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 July 4, 2009
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
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Lacey Place, Southport, Connecticut 06890
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(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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to rule 405 of Regulation S-T
(ss.232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
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 July
4, 2009: Common Stock, $1 par value -19,063,143.
Page 1 of 28
INDEX
STURM, RUGER & COMPANY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed balance sheets - July 4, 2009 and December 31, 2008 ......................................... 3
Condensed statements of operations - Three and six months ended July 4, 2009 and June 28, 2008 ........ 5
Condensed statement of stockholders' equity - Six months ended July 4, 2009 ........................... 6
Condensed statements of cash flows - Three and six months ended July 4, 2009 and June 28, 2008 ........ 7
Notes to condensed financial statements - July 4, 2009 ................................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................................ 24
Item 4. Controls and Procedures ............................................................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................................................... 25
Item 1A. Risk Factors .......................................................................................... 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ........................................... 26
Item 3. Defaults Upon Senior Securities ....................................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders ................................................... 26
Item 5. Other Information ..................................................................................... 26
Item 6. Exhibits .............................................................................................. 27
SIGNATURES ........................................................................................................ 28
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
July 4, 2009 December 31, 2008
--------------------------------------------------------------------------------------------------
(Note)
Assets
Current Assets
Cash and cash equivalents $ 3,890 $ 9,688
Short-term investments 39,704 18,558
Trade receivables, net 27,534 25,809
Gross inventories 51,822 59,846
Less LIFO reserve (43,160) (44,338)
Less excess and obsolescence reserve (2,597) (3,569)
--------------------------------------------------------------------------------------------------
Net inventories 6,065 11,939
--------------------------------------------------------------------------------------------------
Deferred income taxes 5,318 6,400
Prepaid expenses and other current assets 2,558 3,374
--------------------------------------------------------------------------------------------------
Total current assets 85,069 75,768
Property, plant and equipment 131,087 125,026
Less allowances for depreciation (101,364) (98,807)
--------------------------------------------------------------------------------------------------
Net property, plant and equipment 29,723 26,219
--------------------------------------------------------------------------------------------------
Deferred income taxes 9,205 7,743
Other assets 4,525 3,030
--------------------------------------------------------------------------------------------------
Total Assets $ 128,522 $ 112,760
==================================================================================================
Note:
The balance sheet at December 31, 2008 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)
July 4, 2009 December 31, 2008
------------------------------------------------------------------------------------------------
(Note)
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable and accrued expenses $ 9,690 $ 10,235
Product liability 771 1,051
Employee compensation and benefits 10,643 7,994
Workers' compensation 4,665 5,067
Income taxes payable 2,456 4,171
Line of credit -- 1,000
------------------------------------------------------------------------------------------------
Total current liabilities 28,225 29,518
Accrued pension liability 16,932 16,946
Product liability accrual 906 693
Contingent liabilities - Note 9 -- --
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
2009 - 22,798,732 issued,
19,063,143 outstanding
2008 - 22,798,732 issued,
19,047,323 outstanding 22,817 22,799
Additional paid-in capital 6,447 2,442
Retained earnings 106,347 93,500
Less: Treasury stock - at cost
2009 - 3,753,821 shares
2008 - 3,751,419 shares (30,167) (30,153)
Accumulated other comprehensive loss (22,985) (22,985)
------------------------------------------------------------------------------------------------
Total Stockholders' Equity 82,459 65,603
------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 128,522 $ 112,760
================================================================================================
Note:
The balance sheet at December 31, 2008 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 Six Months Ended
-------------------------------------------------------------------
July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008
-------------------------------------------------------------------
Net firearms sales $ 71,372 $ 36,839 $ 133,600 $ 76,869
Net castings sales 1,018 1,825 2,320 4,301
------------------------------------------------------------------------------------------------------------------
Total net sales 72,390 38,664 135,920 81,170
Cost of products sold 47,358 30,169 91,362 62,020
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Gross profit 25,032 8,495 44,558 19,150
------------------------------------------------------------------------------------------------------------------
Expenses:
Selling 5,319 4,098 10,764 8,486
General and administrative 5,738 2,968 10,384 6,909
Other operating expenses (income), net -- (54) -- (54)
------------------------------------------------------------------------------------------------------------------
Total operating expenses 11,057 7,012 21,148 15,341
------------------------------------------------------------------------------------------------------------------
Operating income 13,975 1,483 23,410 3,809
------------------------------------------------------------------------------------------------------------------
Other income:
Interest income 39 118 57 280
Other income (expense), net (14) 144 (101) (1)
------------------------------------------------------------------------------------------------------------------
Total other income (expense), net 25 262 (44) 279
------------------------------------------------------------------------------------------------------------------
Income before income taxes 14,000 1,745 23,366 4,088
Income taxes 5,320 663 8,879 1,554
------------------------------------------------------------------------------------------------------------------
Net income $ 8,680 $ 1,082 $ 14,487 $ 2,534
==================================================================================================================
Earnings per share
Basic $ 0.46 $ 0.05 $ 0.76 $ 0.12
============= ============= ============= =============
Diluted $ 0.45 $ 0.05 $ 0.76 $ 0.12
============= ============= ============= =============
Average shares outstanding
Basic 19,059 20,576 19,052 20,576
============= ============= ============= =============
Diluted 19,272 20,609 19,110 20,626
============= ============= ============= =============
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, 2008 $ 22,799 $ 2,442 $ 93,500 $ (30,153) $ (22,985) $ 65,603
Net income and comprehensive income -- -- 14,487 -- -- 14,487
Dividends paid -- -- (1,640) -- -- (1,640)
Stock-based compensation -- 2,645 -- -- -- 2,645
Tax benefit from exercise of stock options -- 1,378 -- -- -- 1,378
Issuance of 18,222 shares of common stock 18 (18) -- -- -- --
Repurchase of 2,401 shares of common stock -- -- -- (14) -- (14)
=================================================================================================================================
Balance at July 4, 2009 $ 22,817 $ 6,447 $ 106,347 $ (30,167) $ (22,985) $ 82,459
=================================================================================================================================
See notes to condensed financial statements.
6
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended
-------------------------------
July 4, 2009 June 28, 2008
-------------------------------
Operating Activities
Net income $ 14,487 $ 2,534
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 3,325 2,390
Stock-based compensation 2,950 256
Gain on sale of assets -- (54)
Deferred income taxes (380) 48
Changes in operating assets and liabilities:
Trade receivables (1,725) 2,025
Inventories 5,874 (4,584)
Trade accounts payable and accrued expenses 1,472 (1,870)
Product liability (68) (223)
Prepaid expenses, other assets and other liabilities (769) (2,790)
Income taxes (1,715) 1,202
-------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities 23,451 (1,066)
-------------------------------------------------------------------------------------------------------------------
Investing Activities
Property, plant and equipment additions (6,829) (3,846)
Proceeds from sale of assets -- 54
Purchases of short-term investments (48,708) (15,843)
Proceeds from maturities of short-term investments 27,564 21,700
-------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities (27,973) 2,065
-------------------------------------------------------------------------------------------------------------------
Financing Activities
Tax benefit from exercise of stock options 1,378 --
Repayment of line of credit balance (1,000) --
Repurchase of common stock (14) --
Dividends paid (1,640) --
-------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (1,276) --
-------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in cash and cash equivalents (5,798) 999
Cash and cash equivalents at beginning of period 9,688 5,106
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,890 $ 6,105
===================================================================================================================
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 six months ended July 4, 2009 are not
indicative of the results to be expected for the full year ending December 31,
2009. 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, 2008.
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
98% of the Company's total sales for the three and six months ended July 4, 2009
were firearms sales, and 2% were investment castings sales. Export sales
represent less than 2% 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 unaffiliated, third-party customers.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments, including cash, short-term
investments, accounts receivable, accounts payable and accrued liabilities
approximates fair value due to the short-term maturity of these items.
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.
Reclassifications:
Certain prior period balances have been reclassified to conform with
current year presentation.
8
Recent Accounting Pronouncements:
In July 2009, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 165 ("FAS 165") "Subsequent
Events". FAS 165 establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. This disclosure
should alert all users of financial statements that an entity has not evaluated
subsequent events after that date in the set of financial statements being
presented. The Company adopted FAS 165 during the quarter ended July 4, 2009.
NOTE 3 - SHORT-TERM INVESTMENTS
Short-term investments consist principally of United States Treasury
instruments, all maturing within one year, and are recorded at cost plus accrued
interest, which approximates market. The income from short-term investments is
included in other income - net. The Company intends to hold these investments
until maturity.
The Company evaluates securities for other than temporary impairment at
least on a quarterly basis, and more frequently when market conditions warrant
such evaluation. The Company has determined that the carrying value of
short-term investments has not been impaired.
NOTE 4 - 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.
During the six month period ended July 4, 2009, inventory quantities were
reduced. If this reduction remains through year-end, it will result in a
liquidation of LIFO inventory quantities carried at lower costs prevailing in
prior years as compared with the current cost of purchases. Although the effect
of such a liquidation cannot be precisely quantified at the present time,
management believes that if a LIFO liquidation continues to occur in 2009, the
impact may be material to the Company's results of operations for the period but
will not have a material impact on the financial position of the Company.
Inventories consist of the following (in thousands):
July 4, 2009 December 31, 2008
-------------------------------------------------------------------------------
Inventory at FIFO
Finished products $ 2,131 $ 2,790
Materials and work in process 49,691 57,056
-------------------------------------------------------------------------------
Gross inventories 51,822 59,846
Less: LIFO reserve (43,160) (44,338)
Less: excess and obsolescence reserve (2,597) (3,569)
-------------------------------------------------------------------------------
Net inventories $ 6,065 $ 11,939
===============================================================================
9
NOTE 5 - INCOME TAXES
The Company's 2009 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 effective income tax rate for the
three and six months ended July 4, 2009 and June 28, 2008 is 38.0%. Income tax
payments in the three and six months ended July 4, 2009 totaled $7.0 million and
$10.9 million, respectively. The Company was not required to make income tax
payments in the three and six months ended June 28, 2008 because of overpayments
of estimated taxes in 2007.
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 2009,
the IRS completed audits of the Company's 2006 and 2007 federal income tax
returns. Adjustments resulting from this examination did not result in a
material change to the Company's financial position or results of operations.
The Company adheres to the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes," ("FIN 48"). 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 July 4, 2009. 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 6 - PENSION PLANS
The Company has migrated its retirement benefit focus from defined benefit
pension plans to defined contribution retirement plans, utilizing its current
401(k) plan.
In 2007, the Company amended its hourly and salaried defined benefit
pension plans so that employees will no longer accrue benefits under them
effective December 31, 2007. This action "froze" the benefits for all employees
and prevented future hires from joining the plans, effective December 31, 2007.
Currently, the Company provides supplemental discretionary contributions to
substantially all employees' individual 401(k) accounts.
In 2009 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 2009, but there may be such a requirement in future years. The Company
expects to voluntarily contribute approximately $2.0 million to the defined
benefit plans in 2009, of which $0.8 million was contributed in the first half
of 2009. The intent of this discretionary contribution is 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
$200,000 per year, which includes PBGC premiums, actuary and audit fees, and
other expenses.
10
In the first quarter of 2009, the Company settled $2.0 million of pension
liabilities through the purchase of group annuities. This transaction resulted
in an insignificant actuarial gain.
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 frozen defined benefit plans for 2009 is $1.4
million, of which $0.7 million was recognized in the first half of 2009.
Costs attributable to the supplemental discretionary 401(k) plan totaled
$0.5 million and $0.9 million for the three and six months ended July 4, 2009,
respectively. The Company plans to contribute an additional $1.0 million to the
plan during the remainder of 2009.
NOTE 7 - SHARE BASED PAYMENTS
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.
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, 2008 1,420,250 $ 9.02 $ 3.99
Granted 115,900 $ 8.69 $ 4.57
Exercised -- -- --
Expired -- -- --
--------------------------------------------------------------------------------------------------
Outstanding July 4, 2009 1,536,150 $ 9.00 $ 4.08
--------------------------------------------------------------------------------------------------
The aggregate intrinsic value (mean market price at July 2, 2009 less the
weighted average exercise price) of options outstanding under the Plans was
approximately $5.4 million.
The aggregate compensation expense for the options granted in the six
months ended July 4, 2009, calculated using the Black-Scholes option-pricing
model, was $0.2 million. 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 $1.9 million and $2.8 million for three and
six months ended July 4, 2009, respectively, and $0.2 million and $0.3 million
for three and six months ended June 28, 2008, respectively.
In April 2008, a total of 18,222 deferred stock awards were issued to
non-employee directors, which vested in April 2009. Compensation expense related
to these awards was amortized ratably over the vesting period. The total
compensation expense related to these awards was $0.1 million. In April 2009, a
total of 12,144 deferred stock awards were issued to non-employee directors,
which will vest in April 2010. Compensation expense related to these awards will
be amortized ratably over the vesting period. The total compensation expense
related to these awards was $0.1 million.
11
In May 2009, a total of 19,181 deferred stock awards were issued to
certain key employees. These awards require that the Company meets certain
financial objectives in order for the employees to vest. It is anticipated that
these objectives will be met by the end of 2009. The total compensation expense
related to these awards is $0.2 million and is being amortized ratably over the
expected vesting period.
The Company has adopted a policy to pay 25% of all officers' annual
incentive compensation in restricted stock. During the first quarter of 2009,
awards totaling $0.2 million were made under this policy.
NOTE 8 - BASIC AND DILUTED EARNINGS PER SHARE
Weighted average shares outstanding for the three and six months ended
July 4, 2009 were 19,058,537 and 19,051,775, respectively. Weighted average
shares outstanding for the three and six months ended June 28, 2008 were
20,571,817 and 20,575,843, 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 three and six months ended July 4,
2009 of 19,272,412 and 19,109,862, respectively. Diluted weighted-average shares
outstanding for the three and six months ended June 28, 2008 were 20,612,584 and
20,629,871 shares, respectively.
NOTE 9 - CONTINGENT LIABILITIES
As of July 4, 2009, the Company was a defendant in approximately 3
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into one of two categories:
(i) Those that claim damages from the Company related to allegedly
defective product design and/or manufacture 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; or
(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 only remaining lawsuit of the second type is the lawsuit filed by the
City of Gary. The complaint in that case seeks damages, among other things, for
the costs of medical care, police and emergency services, public health
services, and other services as well as punitive damages. In addition, nuisance
abatement and/or injunctive relief is sought to change the design, manufacture,
marketing and distribution practices of the various defendants. The suit
alleges, among other claims, negligence in the design of products, public
nuisance, negligent distribution and marketing, negligence per se and deceptive
advertising. The case does not allege a specific injury to a specific individual
as a result of the misuse or use of any of the Company's products. Market share
allegations have been held inapplicable by the Indiana Supreme Court.
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 suit brought by Gary further
exist based on, among other things, the Protection of Lawful Commerce in Arms
Act ("PLCAA").
12
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.
Of the lawsuits brought by municipalities, counties or a state Attorney
General, twenty-two 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; Cleveland -
dismissed on January 24, 2006 for lack of prosecution; New York City - U.S.
Supreme Court denied plaintiff's Petition for Writ of Certiorari on April 3,
2009; and Washington, D.C. - U.S. Supreme Court denied plaintiff's Petition for
Writ of Certiorari on April 3, 2009.
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. On November
23, 2005, 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. The petition was denied on
January 13, 2009 and the case was remanded to the trial 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.
13
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
case 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 $12.2 million
and $5.0 at December 31, 2008 and 2007, 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 April 4,
2009 and the results of these 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 10 - RELATED PARTY TRANSACTIONS
In the first quarter of 2008, the Company made lump sum pension benefit
payments to William B. Ruger, Jr., the former Chairman and Chief Executive
Officer of the Company, and Stephen L. Sanetti, the former President of the
Company. These payments totaled $2.1 million which represented the actuarially
determined present value of the accrued benefits payable to these individuals
under the Supplementary Executive Retirement Plan as of the date of payment.
14
NOTE 11 - 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 Six Months Ended
--------------------------------------------------------------------------------------------------------------------
July 4, 2009 June 28, 2008 July 4, 2009 June 28, 2008
--------------------------------------------------------------------------------------------------------------------
Net Sales
Firearms $ 71,372 $ 36,839 $ 133,600 $ 76,869
Castings
Unaffiliated 1,018 1,825 2,320 4,301
Intersegment 4,876 2,779 9,039 5,646
--------------------------------------------------------------------------------------------------------------------
5,894 4,604 11,359 9,947
Eliminations (4,876) (2,779) (9,039) (5,646)
--------------------------------------------------------------------------------------------------------------------
$ 72,390 $ 38,664 $ 135,920 $ 81,170
--------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes
Firearms $ 14,413 $ 3,502 $ 24,025 $ 6,527
Castings (121) (907) (625) (1,786)
Corporate (292) (850) (34) (653)
--------------------------------------------------------------------------------------------------------------------
$ 14,000 $ 1,745 $ 23,366 $ 4,088
--------------------------------------------------------------------------------------------------------------------
July 4, December 31,
2009 2008
--------------------------------------------------------------------------------------------------------------------
Identifiable Assets
Firearms $ 62,599 $ 63,042
Castings 4,490 4,842
Corporate 61,433 44,876
--------------------------------------------------------------------------------------------------------------------
$ 128,522 $ 112,760
--------------------------------------------------------------------------------------------------------------------
NOTE 12 - STOCK REPURCHASE
In November 2008, the Company announced that its Board of Directors
authorized a $5 million stock repurchase program. During the first half of 2009,
the Company repurchased approximately 2,400 shares of its common stock under a
10b5-1 program, representing 0.01% of the outstanding shares, in the open market
at an average price of $6.03 per share. These purchases were made with cash held
by the Company and no debt was incurred. At July 4, 2009, $4.7 million remained
available for share repurchases under this repurchase program.
NOTE 13 - LINE OF CREDIT
In December 2008, the Company renewed a $25 million credit facility with a
bank which terminates on December 13, 2009. Borrowings under this facility bear
interest at LIBOR plus 200 basis points. The unused fee is 50 basis points per
year on the unused portion of the credit facility. During the first quarter of
2009, the Company paid down the $1 million balance on its $25 million credit
facility, in response to the relative improvement in the global financial and
credit markets. The credit facility remains unused.
15
NOTE 14 - SUBSEQUENT EVENTS
On July 28, 2009, the Company declared a dividend of 12.3 cents per share
to shareholders of record on August 14, 2009.
The Company has evaluated events through July 29, 2009, the date the
financial statements were issued, and determined that there were no events
occurring subsequent to July 4, 2009 that would have a material impact on the
Company's results of operations or financial position.
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
98% of the Company's total sales for the three and six months ended July 4, 2009
were firearms sales, and 2% were investment castings sales. Export sales
represent less than 2% 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 excess investment casting capacity to
manufacture and sell castings to unaffiliated, third-party 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.
16
Results of Operations
Summary Unit Data
Firearms unit data for orders, production, shipments and ending inventory
for the last six quarters are as follows:
2009 2008
-------------------- --------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------- --------------------------------------------
Units Ordered 204,700 501,000 270,400 125,700 120,300 260,100
Units Produced 247,300 209,900 167,100 158,900 150,600 124,000
Units Shipped 246,200 213,700 208,100 146,000 136,700 135,700
Average Sales Price $ 286 $ 283 $ 275 $ 276 $ 270 $ 296
Units on Backorder 412,300 458,900 175,900 115,300 137,700 157,100
Units - Company Inventory 9,600 8,800 12,400 52,600 40,200 24,900
Units - Distributor Inventory (Note 1) 53,900 35,200 57,500 65,800 62,900 61,800
Orders Received and Ending Backlog
The gross value of orders received and ending backlog for the trailing
five quarters are as follows (in millions except average sales price, including
Federal Excise Tax):
2009 2008
-------------------- --------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------- --------------------------------------------
Orders Received $ 81.8 $ 154.3 $ 86.1 $ 33.5 $ 37.0 $ 73.8
Average Sales Price of Orders Received (2) $ 400 $ 308 $ 287 $ 267 $ 275 $ 257
Ending Backlog (2) $ 138.0 $ 136.3 $ 47.8 $ 27.9 $ 33.7 $ 40.7
Average Sales Price of Ending Backlog (2) $ 335 $ 297 $ 269 $ 242 $ 245 $ 234
Note 1: Distributor ending inventory as provided by the Company's distributors.
Note 2: Average sales price for orders received and ending backlog is net of
Federal Excise Tax of 10% for handguns and 11% for long guns.
17
The incoming order rate declined in the second quarter of 2009, reflecting
the impact of the following:
o A reduction in the industry-wide surge in demand that began in the
fourth quarter of 2008,
o The large backlog at the end of the first quarter, which discouraged
additional orders,
o Prolonged ammunition shortages at retail, which hindered retail
firearms sales,
o Stronger inventories throughout the distribution channel, and
o Normal product seasonality.
Demand remained strong for many firearms, particularly those related to
self defense, including the LCP pistol and the LCR revolver.
The increase in the average sales price of orders received and the average
sales price of the ending backlog at the end of the second quarter of 2009 is
due to the orders received during the quarter for the SR-556 rifle, which was
introduced in the second quarter of 2009. Shipments of the SR-556, which has a
higher price relative to the other product lines, began in the latter part of
the second quarter. In addition, throughout 2008 the lower-priced LCP pistol
accounted for a disproportionate percentage of the total backlog, depressing the
average sales price of the units in backlog in 2008.
Production
Production rates continued to improve. Unit production in the second
quarter of 2009 increased 18% from the first quarter of 2009, and increased 64%
from the second 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 single-piece flow production and inventory pull systems.
The current focus is on:
o Establishing single-piece flow cells for small parts manufacturing,
o Process improvement for existing cells,
o Developing inventory pull systems,
o Developing standard work for all cell processes,
o Managing vendors,
o Reallocating capacity from products for which demand appears to be
cresting to products with unmet demand, and
o Re-engineering existing product designs for improved
manufacturability.
There is also considerable focus on better matching production rates to
incoming orders and the backlog to optimize order fill rates while reducing
inventory levels.
Inventories
The Company's finished goods inventory remains at extraordinarily low
levels. When the current surge in demand subsides, the Company expects to
replenish its finished goods inventory to safety stock levels before
implementing any significant production rate reductions. This planned
replenishment could increase the value of finished goods inventory by as much as
$15.0 million from current depressed levels.
Sales
Consolidated net sales were $72.4 million for the three months ended July
4, 2009. This represents an increase of $33.7 million or 87% from consolidated
net sales of $38.7 million in the comparable prior year period.
18
For the six months ended July 4, 2009, consolidated net sales were $135.9
million, an increase of $54.8 million or 67% from sales of $81.2 million in the
comparable 2008 period.
Firearms net sales were $71.4 million for the three months ended July 4,
2009. This represents an increase of $34.5 million or 94% from firearms net
sales of $36.8 million in the comparable prior year period.
For the six months ended July 4, 2009, firearms net sales were $133.6
million. This represents an increase of $56.7 or 74% from firearms net sales of
$76.9 million in the comparable 2008 period.
Firearms unit shipments increased 80% and 69% for the three and six months
ended July 4, 2009 when compared to the comparable prior year period due to
increased shipments of pistols, rifles and revolvers. This increase is
attributable to continued strong demand for most product lines and increased
production of both new and mature products throughout the first half of 2009.
Casting net sales were $1.0 million for the three months ended July 4,
2009. This represents a decrease of $0.8 million or 44% from casting sales of
$1.8 million in the comparable prior year period.
For the six months ended July 4, 2009, casting net sales were $2.3
million. This represents a decrease of $2.0 million or 46% from casting sales of
$4.3 million in the comparable prior year period.
Cost of Products Sold and Gross Margin
Consolidated cost of products sold was $47.4 million for the three months
ended July 4, 2009. This represents an increase of $17.2 million or 56.9% from
consolidated cost of products sold of $30.2 million in the comparable prior year
period.
For the six months ended July 4, 2009, consolidated cost of products sold
was $91.4 million. This represents an increase of $29.4 million or 47.3% from
consolidated cost of products sold of $62.0 million in the comparable prior year
period.
19
Gross margin as a percent of sales was 34.6% and 32.8% for the three and
six months ended July 4, 2009. This represents an increase from the gross margin
percentages of 22.0% and 23.6% in the comparable prior year periods as
illustrated below (in thousands):
Three Months Ended
-----------------------------------------------------------------------------------------------------------------------------
July 4, 2009 June 28, 2008
-----------------------------------------------------------------------------------------------------------------------------
Net sales $ 72,390 100.0% $ 38,664 100.0%
Cost of products sold, before LIFO, overhead and labor rate
adjustments to inventory, product liability, and product
recall 46,255 63.9% 30,803 79.7%
LIFO (income) expense (929) (1.3)% 2,130 5.5%
Overhead rate adjustments to inventory 1,071 1.5% (1,062) (2.8)%
Labor rate adjustments to inventory 289 0.4% (1,879) (4.9)%
Product liability 654 0.9% 177 0.5%
Product recall 18 -- -- --
--------- --------- --------- ---------
Total cost of products sold 47,358 65.4% 30,169 78.0%
-----------------------------------------------------------------------------------------------------------------------------
Gross margin $ 25,032 34.6% $ 8,495 22.0%
=============================================================================================================================
Six Months Ended
-----------------------------------------------------------------------------------------------------------------------------
July 4, 2009 June 28, 2008
-----------------------------------------------------------------------------------------------------------------------------
Net sales $ 135,920 100.0% $ 81,170 100.0%
Cost of products sold, before LIFO, overhead and labor rate
adjustments to inventory, product liability, and product
recall 88,979 65.5% 61,623 75.9%
LIFO (income) expense (1,178) (0.9)% 2,227 2.7%
Overhead rate adjustments to inventory 1,760 1.3% (1,526) (1.9)%
Labor rate adjustments to inventory 457 0.3% (1,879) (2.3)%
Product liability 747 0.6% 367 0.5%
Product recall 597 0.4% 1,208 1.5%
--------- --------- --------- ---------
Total cost of products sold 91,362 67.2% 62,020 76.4%
-----------------------------------------------------------------------------------------------------------------------------
Gross margin $ 44,558 32.8% $ 19,150 23.6%
=============================================================================================================================
20
Cost of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability, and product recall--During the three and six
months ended July 4, 2009, cost of products sold, before LIFO, overhead and
labor rate adjustments to inventory, product liability, and product recall
decreased as a percentage of sales by 15.8% and 10.4%, respectively, compared
with the comparable 2008 periods. The improvement was due to the leveraging of
fixed overhead expense with year-over-year sales growth of 87.2% and 67.5%
during the three and six months ended July 4, 2009, respectively. Greater
efficiency was experienced in personnel costs and non-personnel variable
overhead spending.
LIFO--During the three and six months ended July 4, 2009, gross inventories
decreased by $3.4 million and $8.0 million, respectively, compared to increases
in gross inventories of $3.5 million and $3.0 million in the comparable 2008
periods. As a result, in the three and six months ended July 4, 2009 the Company
recognized LIFO income resulting in decreased cost of products sold of $0.9
million and $1.2 million, respectively, compared to LIFO expense and increased
cost of products sold of $2.1 million and $2.2 million in the comparable 2008
periods.
Overhead Rate Adjustments-- During the three and six months ended July 4, 2009,
the overhead rates used to absorb overhead expenses into inventory declined,
resulting in decreases in inventory value of $1.1 million and $1.8 million,
respectively. These decreases in inventory carrying values resulted in increases
to cost of products sold. During the comparable 2008 periods, the overhead rate
used to absorb overhead expenses into inventory increased, resulting in
increases in inventory value of $1.1 million and $1.5 million, respectively.
These increases in inventory carrying values resulted in decreases to cost of
products sold.
Labor Rate Adjustments-- During the three and six months ended July 4, 2009, the
standard labor rates used to absorb incurred labor expenses into inventory
declined, resulting in decreases in inventory value of $0.3 and $0.5 million,
respectively. These decreases in inventory carrying values resulted in increases
to cost of products sold. During the comparable 2008 periods, the standard labor
rates used to absorb incurred labor expenses into inventory increased, resulting
in increases in inventory value of $1.1 million and $1.5 million, respectively.
These increases in inventory carrying values resulted in decreases to cost of
products sold.
Product Liability--Product liability expenses include the cost of outside legal
fees, insurance, and other expenses incurred in the management and defense of
product liability matters. During the three and six months ended July 4, 2009,
the Company incurred product liability expense of $0.7 million and $0.7 million,
respectively. For the comparable 2008 periods, product liability expenses
totaled $0.2 million and $0.4 million, respectively. See Note 9 to the notes to
the financial statements "Contingent Liabilities" for further discussion of the
Company's product liability.
Product Recalls--In 2008, the Company received a small number of reports from
the field that its SR9 pistols, and later, its LCP pistols, could discharge if
dropped onto a hard surface. The Company began recalling SR9 pistols in April
2008 and LCP pistols in October 2008 to offer free safety retrofits. The
estimated cost of these safety retrofit programs of approximately $3.5 million
was recorded in 2008. During the first quarter of 2009, it became apparent that
the recalls were more successful than originally forecast and a greater quantity
of affected pistols would be retrofitted than originally estimated. Therefore,
an additional expense of $0.6 million was recognized in the first quarter of
2009.
Gross Margin--For the three and six months ended July 4, 2009, gross margin was
$25.0 million and $44.6 million or 34.6% and 32.8% of sales, respectively. This
is an increase of $16.5 million and $25.4 or 194.7% and 132.7% from the
comparable prior year periods gross margin of $8.5 million and $19.2 million, or
22.0% and 23.6% of sales.
21
Selling, General and Administrative
Selling, general and administrative expenses were $11.1 million and $21.1
million, or 15.3% and 15.6% of sales, for the three and six months ended July 4,
2009, respectively. This represents an increase of $4.0 million and $5.8 million
from selling, general and administrative expenses of $7.0 million and $15.3
million, or 18.1% and 18.9% of sales, in the comparable prior year periods. The
increase in expense reflects greater personnel-related expenses, increased sales
promotion and advertising expenses, and increased shipping expenses.
Other income
Other income was a break-even in the three and six months ended July 4,
2009 compared to income of $0.3 million in both the three and six months ended
June 28, 2008.
Income Taxes and Net Income
The effective income tax rate in the three and six months ended July 4,
2009 and June 28, 2008 was 38.0%.
As a result of the foregoing factors, consolidated net income was $8.7
million and $14.5 million for the three and six months ended July 4, 2009,
respectively. This represents an increase of $7.6 million and $12.0 million from
consolidated net income of $1.1 million and $2.5 million in the comparable prior
year periods.
Financial Condition
Liquidity
At the end of the second quarter of 2009, our cash, cash equivalents and
short-term investments totaled $43.6 million. Our pre-LIFO working capital of
$100.0 million, less the LIFO reserve of $43.2 million, resulted in working
capital of $56.8 million and a current ratio of 3.0 to 1.
When the current surge in demand subsides, the Company expects to
replenish its finished goods inventory to safety stock levels. This planned
replenishment could increase the value of finished goods inventory by as much as
$15 million from current depressed levels. The cash that will be consumed by
this increase in finished goods inventory would be partially offset by a
reduction in accounts receivable which would be expected during a period of
reduced sales.
During the first quarter of 2009, the Company paid down the $1 million
balance on its $25 million credit facility, in response to the relative
improvement in the global financial and credit markets. The credit facility,
which expires on December 13, 2009, remains unused.
Operations
Cash provided by operating activities was $23.5 million for the six months
ended July 4, 2009 compared to cash used by operating activities of $1.1 million
for the comparable prior year period. The increase in cash provided in 2009
compared to 2008 is principally attributable to the increased profitability in
2009, inventory reductions in 2009 compared to inventory increases in 2008, and
other working capital fluctuations.
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 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.
22
Investing and Financing
Capital expenditures for the six months ended July 4, 2009 totaled $6.8
million. In 2009, the Company expects to spend approximately $12 million on
capital expenditures to purchase tooling for new product introductions and to
upgrade and modernize manufacturing equipment, and to increase capacity of
certain products in strong demand. The Company finances, and intends to continue
to finance, all of these activities with cash provided by operations and current
cash and short-term investments.
Dividends of $1.6 million were paid during the six months ended July 4,
2009.
On July 28, 2009, the Company declared a dividend of 12.3 cents per share
to shareholders of record on August 14, 2009. The amount of this dividend was
based on a percentage of Operating Profit after adjustment for certain items,
the same approach used by the Company last quarter when it declared its first
dividend in over three years. Under this approach, the amount of the quarterly
dividend fluctuates directly with certain operating results of the Company. 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.
In 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 and
prevented future hires from joining the plans, effective December 31, 2007.
Currently, the Company provides supplemental discretionary contributions to
substantially all employees' individual 401(k) accounts.
In 2009 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 2009, but there may be such a requirement in future years. The Company
expects to voluntarily contribute approximately $2.0 million to the defined
benefit plans in 2009, of which $0.8 million was contributed in the first half
of 2009. The intent of this discretionary contribution is 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
$200,000 per year, which includes PBGC premiums, actuary and audit fees, and
other expenses.
In the first quarter of 2009, the Company settled $2.0 million of pension
liabilities through the purchase of group annuities. This transaction resulted
in an insignificant actuarial gain.
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 2007, the Company established an unsecured $25 million credit facility.
At December 31, 2008, $1.0 million was outstanding from this credit facility.
During the first quarter of 2009, the Company paid down the $1.0 million balance
on its $25 million credit facility, in response to the relative improvement in
the global financial and credit markets. The credit facility, which expires on
December 13, 2009, remains unused.
In November 2008, the Company announced that its Board of Directors
authorized a $5 million stock repurchase program. During the first half of 2009,
the Company repurchased approximately 2,400 shares of its common stock under a
10b5-1 program, representing 0.01% of the outstanding shares, in the open market
at an average price of $6.03 per share. These purchases were made with cash held
by the Company and no debt was incurred. At July 4, 2009, $4.7 million remained
available for share repurchases under this repurchase program.
The Company plans to demolish most of its 300,000 square foot Dorr Woolen
Building during the second half of 2009. A portion of the building will remain
and be refurbished, and will continue to serve as the firearms warehouse in New
Hampshire. The cost of this demolition and refurbishment is expected to be
approximately $2 million.
23
Other Operational Matters
In the normal course of its manufacturing operations, the Company is
subject to occasional governmental proceedings and orders pertaining to
workplace safety, 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 valuation of the future defined-benefit pension obligations at
December 31, 2008 and 2007 indicated that these plans were underfunded by $16.9
million and $4.8 million, respectively, and resulted in a cumulative other
comprehensive loss of $23.0 million and $13.4 million on the Company's balance
sheet at December 31, 2008 and 2007, respectively.
The Company expects to realize its deferred tax assets through tax
deductions against future taxable income.
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its critical accounting
estimates and assumptions described in the Company's 2008 Annual Report on Form
10-K filed on February 24, 2009, or the judgments affecting the application of
those estimates and assumptions.
Recent Accounting Pronouncements:
In July 2009, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 165 ("FAS 165") "Subsequent
Events". FAS 165 establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. This disclosure
should alert all users of financial statements that an entity has not evaluated
subsequent events after that date in the set of financial statements being
presented. The Company adopted FAS 165 during the quarter ended July 4, 2009.
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
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 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.
24
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 July 4, 2009.
Based on the evaluation, the Company's Chief Executive Officer and
Treasurer and Chief Financial Officer have concluded that, as of July 4, 2009,
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 July 4,
2009 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 have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at
Note 9 to this Form 10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through April 4,
2009, and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10Q and 10K reports, to which reference is hereby made.
One case was formally instituted against the Company during the three
months ending July 4, 2009. On June 23, 2009, the Company was served with a
complaint captioned Belmore v. Sturm, Ruger & Co., Inc. pending in Yavapai
County Superior Court in the State of Arizona. Plaintiff Roger Belmore worked
for a third-party contractor as a security guard in a Company facility, and the
complaint alleges that he slipped and fell. General damages, medical expenses,
and loss of earnings and earning capacity are demanded.
On July 20, 2009, the Company was served with a complaint captioned
Gilbert v. Sturm, Ruger & Co., Inc pending in the Boyd County Circuit Court in
the Commonwealth of Kentucky. The complaint alleges that the plaintiff was
handling a Ruger SR9 pistol when it discharged, resulting in injury to his leg.
Compensatory damages, punitive damages and costs are demanded.
During the three months ending July 4, 2009, no previously reported cases
were settled.
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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, 2008.
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
The 2009 Annual Meeting of Stockholders of the Company was held on
April 29, 2009. The table below sets forth the results of the votes
taken on the 2009 Annual Meeting:
1. Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
Michael O. Fifer 16,217,405 203,430
James E. Service 16,191,960 228,875
John A. Cosentino, Jr. 16,228,179 192,656
C. Michael Jacobi 16,133,521 287,314
John M. Kingsley, Jr. 16,179,342 241,493
Stephen T. Merkel 16,231,047 189,788
Ronald C. Whitaker 16,221,218 199,617
2. Ratification of McGladrey & Pullen, LLP as Auditors for 2009
------------------------------------------------------------
Votes For Votes Against Abstain
--------- ------------- -------
16,255,069 120,773 44,993
ITEM 5. OTHER INFORMATION
None
26
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
27
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JULY 4, 2009
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: July 28, 2009 /S/ THOMAS A. DINEEN
-----------------------------------------------------
Thomas A. Dineen
Principal Financial Officer,
Vice President, Treasurer and Chief Financial Officer
28