program is expected to be in effect for
several years.
23
In April 2008, the Company announced that it determined that Ruger SR9
pistols manufactured between October 2007 and April 2008 can, under certain
conditions, fire if dropped with their manual safeties in the "off" or "fire"
position and a round in the chamber. The Company has started to retrofit all
Ruger SR9 pistols manufactured during that period at no charge to the firearm
owners. The estimated cost of this retrofit program of approximately $1.2
million was recorded in the first quarter of 2008. The recall program has been
very effective, with approximately two thirds of all affected SR9s returned and
retrofitted already. This recall program is expected to be in effect for several
more years to complete the retrofit of all remaining affected SR9s, and the
Company considers the remaining reserve of approximately $0.4 million to be
adequate to complete the recall program. The Company commenced production and
shipments of the redesigned SR9 during the third quarter.
Selling, General and Administrative
Selling, general and administrative expenses were $6.5 million and $21.9
million for the three and nine months ended September 27, 2008, respectively.
This represents no change and an increase of $0.6 million from selling, general
and administrative expenses of $6.5 million and $21.3 million in the comparable
prior year periods. The increase for the nine months ended September 27, 2008
reflects a retail co-op advertising program that was introduced on January 1,
2008 and increased promotional and advertising expenses, many of which related
to new products.
Pension Plan Curtailment Charge
During the third quarter of 2007, the Company amended its hourly and
salaried defined benefit pension plans so that employees would no longer accrue
benefits under these plans effective December 31, 2007. This action, which
"froze" the benefits for essentially all employees, also prevented future hires
from joining the plans, effective December 31, 2007. These amendments resulted
in a $1.2 million pension curtailment charge that was recognized in the third
quarter of 2007.
Gains on Sale of Real Estate
In the first nine months of 2007, the Company recorded gains on the sale
of non-manufacturing real property of $7.1 million. No real estate sales were
made in the 2008.
The Company has two properties in Connecticut and one property in New
Hampshire listed for sale. The timing on when these properties will sell is
uncertain due to the weak real estate and credit markets.
Interest income
Interest income was $0.1 million and $0.4 million for the three and nine
months ended September 27, 2008, respectively. This represents a decrease of
$0.7 million and $1.6 million from interest income of $0.8 million and $2.0 in
the comparable prior year periods. The decrease is attributable to lower
interest rates and decreased principal invested in 2008 compared to 2007.
Income Taxes and Net Income
The effective income tax rates in the three and nine months ended
September 27, 2008 were 38.0%. The effective income tax rates were 40.1% in the
comparable prior year periods.
As a result of the foregoing factors, consolidated net income was $0.4
million and $2.9 million for the three and nine months ended September 27, 2008,
respectively. This represents an increase of $1.0 million and a decrease of $9.7
million from the consolidated net loss of $0.6 million and consolidated net
income of $12.6 million, respectively, in the comparable prior year periods.
24
Financial Condition
Liquidity
At September 27, 2008, the Company had cash, cash equivalents and
short-term investments of $22.6 million. The Company's pre-LIFO working capital
of $91.6 million, less the LIFO reserve of $47.5 million, resulted in working
capital of $44.1 million and a current ratio of 2.8 to 1.
At October 20, 2008, with the previously announced stock repurchase
program substantially completed, the Company had cash, cash equivalents and
short-term investments of $20 million. To protect its liquidity in light of the
recent turbulence in the financial and credit markets, in October the Company
withdrew $16 of its short term investments from a money market fund and
purchased United States Treasury Bills, which mature over the next 6 months.
Further, the Company drew down $1 million from its $25 million credit
facility to provide additional working capital. The credit facility expires on
December 13, 2008, at which time the Company intends on renewing the credit
facility for another year, subject to bank approval. The Company plans to use
this credit facility to fund its operational cash needs until the financial and
credit markets stabilize.
Operations
Cash provided by operating activities was $0.6 million for the nine months
ended September 27, 2008 compared to funds provided by operating activities of
$25.9 million for comparable prior year period. The decrease in cash provided in
2008 compared to 2007 is principally attributable to the significant reduction
in gross inventory in 2007.
Third parties supply the Company with various raw materials for its
firearms and castings, such as fabricated steel components, walnut, birch,
beech, maple and laminated lumber for rifle and shotgun stocks, wax, ceramic
material, metal alloys, various synthetic products and other component parts.
There is a limited supply of these materials in the marketplace at any given
time, which can cause the purchase prices to vary based upon numerous market
factors. The Company believes that it has adequate quantities of raw materials
in inventory to provide ample time to locate and obtain additional items at
then-current market cost without interruption of its manufacturing operations.
However, if market conditions result in a significant prolonged inflation of
certain prices or if adequate quantities of raw materials can not be obtained,
the Company's manufacturing processes could be interrupted and the Company's
financial condition or results of operations could be materially adversely
affected.
Investing and Financing
Capital expenditures for the nine months ended September 27, 2008 totaled
$6.4 million. In 2008, the Company expects to spend approximately $8 million on
capital expenditures to purchase tooling for new product introductions and to
upgrade and modernize manufacturing equipment. The Company finances, and intends
to continue to finance, all of these activities with funds provided by
operations and current cash and short-term investments. There were no dividends
paid for the nine months ending September 27, 2008. The payment of future
dividends depends on many factors, including internal estimates of future
performance, then-current cash and short-term investments, and the Company's
need for funds. The Company does not expect to pay dividends in the near term.
25
In April 2008, the Company announced that its Board of Directors
authorized a $10 million stock repurchase program. During the third quarter of
2008, the Company repurchased approximately 1,124,000 shares of its common stock
under a 10b5-1 program, representing 5.5% of the outstanding shares, in the open
market at an average price of $6.50 per share. Through October 17, 2008 when its
10b5-1 program expired, the Company repurchased an additional 364,200 shares of
its common stock, representing 1.8% of the outstanding shares, in the open
market at an average price of $6.87 per share. In total, the Company repurchased
1.5 million shares of its common stock for $9.9 million, representing 7.2% of
the outstanding shares, at an average price per share of $6.59. These purchases
were made with cash held by the Company and no debt was incurred. At October 20,
2008, 19.1 million shares remained outstanding.
In March 2007, the Company sold 42 parcels of non-manufacturing real
property for $7.3 million to William B. Ruger, Jr., the Company's former Chief
Executive Officer and Chairman of the Board. The sale included substantially all
of the Company's raw land real property assets in New Hampshire. The sales price
was based upon an independent appraisal, and the Company recognized a gain of
$5.2 million on the sale.
In April 2007, the Company sold a non-manufacturing facility in Arizona
for $5.0 million. This facility had not been used in the Company's operations
for several years. The Company realized a gain of approximately $1.5 million
from this sale.
In the third quarter of 2007, the Company amended its hourly and salaried
defined benefit pension plans so that employees no longer accrue benefits under
them effective December 31, 2007. This action froze the benefits for all
employees effective December 31, 2007 and prevents future hires from joining the
plans. Since January 1, 2008, the Company has provided supplemental
discretionary contributions to substantially all employees' individual 401(k)
accounts.
In late 2007, after authorizing the "freeze" amendment to its hourly and
salaried defined benefit pension plans, the Company contributed an additional $5
million to these plans. The intent of this discretionary contribution was to
reduce the amount of time that the Company will be required to continue to
operate the frozen plans. The ongoing cost of running the plans (even if frozen)
is approximately $0.2 million per year, which includes PBGC premiums, actuary
and audit fees, and other expenses.
In 2008 and future years, the Company may be required to make cash
contributions to the two defined benefit pension plans according to the new
rules of the Pension Protection Act of 2006. The annual contributions will be
based on the amount of the unfunded plan liabilities derived from the frozen
benefits and will not include liabilities for any future accrued benefits for
any new or existing participants. The total amount of these future cash
contributions will be dependent on the investment returns generated by the
plans' assets and the then-applicable discount rates used to calculate the
plans' liabilities. There is no minimum required cash contribution for the
defined benefit plans for 2008, but there may be such a requirement in 2009
because of recent market volatility which has adversely affected investment
returns for the plans' assets.
The total annual cash outlays for retirement benefits, which include the
continuing discretionary funding of the two defined benefit pension plans and
supplemental discretionary 401(k) contributions, are intended to be comparable
to the previous retirement benefit cash funding levels of approximately $2
million per year. This intended annual discretionary funding level is subject to
future review based on any changes in the minimum required funding for the
defined benefit plans and other business conditions.
In February 2008, the Company made lump sum benefit payments to two
participants in its only non-qualified defined benefit plan, the Supplemental
Executive Retirement Plan. These payments, which totaled $2.1 million,
represented the actuarial present value of the participants' accrued benefit as
of the date of payment. Only one, retired, participant remains in this plan.
26
Firearms Litigation
As of September 27, 2008, the Company is a defendant in approximately 5
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into one of the two following categories:
(i) Those that claim damages from the Company related to allegedly
defective product design which stem from a specific incident.
Pending lawsuits and claims are based principally on the theory of
"strict liability" but also may be based on negligence, breach of
warranty, and other legal theories.
(ii) Those brought by cities or other governmental entities, and
individuals against firearms manufacturers, distributors and
retailers seeking to recover damages allegedly arising out of the
misuse of firearms by third-parties in the commission of homicides,
suicides and other shootings involving juveniles and adults. The
complaints by municipalities seek damages, among other things, for
the costs of medical care, police and emergency services, public
health services, and the maintenance of courts, prisons, and other
services. In certain instances, the plaintiffs seek to recover for
decreases in property values and loss of business within the city
due to criminal violence. In addition, nuisance abatement and/or
injunctive relief is sought to change the design, manufacture,
marketing and distribution practices of the various defendants.
These suits allege, among other claims, strict liability or
negligence in the design of products, public nuisance, negligent
entrustment, negligent distribution, deceptive or fraudulent
advertising, violation of consumer protection statutes and
conspiracy or concert of action theories. Most of these cases do not
allege a specific injury to a specific individual as a result of the
misuse or use of any of the Company's products.
The Company has expended significant amounts of financial resources and
management time in connection with product liability litigation. Management
believes that, in every case involving firearms, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses to the suits brought by
governmental entities further exist based on, among other things, the Protection
of Lawful Commerce in Arms Act, established state law precluding recovery for
essential government services, the remoteness of the claims, the types of
damages sought to be recovered, and limitations on the extraterritorial
authority which may be exerted by a city, municipality, county or state under
state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a constitutional
jury, Hamilton, et al. v. Accu-tek, et al., resulted in a defense verdict in
favor of the Company on February 11, 1999. In that case, numerous firearms
manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and "industry-wide" liability. The Company and
its marketing and distribution practices were exonerated from any claims of
negligence in each of the seven cases decided by the jury. In subsequent
proceedings involving other defendants, the New York Court of Appeals as a
matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a manufacturer's lawfully made
products; and 2) liability of firearms manufacturers could not be apportioned
under a market share theory. More recently, the New York Court of Appeals on
October 21, 2003 declined to hear the appeal from the decision of the New York
Supreme Court, Appellate Division, affirming the dismissal of New York Attorney
General Eliot Spitzer's public nuisance suit against the Company and other
manufacturers and distributors of firearms. In its decision, the Appellate
Division relied heavily on Hamilton in concluding that it was "legally
inappropriate," "impractical," "unrealistic" and "unfair" to attempt to hold
firearms manufacturers responsible under theories of public nuisance for the
criminal acts of others.
27
Of the lawsuits brought by municipalities, counties or a state Attorney
General, twenty have been concluded: Atlanta - dismissal by intermediate
Appellate Court, no further appeal; Bridgeport - dismissal affirmed by
Connecticut Supreme Court; County of Camden - dismissal affirmed by U.S. Third
Circuit Court of Appeals; Miami - dismissal affirmed by intermediate appellate
court, Florida Supreme Court declined review; New Orleans - dismissed by
Louisiana Supreme Court, United States Supreme Court declined review;
Philadelphia - U.S. Third Circuit Court of Appeals affirmed dismissal, no
further appeal; Wilmington - dismissed by trial court, no appeal; Boston -
voluntary dismissal with prejudice by the City at the close of fact discovery;
Cincinnati - voluntarily withdrawn after a unanimous vote of the city council;
Detroit - dismissed by Michigan Court of Appeals, no appeal; Wayne County -
dismissed by Michigan Court of Appeals, no appeal; New York State - Court of
Appeals denied plaintiff's petition for leave to appeal the Intermediate
Appellate Court's dismissal, no further appeal; Newark - Superior Court of New
Jersey Law Division for Essex County dismissed the case with prejudice; City of
Camden - dismissed on July 7, 2003, not reopened; Jersey City - voluntarily
dismissed and not re-filed; St. Louis - Missouri Supreme Court denied
plaintiffs' motion to appeal Missouri Appellate Court's affirmation of
dismissal; Chicago - Illinois Supreme Court affirmed trial court's dismissal;
and Los Angeles City, Los Angeles County, San Francisco - Appellate Court
affirmed summary judgment in favor of defendants, no further appeal; and
Cleveland - dismissed on January 24, 2006 for lack of prosecution.
The dismissal of the Washington, D.C. municipal lawsuit was sustained on
appeal, but individual plaintiffs were permitted to proceed to discovery and
attempt to identify the manufacturers of the firearms used in their shootings as
"machine guns" under the city's "strict liability" law. On April 21, 2005, the
D.C. Court of Appeals, in an en banc hearing, unanimously dismissed all
negligence and public nuisance claims, but let stand individual claims based
upon a Washington, D.C. act imposing "strict liability" for manufacturers of
"machine guns." Based on present information, none of the Company's products has
been identified with any of the criminal assaults which form the basis of the
individual claims. The writ of certiorari to the United States Supreme Court
regarding the constitutionality of the Washington, D.C. act was denied and the
case was remanded to the trial court for further proceedings. The defendants
subsequently moved to dismiss the case based upon the Protection of Lawful
Commerce in Arms Act ("PLCAA"), which motion was granted on May 22, 2006. The
individual plaintiffs and the District of Columbia, which has subrogation claims
in regard to the individual plaintiffs, appealed. On January 10, 2008, the
District of Columbia Court of Appeals unanimously upheld the dismissal. On
February 22, 2008, the District and the individual plaintiffs filed petitions
for rehearing or rehearing en banc. On June 9, 2008, the court denied the
petition. On October 23, 2008, the District and the individual plaintiffs filed
a Petition for writ of certiorari in the United States Supreme Court.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by
the trial court, but the Indiana Supreme Court reversed this dismissal and
remanded the case for discovery proceedings on December 23, 2003. Gary is
scheduled to begin trial in 2009. The defendants filed a motion to dismiss
pursuant to the PLCAA. The state court judge held the PLCAA unconstitutional and
the defendants filed a motion with the Indiana Court of Appeals asking it to
accept interlocutory appeal on the issue, which appeal was accepted on February
5, 2007. On October 29, 2007, the Indiana Appellate Court affirmed, holding that
the PLCAA does not apply to the City's claims. A petition for rehearing was
filed in the Appellate Court and denied on January 9, 2008. On February 8, 2008,
a Petition to Transfer the appeal to the Supreme Court of Indiana was filed,
which has not yet been ruled upon. The case is set for trial on June 15, 2009.
In the previously reported New York City municipal case, the defendants
moved to dismiss the suit pursuant to the PLCAA. The trial judge found the PLCAA
to be constitutional, but denied the defendants' motion to dismiss the case, on
the basis that the Act was not applicable to the suit. The defendants were given
leave to appeal to the U.S. Court of Appeals for the Second Circuit. The Second
Circuit affirmed the constitutionality of the PLCAA and reversed on
applicability, holding that the PLCAA did apply. The case was remanded for
dismissal. On June 16, 2008, the City filed a petition for rehearing or
rehearing en banc. On August 20, 2008, the City's petition was denied by the
Second Circuit. On October 20, 2008, the City filed a Petition for writ of
certiorari in the United States Supreme Court.
28
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict
rejecting the NAACP's claims. On July 21, 2003, Judge Jack B. Weinstein entered
an order dismissing the NAACP lawsuit, but this order contained lengthy dicta
which defendants believe are contrary to law and fact. Appeals by both sides
were filed, but plaintiffs withdrew their appeal. On August 3, 2004, the United
States Court of Appeals for the Second Circuit granted the NAACP's motion to
dismiss the defendants' appeal of Judge Weinstein's order denying defendants'
motion to strike his dicta made in his order dismissing the NAACP's case, and
the defendants' motion for summary disposition was denied as moot. The ruling of
the Second Circuit effectively confirmed the decision in favor of defendants and
brought this matter to a conclusion.
Legislation has been passed in approximately 34 states precluding suits of
the type brought by the municipalities mentioned above. On the Federal level,
the "Protection of Lawful Commerce in Arms Act" was signed by President Bush on
October 26, 2005. The Act requires dismissal of suits against manufacturers
arising out of the lawful sale of their products for harm resulting from the
criminal or unlawful misuse of a firearm by a third party. The Company is
pursuing dismissal of each action involving such claims, including the municipal
cases described above.
Punitive damages, as well as compensatory damages, are demanded in certain
of the lawsuits and claims. Aggregate claimed amounts presently exceed product
liability accruals and applicable insurance coverage. For claims made after July
10, 2000, coverage is provided on an annual basis for losses exceeding $5
million per claim, or an aggregate maximum loss of $10 million annually, except
for certain new claims which might be brought by governments or municipalities
after July 10, 2000, which are excluded from coverage.
Product liability claim payments are made when appropriate if, as, and
when claimants and the Company reach agreement upon an amount to finally resolve
all claims. Legal costs are paid as the lawsuits and claims develop, the timing
of which may vary greatly from case to case. A time schedule cannot be
determined in advance with any reliability concerning when payments will be made
in any given case.
Provision is made for product liability claims based upon many factors
related to the severity of the alleged injury and potential liability exposure,
based upon prior claim experience. Because our experience in defending these
lawsuits and claims is that unfavorable outcomes are typically not probable or
estimable, only in rare cases is an accrual established for such costs. In most
cases, an accrual is established only for estimated legal defense costs. Product
liability accruals are periodically reviewed to reflect then-current estimates
of possible liabilities and expenses incurred to date and reasonably anticipated
in the future. Threatened product liability claims are reflected in our product
liability accrual on the same basis as actual claims; i.e., an accrual is made
for reasonably anticipated possible liability and claims-handling expenses on an
ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes
cannot be made. However, in product liability cases in which a dollar amount of
damages is claimed, the amount of damages claimed, which totaled $5.0 million
and $0.0 at December 31, 2007 and 2006, respectively, are set forth as an
indication of possible maximum liability that the Company might be required to
incur in these cases (regardless of the likelihood or reasonable probability of
any or all of this amount being awarded to claimants) as a result of adverse
judgments that are sustained on appeal.
The Company management monitors the status of known claims and the product
liability accrual, which includes amounts for asserted and unasserted claims.
While it is not possible to forecast the outcome of litigation or the timing of
costs, in the opinion of management, after consultation with special and
corporate counsel, it is not probable and is unlikely that litigation, including
punitive damage claims, will have a material adverse effect on the financial
position of the Company, but may have a material impact on the Company's
financial results for a particular period.
The Company has reported all cases instituted against it through June 28,
2008 and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports to which reference is hereby made.
29
Other Operational Matters
In the normal course of its manufacturing operations, the Company is
subject to occasional governmental proceedings and orders pertaining to waste
disposal, air emissions and water discharges into the environment. The Company
believes that it is generally in compliance with applicable environmental
regulations and the outcome of such proceedings and orders will not have a
material adverse effect on the financial position or results of operations of
the Company.
The Company self-insures a significant amount of its product liability,
workers' compensation, medical, and other insurance. It also carries significant
deductible amounts on various insurance policies.
The Company expects to realize its deferred tax assets through tax
deductions against future taxable income.
Historically, the Company has not required external financing. Based on
its unencumbered assets, the Company believes it has the ability to raise
substantial amounts of cash through issuance of short-term or long-term debt. In
the fourth quarter of 2007, the Company secured a $25 million credit facility.
This credit facility remained unused at September 27, 2008. In October 2008, the
Company drew down $1 million from its $25 million credit facility to provide
additional working capital. The credit facility expires on December 13, 2008, at
which time the Company intends on renewing the credit facility for another year,
subject to bank approval. The Company plans to use this credit facility to fund
its operational cash needs until the financial and credit markets stabilize.
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its critical accounting
estimates and assumptions described in the Company's 2007 Annual Report on Form
10-K filed on February 26, 2008, or the judgments affecting the application of
those estimates and assumptions.
Recent Accounting Pronouncements:
In September 2006, FASB issued FAS No. 157, "Fair Value Measurements"
("FAS 157"). FAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. The provisions of FAS 157 are
effective for the fiscal year beginning January 1, 2008. The FASB has deferred
the implementation of FAS 157 by one year for certain non-financial assets and
liabilities such as this will be effective for the fiscal year beginning January
1, 2009. The adoption of FAS 157 did not have a material impact on the Company's
financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("FAS 141R"). FAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. FAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. FAS 141R is effective for the fiscal year
beginning January 1, 2009, and will be adopted by the Company in the first
quarter of 2009. The adoption of FAS 141R is not expected to have a material
impact on the Company's financial position, results of operations and cash
flows.
Forward-Looking Statements and Projections
The Company may, from time to time, make forward-looking statements and
projections concerning future expectations. Such statements are based on current
expectations and are subject to certain qualifying risks and uncertainties, such
as market demand, sales levels of firearms, anticipated castings sales and
earnings, the need for external financing for operations or capital
expenditures, the results of pending litigation against the Company including
30
lawsuits filed by mayors, state attorneys general and other governmental
entities and membership organizations, and the impact of future firearms control
and environmental legislation, any one or more of which could cause actual
results to differ materially from those projected. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date made. The Company undertakes no obligation to publish revised
forward-looking statements to reflect events or circumstances after the date
such forward-looking statements are made or to reflect the occurrence of
subsequent unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this interest rate
market risk exposure to be material to its financial condition or results of
operations. The Company invests primarily in a bank-managed money market fund
that invests principally in United States Treasury instruments, all maturing
within one year. The carrying amount of these investments approximates fair
value due to the short-term maturities. Under its current policies, the Company
does not use derivative financial instruments, derivative commodity instruments
or other financial instruments to manage its exposure to changes in interest
rates or commodity prices.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Treasurer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (the
"Disclosure Controls and Procedures"), as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of the September 27, 2008.
Based on the evaluation, the Company's Chief Executive Officer and
Treasurer and Chief Financial Officer have concluded that, as of September 27,
2008, such disclosure controls and procedures are effective to ensure that
information required to be disclosed in the Company's periodic reports filed
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
forms. Additionally, the Company's Chief Executive Officer and Treasurer and
Chief Financial Officer have concluded that, as of the end of the period covered
by this Quarterly Report on Form 10-Q, there have been no changes in the
Company's control over financial reporting that occurred during the quarter
ended September 27, 2008 that have materially affected, or are reasonably likely
to materially affect, the Company's control over financial reporting.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at
Note 8 to this Form 10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through June 28,
2008, and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-Q and 10-K reports, to which reference is hereby made.
No cases were formally instituted against the Company during the three
months ending September 27, 2008.
During the three months ending September 27, 2008, no previously reported
cases were settled.
On July 10, 2008, in the previously reported case Watkins v. Company, et
al (PA), an order was entered sustaining the Company's preliminary objections
that the claims are barred under the Protection of Lawful Commerce in Arms Act.
On August 8, 2008, plaintiff filed a notice of appeal and on August 21, 2008,
the Company filed a motion to quash the appeal on the basis that the order was
not a final appealable order but only interlocutory in nature. On September 18,
2008, the Appellate Court granted the motion to quash.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from the
information provided in Item 1A. Risk Factors included in our Annual
Report on Form 10-K for the year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
32
ITEM 6. EXHIBITS
(a) Exhibits:
31.1 Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
33
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2008
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STURM, RUGER & COMPANY, INC.
------------------------------------
Date: October 29, 2008 /S/ THOMAS A. DINEEN
------------------------------------
Thomas A. Dineen
Principal Financial Officer,
Vice President, Treasurer and
Chief Financial Officer