FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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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)
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Delaware
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06-0633559 |
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(State or other jurisdiction of
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(I.R.S. employer |
incorporation or organization)
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identification no.) |
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Lacey Place, Southport, Connecticut
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06890 |
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(Address of principal executive offices)
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(Zip code) |
(203) 259-7843
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the issuers common stock as of September 30, 2007: Common
Stock, $1 par value 22,798,732.
INDEX
STURM, RUGER & COMPANY, INC.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Note) |
Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
2,706 |
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$ |
7,316 |
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Short-term investments |
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60,857 |
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22,026 |
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Trade receivables, net |
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15,066 |
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18,007 |
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Gross inventories |
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60,469 |
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87,477 |
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Less LIFO reserve |
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(45,106 |
) |
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(57,555 |
) |
Less excess and obsolescence reserve |
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(3,882 |
) |
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(5,516 |
) |
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Net inventories |
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11,481 |
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24,406 |
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Deferred income taxes |
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5,903 |
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8,347 |
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Prepaid expenses and other current assets |
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1,666 |
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1,683 |
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Total current assets |
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97,679 |
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81,785 |
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Property, plant and equipment |
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125,266 |
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128,042 |
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Less allowances for depreciation |
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(103,248 |
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(105,081 |
) |
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Net property, plant and equipment |
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22,018 |
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22,961 |
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Deferred income taxes |
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1,369 |
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3,630 |
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Other assets |
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4,101 |
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8,690 |
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Total Assets |
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$ |
125,167 |
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$ |
117,066 |
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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)
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Note) |
Liabilities and Stockholders Equity |
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Current Liabilities |
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Trade accounts payable and accrued expenses |
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$ |
4,912 |
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$ |
6,342 |
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Product liability |
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1,249 |
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904 |
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Employee compensation and benefits |
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4,847 |
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6,416 |
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Workers compensation |
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6,000 |
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6,547 |
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Income taxes payable |
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858 |
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1,054 |
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Total current liabilities |
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17,866 |
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21,263 |
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Accrued pension liability |
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5,798 |
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7,640 |
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Product liability accrual |
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774 |
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837 |
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Contingent liabilities Note 8 |
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Stockholders Equity |
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Common Stock, non-voting, par value $1: |
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Authorized shares 50,000; none issued |
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Common Stock, par value $1: Authorized shares
40,000,000; issued and outstanding 22,798,732
and 22,638,700 |
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22,799 |
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22,639 |
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Additional paid-in capital |
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1,626 |
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2,615 |
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Retained earnings |
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87,079 |
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74,505 |
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Accumulated other comprehensive loss |
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(10,775 |
) |
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(12,433 |
) |
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Total Stockholders Equity |
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100,729 |
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87,326 |
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Total Liabilities and Stockholders Equity |
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$ |
125,167 |
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$ |
117,066 |
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Note:
The balance sheet at December 31, 2006 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)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Net firearms sales |
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$ |
29,298 |
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$ |
34,378 |
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$ |
112,535 |
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$ |
104,425 |
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Net castings sales |
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2,565 |
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7,234 |
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9,892 |
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19,890 |
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Total net sales |
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31,863 |
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41,612 |
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122,427 |
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124,315 |
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Cost of products sold |
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26,268 |
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35,413 |
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88,140 |
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99,588 |
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Gross profit |
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5,595 |
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6,199 |
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34,287 |
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24,727 |
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Expenses: |
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Selling |
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3,853 |
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3,275 |
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10,747 |
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11,110 |
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General and administrative |
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2,675 |
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2,587 |
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10,510 |
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9,206 |
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Pension plan curtailment charge |
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1,143 |
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1,143 |
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Impairment of assets |
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489 |
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489 |
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8,160 |
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5,862 |
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22,889 |
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20,316 |
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Operating profit (loss) |
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(2,565 |
) |
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337 |
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11,398 |
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4,411 |
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Gain on sale of non-manufacturing
assets (Notes 9 and 11) |
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7,085 |
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Other income-net |
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823 |
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1,261 |
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1,798 |
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1,974 |
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Total other income |
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823 |
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1,261 |
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8,883 |
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1,974 |
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Income (loss) before income taxes |
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(1,742 |
) |
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1,598 |
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20,281 |
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6,385 |
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Income taxes (benefit) |
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(1,125 |
) |
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641 |
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7,707 |
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2,560 |
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Net income (loss) |
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($ |
617 |
) |
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$ |
957 |
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$ |
12,574 |
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$ |
3,825 |
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Earnings (loss) per share |
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Basic |
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($ |
0.03 |
) |
|
$ |
0.04 |
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$ |
0.55 |
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$ |
0.14 |
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Diluted |
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($ |
0.03 |
) |
|
$ |
0.04 |
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$ |
0.55 |
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$ |
0.14 |
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Average shares outstanding |
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Basic |
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22,759 |
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26,679 |
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22,686 |
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26,832 |
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Diluted |
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22,759 |
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26,684 |
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23,030 |
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26,835 |
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See notes to condensed financial statements.
5
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)
(Dollars in thousands)
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Accumulated |
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Additional |
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Other |
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Common |
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Paid-in |
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Retained |
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Comprehensive |
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Stock |
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Capital |
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Earnings |
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(Loss) |
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Total |
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Balance at December 31, 2006 |
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$ |
22,639 |
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|
$ |
2,615 |
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$ |
74,505 |
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$ |
(12,433 |
) |
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$ |
87,326 |
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Net income |
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|
|
|
|
|
|
|
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|
12,574 |
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|
|
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|
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|
12,574 |
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Impact of curtailment
charge on pension
liability |
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|
|
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|
1,658 |
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|
1,658 |
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Comprehensive income |
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14,232 |
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Stock-based
compensation, net of
tax |
|
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|
297 |
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|
|
|
|
297 |
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|
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Stock options exercised |
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|
160 |
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(1,286 |
) |
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(1,126 |
) |
|
Balance at September 30, 2007 |
|
$ |
22,799 |
|
|
$ |
1,626 |
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|
$ |
87,079 |
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|
$ |
(10,775 |
) |
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$ |
100,729 |
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|
See notes to condensed financial statements.
6
STURM, RUGER & COMPANY, INC.
CONDENSED
STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
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Nine Months Ended September 30, |
|
|
2007 |
|
2006 |
Operating Activities |
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|
|
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|
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|
Net income |
|
$ |
12,574 |
|
|
$ |
3,825 |
|
Adjustments to reconcile net income to cash
provided by operating activities: |
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|
|
|
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Depreciation |
|
|
3,126 |
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|
|
3,515 |
|
Slow moving inventory valuation adjustment |
|
|
(1,590 |
) |
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|
|
|
Asset impairment charge |
|
|
489 |
|
|
|
|
|
Pension plan curtailment charge |
|
|
1,143 |
|
|
|
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Stock option expense |
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|
297 |
|
|
|
64 |
|
Gain on sale of assets |
|
|
(7,141 |
) |
|
|
(998 |
) |
Deferred income taxes |
|
|
4,705 |
|
|
|
111 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade receivables |
|
|
2,941 |
|
|
|
(5,966 |
) |
Inventories |
|
|
14,515 |
|
|
|
8,146 |
|
Trade accounts payable and other liabilities |
|
|
(3,546 |
) |
|
|
1,089 |
|
Product liability |
|
|
282 |
|
|
|
(339 |
) |
Prepaid expenses and other assets |
|
|
(1,665 |
) |
|
|
1,959 |
|
Income taxes |
|
|
(196 |
) |
|
|
(5 |
) |
|
Cash provided by operating activities |
|
|
25,934 |
|
|
|
11,401 |
|
|
|
|
|
|
|
|
|
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|
Investing Activities |
|
|
|
|
|
|
|
|
Property, plant and equipment additions |
|
|
(3,128 |
) |
|
|
(2,417 |
) |
Proceeds from the sale of assets |
|
|
12,542 |
|
|
|
1,829 |
|
Purchases of short-term investments |
|
|
(49,832 |
) |
|
|
(87,064 |
) |
Proceeds from maturities of short-term investments |
|
|
11,000 |
|
|
|
104,017 |
|
|
Cash provided by (used for) investing activities |
|
|
(29,418 |
) |
|
|
16,365 |
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Payments of employee witholding tax for cashless exercise of stock options |
|
|
(1,126 |
) |
|
|
|
|
Repurchase and retirement of common stock |
|
|
|
|
|
|
(25,205 |
) |
|
Cash (used for) financing activities |
|
|
(1,126 |
) |
|
|
(25,205 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(4,610 |
) |
|
|
2,561 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
7,316 |
|
|
|
4,057 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,706 |
|
|
$ |
6,618 |
|
|
See notes to condensed financial statements.
7
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
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 30, 2007 are not indicative of the results to be expected for the full year ending
December 31, 2007. 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, 2006.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Organization:
Sturm, Ruger & Company, Inc. (the Company) is principally engaged in the design,
manufacture, and sale of firearms and investment castings. The Companys design and manufacturing
operations are located in the United States. Sales for the three months ended September 30, 2007
were 94% domestic and 6% export. Sales for the nine months ended September 30, 2007 were 95%
domestic and 5% export. The Companys firearms are sold through a select number of independent
wholesale distributors principally to the commercial sporting market. Investment castings are sold
either directly or through manufacturers representatives to companies in a wide variety of
industries.
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 year balances have been reclassified to conform with current year presentation.
Recent Accounting Pronouncements:
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements, (FAS 157) and No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, (FAS 159). These Standards define fair value, establishes a framework for
measuring fair value under generally
8
accepted accounting principles and expands disclosures about fair value measurements. FAS 157 and
FAS 159 are effective for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. The adoption of FAS 157 and FAS 159 are not
expected to have a material impact on the Companys 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 managements estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond managements control, interim results are subject to the final
year-end LIFO inventory valuation.
During the nine month period ended September 30, 2007, inventory quantities were reduced. This
reduction in inventory levels is expected to continue through year-end. This reduction 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 2007, the impact may be material to the Companys results of operations for the period
but will not have a material impact on the financial position of the Company. The Company estimates
that the impact of this liquidation on the results of operations for the three and nine month
periods ended September 30, 2007 was to reduce cost of products sold by $0.2 and $16.4 million,
respectively.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
Inventory at FIFO |
|
|
|
|
|
|
|
|
Finished products |
|
$ |
8,323 |
|
|
$ |
13,117 |
|
Materials and work in process |
|
|
52,146 |
|
|
|
74,360 |
|
|
Gross inventory |
|
|
60,469 |
|
|
|
87,477 |
|
Less: LIFO reserve |
|
|
(45,106 |
) |
|
|
(57,555 |
) |
Less: excess and obsolescence reserve |
|
|
(3,882 |
) |
|
|
(5,516 |
) |
|
Net inventories |
|
$ |
11,481 |
|
|
$ |
24,406 |
|
|
In addition to the aforementioned liquidation, the LIFO reserve was further reduced by $1.7
million as a result of the sale of excess titanium inventory in 2007. This sale did not have an
impact on the statement of income.
The LIFO impact on FIFO inventory increased from 66% at December 31, 2006 to 76% at September
30, 2007. The excess and obsolescence reserve decreased primarily as a result of this increase.
NOTE 4 INCOME TAXES
The Companys 2007 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 Companys 2006 effective tax rate differs from the statutory tax rate due principally to
state income taxes. The effective income tax rates for the nine months ended September 30, 2007,
is 38.0%. The Companys 2007 effective tax rate is lower than the 2006 effective tax rate of 40.1%
principally as a result of increased benefit of Federal manufacturing income tax credits.
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
9
for years before 2003. In the third quarter of 2007, the Internal Revenue Service (IRS) completed
an examination of the Companys Federal income tax return for 2005. The IRS did not propose any
adjustments as a result of this examination and has accepted the Companys return as filed.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, 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 $0.5 to $1.0 million exist. The
Company had previously recorded $0.7 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 30, 2007. 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.
During the quarter ended September 30, 2007, the Company amended its hourly and salaried
defined benefit pension plans so that employees will no longer accrue benefits under these plans
effective December 31, 2007. This action, which will freeze the benefits for essentially all
employees, will also prevent future hires from joining the plans, effective December 31, 2007.
Starting in 2008, the Company will provide supplemental discretionary contributions to
substantially all employees individual 401(k) accounts.
These amendments resulted in a $1.2 million pension curtailment charge that was recognized in
the quarter ended September 30, 2007.
In 2008 and future years, the Company will likely be required to make cash contributions to
the two defined benefit pension plans. 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, and could be as high as $10 million in aggregate.
In future years, the total annual cash outlays for retirement benefits, which would include
the continuing funding of the two defined benefit pension plans and the new supplemental
discretionary 401(k) contributions, are expected to be comparable to the current retirement funding
levels.
The Company anticipates terminating the two defined benefit pension plans in the future when
they are more fully funded. When the plans are terminated, the Company will likely incur a plan
termination charge. This charge, which would be as much as $15 million to $20 million if the plans
were terminated today, will likely be much less when actually terminated. Notwithstanding the
aforementioned termination charge, the Companys annual retirement benefit expense is not expected
to increase materially in the foreseeable future.
10
The estimated cost of the defined benefit plans is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Service cost |
|
$ |
339 |
|
|
$ |
406 |
|
|
$ |
1,090 |
|
|
$ |
1,216 |
|
|
Interest cost |
|
|
700 |
|
|
|
821 |
|
|
|
2,249 |
|
|
|
2,463 |
|
|
Expected return on plan assets |
|
|
(861 |
) |
|
|
(993 |
) |
|
|
(2,765 |
) |
|
|
(2,980 |
) |
|
Amortization
of prior service cost |
|
|
33 |
|
|
|
66 |
|
|
|
105 |
|
|
|
198 |
|
|
Recognized actuarial gains |
|
|
253 |
|
|
|
256 |
|
|
|
812 |
|
|
|
768 |
|
|
|
Net periodic pension cost |
|
$ |
464 |
|
|
$ |
556 |
|
|
$ |
1,491 |
|
|
$ |
1,665 |
|
|
The Company made contributions totaling $0.5 million and $1.4 million related to its defined
benefit pension plans in the three and nine months ended September 30, 2007. The Company plans on
contributing $5 million to its defined benefit pension plans in the fourth quarter of 2007.
NOTE 6 SHARE BASED PAYMENTS
On February 23, 2007 the Company adopted and on April 24, 2007 shareholders approved the
Sturm, Ruger & Company, Inc. 2007 Stock Incentive Plan (the Plan). The Plan replaces both the
Companys 1998 Stock Incentive Plan and its 2001 Stock Option Plan for Non-Employee Directors and
becomes the sole plan for providing stock-based incentive compensation. All directors (including
non-employee directors), officers, employees and independent contractors of the Company are
eligible to participate in the Plan. The Plan provides for the issuance of up to 2,550,000 shares
of the Companys common stock over the ten-year term of the Plan.
The Plan provides for the granting of non-qualified stock options to purchase up to 2,350,000
shares of the Companys common stock at a price not less than 100% of the fair market value of the
stock as of the date of the grant. Incentive stock options are only available to employee
participants. Each non-employee director will be granted options to purchase 20,000 shares of stock
upon becoming a director. Options are exercisable for a period of up to ten years. The Plan also
provides for restricted stock awards available to all eligible participants. Each non-employee
director will be granted an annual award of restricted stock equal to $25,000 on the date of grant.
The Plan also provides for the granting of deferred stock awards and share appreciation rights to
all eligible participants.
A summary of changes in options outstanding under the 1998 Stock Incentive Plan and 2001 Stock
Option Plan for Non-Employee Directors is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Shares |
|
Exercise Price |
|
Outstanding at December 31, 2006 |
|
|
1,325,000 |
|
|
$ |
9.46 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
495,000 |
|
|
|
11.76 |
|
Expired |
|
|
50,000 |
|
|
|
9.59 |
|
|
Outstanding September 30, 2007 |
|
|
780,000 |
|
|
$ |
8.14 |
|
|
The aggregate intrinsic value (mean market price at September 30, 2007 less the weighted
average exercise price) of options outstanding under the 1998 Stock Incentive Plan and 2001 Stock
Option Plan for Non-Employee Directors was approximately $7.8 million.
11
A summary of changes in options outstanding under the 2007 Stock Incentive Plan is summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Shares |
|
Exercise Price |
|
Outstanding at December 31, 2006 |
|
|
|
|
|
|
|
|
Granted |
|
|
286,250 |
|
|
$ |
13.39 |
|
Exercised |
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2007 |
|
|
286,250 |
|
|
$ |
13.39 |
|
|
The aggregate intrinsic value (mean market price at September 30, 2007 less the weighted
average exercise price) of options outstanding under the 2007 Stock Incentive Plan was
approximately $1.4 million.
The aggregate compensation expense for options granted in April 2007, calculated using the
Black-Scholes option-pricing model, was $0.7 million. This expense, which is a non-cash item, is
being amortized in the Companys Statements of Operations over the vesting period. 171,000 of the
options granted to employees vest upon the Companys attainment of certain performance objectives
if achieved within three years from the date of grant. 115,000 of the options granted to employees
vest over five years. Compensation costs related to share-based payments granted under all three
plans recognized in the Condensed Statements of Operations aggregated $0.1 million and $0.3 million
for the three and nine months ended September 30, 2007, respectively. For the three and nine months
ended September 30, 2006, compensation costs related to share-based payments recognized in the
Condensed Statements of Operations were $34,000 and $64,000, respectively.
In addition to the above options granted in the nine month period ended September 30, 2007
under the 2007 Stock Incentive Plan, deferred stock awards totaling 29,945 shares with a fair value
of $438,000 were granted to certain executives of the Company and restricted stock shares totaling
10,920 with a fair value of $150,000 were issued to non-employee directors of the Company in
partial payment of directors fees. The deferred shares granted to employees vested thirty days
from the date of grant. The restricted shares issued to non-employee directors vest on the date of
the 2008 annual meeting of stockholders. As a result of granting these awards, the Companys income
before taxes and net income for the nine months ended September 30, 2007 were $438,000 and $262,000
lower, respectively.
The Company has adopted a policy to pay 25% of all officers annual incentive compensation in
deferred stock which vests over three years commencing on the date of the award. This policy
commences with the 2007 fiscal year and any annual incentive compensation earned by officers for
that period.
NOTE 7 BASIC AND DILUTED EARNINGS PER SHARE
Shares outstanding as of September 30, 2007 and 2006 were 22,798,732 and 26,910,720,
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 nine
months ended September 30, 2007 of 23,030,164 shares. Since a loss was recorded for the three
months ended September 30, 2007, there were no additional shares included in the total diluted
shares outstanding for that period. Diluted weighted average of shares outstanding for both the
three and nine months ended September 30, 2006 were 26,912,000.
12
NOTE 8 CONTINGENT LIABILITIES
(The following disclosures within Note 8-Contingent Liabilities are identical to the disclosures
within Firearms Litigation in Item 2-Managements Discussion and Analysis of Financial Condition
and Results of Operations.)
As of September 30, 2007, 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 two
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; and |
|
|
(ii) |
|
those brought by cities or other governmental entities, and individuals against
firearms manufacturers, distributors and dealers 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 Companys 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 further exist to the suits brought by governmental
entities based, among other reasons, on 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 manufacturers 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 Spitzers public nuisance suit against the Company and other
13
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 plaintiffs petition for leave to appeal
the Intermediate Appellate Courts 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 Courts affirmance of dismissal; Chicago Illinois Supreme Court
affirmed trial courts 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 citys 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 Companys 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, 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, have appealed.
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 Protection of Lawful Commerce in Arms Act
(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.
In the previously reported New York City municipal case, the defendants moved to
dismiss the suit pursuant to the Protection of Lawful Commerce in Arms Act. The trial judge found
the Act to be constitutional but denied the defendants motion to dismiss the case, stating that
the Act was not applicable to the suit. The defendants were given leave to appeal and in fact have
appealed the decision to the U.S. Court of Appeals for the Second Circuit. That appeal remains
pending.
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the
NAACPs 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 NAACPs
motion to dismiss the defendants appeal of Judge Weinsteins order denying defendants motion to
14
strike his dicta made in his order dismissing the NAACPs 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. The Company was
voluntarily dismissed with prejudice on March 23, 2007 from the previously reported Arnold case.
The matter was thus concluded with no payment by the Company.
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.
Currently, there are no product liability cases in which a dollar amount of damages is claimed. If
there were cases with claimed damages, the amount of damages claimed would be 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 Companys financial results for a particular period.
The Company has reported all cases instituted against it through June 30, 2007 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.
15
NOTE 9 RELATED PARTY TRANSACTIONS
On March 8, 2007, the Company sold 42 parcels of non-manufacturing real property for $7.3
million to William B. Ruger, Jr., the Companys former Chief Executive Officer and Chairman of the
Board. The sales price was based upon an independent appraisal. The sale included substantially all
of the Companys non-manufacturing real property assets in New Hampshire. The Company recognized a
gain of $5.2 million on the sale. Also in 2007, the Company sold several pieces of artwork to
members of the Ruger family for $0.2 million and recognized insignificant gains from these sales.
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 consists of one operating division that manufactures and sells steel
investment castings. In July 2006, the Company announced the cessation of titanium castings
operations. Production of titanium castings was completed in the first quarter of 2007. Sales of
titanium castings for the remainder of 2007 will be insignificant. The Company continues to
manufacture and sell steel investment castings. Selected operating segment financial information
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
29,298 |
|
|
$ |
34,378 |
|
|
$ |
112,535 |
|
|
$ |
104,425 |
|
Castings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
2,565 |
|
|
|
7,234 |
|
|
|
9,892 |
|
|
|
19,890 |
|
Intersegment |
|
|
2,639 |
|
|
|
2,330 |
|
|
|
6,719 |
|
|
|
10,386 |
|
|
|
|
|
5,204 |
|
|
|
9,564 |
|
|
|
16,611 |
|
|
|
30,276 |
|
Eliminations |
|
|
(2,639 |
) |
|
|
(2,330 |
) |
|
|
(6,719 |
) |
|
|
(10,386 |
) |
|
|
|
$ |
31,863 |
|
|
$ |
41,612 |
|
|
|
122,427 |
|
|
$ |
124,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before
Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
4,228 |
|
|
$ |
627 |
|
|
$ |
20,952 |
|
|
$ |
5,639 |
|
Castings |
|
|
(915 |
) |
|
|
540 |
|
|
|
(2,568 |
) |
|
|
(717 |
) |
Corporate |
|
|
(5,055 |
) |
|
|
431 |
|
|
|
1,897 |
|
|
|
1,463 |
|
|
|
|
($ |
1,742 |
) |
|
$ |
1,598 |
|
|
$ |
20,281 |
|
|
$ |
6,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
Identifiable Assets |
|
|
|
|
|
|
|
|
Firearms |
|
$ |
43,252 |
|
|
$ |
53,525 |
|
Castings |
|
|
6,600 |
|
|
|
17,154 |
|
Corporate |
|
|
75,315 |
|
|
|
46,387 |
|
|
|
|
$ |
125,167 |
|
|
$ |
117,066 |
|
|
NOTE 11 NON-RECURRING EVENT
On April 16, 2007, the Company sold a non-manufacturing facility in Arizona for $5.0 million.
This facility had not been used in the Companys operations for several years. The Company
realized a gain of approximately $1.5 million from this sale in the second quarter of 2007.
16
ITEM 2. MANAGEMENTS 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 and investment castings. The Companys design and manufacturing
operations are located in the United States. Sales for the three months ended September 30, 2007
were 94% domestic and 6% export. Sales for the nine months ended September 30, 2007 were 95%
domestic and 5% export. The Companys firearms are sold through a select number of Federally
licensed independent wholesale distributors principally to the commercial sporting market.
The Companys investment castings segment provides major components for many of the Companys
firearms. To operate this segment more cost-effectively, some of its capacity is used to
manufacture investment castings that are sold either directly to or through manufacturers
representatives to companies in a variety of industries. Investment casting sales to these third
parties for the three and nine months ended September 30, 2007 were 8% of total sales. These sales
did not contribute significantly to earnings.
In July 2006, the Company announced the cessation of titanium castings operations. Production
of these items was completed in the first quarter of 2007. Sales of titanium castings for the
remainder of 2007 will be insignificant. The Company consolidated its Arizona casting operations
in its New Hampshire foundry during the first half of 2007. In the third quarter of 2007, the
Company recognized an asset impairment charge of $0.5 million related to certain assets remaining
in its Arizona foundry. The Company continues to manufacture and sell steel investment castings.
Because many of the Companys 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 experiences differing seasonality in various firearms product lines, typically
related to their end-use applications, with the overall net effect being moderately lower firearms
demand in the third quarter of the year.
17
Results of Operations
Summary Unit Data
Firearms unit data for orders, production, shipments and ending inventory, and castings setups
(a measure of foundry production) for the trailing four quarters are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
Q3 |
|
Q2 |
|
Q1 |
|
Q4 |
Units Ordered |
|
|
80,927 |
|
|
|
115,312 |
|
|
|
175,729 |
|
|
|
125,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Produced |
|
|
100,781 |
|
|
|
131,999 |
|
|
|
127,237 |
|
|
|
97,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Shipped |
|
|
98,590 |
|
|
|
129,649 |
|
|
|
141,736 |
|
|
|
116,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Company Inventory |
|
|
45,264 |
|
|
|
43,073 |
|
|
|
40,723 |
|
|
|
55,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Distributor
Inventory |
|
|
70,461 |
|
|
|
78,805 |
|
|
|
59,987 |
|
|
|
57,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units on Backorder |
|
|
35,670 |
|
|
|
53,386 |
|
|
|
68,284 |
|
|
|
34,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Castings Setups |
|
|
42,752 |
|
|
|
37,249 |
|
|
|
27,232 |
|
|
|
30,992 |
|
Note: Distributor ending inventory as provided by the Companys distributors.
Orders Received and Backlog
In prior years, the Company received one cancelable annual firearms order in December from
each of its distributors. Effective December 1, 2006, the Company changed the manner in which
distributors order firearms, and began receiving firm, non-cancelable purchase orders on a frequent
basis, with most orders for immediate delivery. The gross value of orders received and ending
backlog for the trailing four quarters are as follows (in millions, including Federal Excise Tax):
Firearms Orders Received and Ending Backlog
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
Q3 |
|
Q2 |
|
Q1 |
|
Q4 |
Orders Received |
|
$ |
25.4 |
|
|
$ |
39.1 |
|
|
$ |
58.9 |
|
|
$ |
45.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Backlog |
|
$ |
16.2 |
|
|
$ |
23.3 |
|
|
$ |
27.9 |
|
|
$ |
16.2 |
|
Because of the aforementioned change in the manner in which distributors now order firearms,
comparable data for prior periods is not meaningful.
18
The Company believes that the aggregate decline in order value received and units ordered is
attributable to a combination of the following factors:
|
1) |
|
the Companys inability to produce and ship sufficient quantities of certain firearms
already on order, which discouraged additional orders for those products, |
|
|
2) |
|
softening of demand in some of the market segments in which the Company participates, |
|
|
3) |
|
softening of demand specific to certain of the Companys older product designs, and |
|
|
4) |
|
normal seasonality of the firearms industry, with lower third quarter demand. |
The Company cannot ascertain the degree to which each of these factors contributed to the
aggregate decline in order value received and units ordered. Many firearms product lines saw a
decline in demand; however, there was strong demand for certain firearms product lines.
An increase in firearm sales in future periods is partly dependent on the Companys ability to
increase the rate of incoming orders.
Production
Certain product lines saw a decline in demand as the Company fulfilled open orders, built
safety stocks of finished goods, and replenished distributor inventory. In response, the Company
deliberately reduced its rate of production for many of these models. This planned reduction in
output was achieved with little unfavorable impact on gross margin.
Other product lines saw continued strong demand and the Company was unable to produce these
products in sufficient quantities to materially reduce their backlog. In many cases the Companys
rate of production for these products declined, principally because of a shortage of associated
component parts. This unplanned decrease in the rate of production negatively impacted the results
of the quarter ended September 30, 2007, and is expected to continue to depress operating results
until improved. It is uncertain when higher levels of production will be achieved.
An increase in firearm unit shipments in near-term future periods is largely dependent on the
Companys ability to increase unit production of those models in strong demand.
Sales
Consolidated net sales were $31.9 million for the three months ended September 30, 2007. This
represents a decrease of $9.7 million or 23.4% from consolidated net sales of $41.6 million in the
comparable prior year period.
For the nine months ended September 30, 2007, consolidated net sales were $122.4 million, a
decrease of $1.9 million or 1.5% over sales of $124.3 million in the comparable 2006 period.
Firearms segment net sales were $29.3 million for the three months ended September 30, 2007.
This represents a decrease of $5.1 million or 14.8% from firearm net sales of $34.4 million in the
comparable prior year period.
For the nine months ended September 30, 2007, firearms segment net sales were $112.5 million.
This represents an increase of $8.1 million or 7.8% from 2006 firearm net sales of $104.4 million
in the comparable 2006 period.
Firearms unit shipments decreased 19.4% for the three months ended September 30, 2007 when
compared to the third quarter of 2006. Rifle shipments decreased 26.0% from the comparable prior
year period due to the sale of certain models which were discontinued in the third quarter of 2006.
Revolver shipments decreased 36.0% from the
19
comparable prior year period when demand and availability for Vaquero revolvers was stronger than
it was in the third quarter of 2007. Pistol shipments increased 33.0% from the comparable prior
year period, due largely to two pistol promotions which were in effect during the quarter ended
September 30, 2007. Due to the depletion of safety stock of certain models in strong demand during
the first half of 2007, the one-week annual-maintenance shutdown at our largest firearms plant in
August hindered overall firearm shipments for the quarter ended September 30, 2007.
For the nine months ended September 30, 2007, firearms unit shipments increased 3.0% from the
comparable 2006 period. Rifle shipments increased 5.0% from the comparable prior year period.
Revolver shipments decreased 10.0% from the 2006 period despite the 2006 shipment of 5,000
discontinued revolvers.
Casting segment net sales were $2.6 million for the three months ended September 30, 2007.
This represents a decrease of $4.6 million or 64.5% from casting sales of $7.2 million in the
comparable prior year period.
For the nine months ended September 30, 2007, casting segment net sales were $9.9 million.
This represents a decrease of $10.0 million or 50.3% from casting sales of $19.9 million in the
comparable prior year period.
The casting sales decrease in both the three and nine months ended September 30, 2007,
reflects the cessation of titanium casting operations, as previously announced by the Company in
July 2006. Titanium casting sales accounted for $0.5 million or 20.0% of casting sales for the
three months ended September 30, 2007, and $4.2 million or 58.0% of total casting sales in the
comparable prior year period. For the nine months ended September 30, 2007, titanium casting sales
were $3.2 million or 32.0% of total casting sales compared to $9.8 million or 49.0% in the
comparable 2006 period. The Company continues to manufacture and sell steel investment castings.
Cost of Products Sold and Gross Margin
Consolidated cost of products sold was $26.3 million for the three months ended September 30,
2007. This represents a decrease of $9.1 million or 25.8% from consolidated cost of products sold
of $35.4 million in the comparable prior year period.
For the nine months ended September 30, 2007, consolidated cost of products sold was $88.1
million. This represents a decrease of $11.5 million or 11.5% from consolidated cost of products
sold of $99.6 million in the comparable prior year period.
Gross margin as a percent of sales was 17.6% and 28.0% for the three and nine months ended
September 30, 2007, respectively. This represents increases from the gross margin of 14.9% and
19.9% in the comparable prior year periods as illustrated below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
2007 |
|
2006 |
|
Net sales |
|
$ |
31,863 |
|
|
|
100.0 |
% |
|
$ |
41,612 |
|
|
|
100.0 |
% |
Total cost of products sold, before
LIFO and overhead rate adjustments to
inventory and product liability |
|
|
(25,462 |
) |
|
|
(79.9 |
)% |
|
|
(33,328 |
) |
|
|
(80.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance gross margin * |
|
|
6,401 |
|
|
|
20.1 |
% |
|
|
8,284 |
|
|
|
19.9 |
% |
|
LIFO income (expense) |
|
|
237 |
|
|
|
0.7 |
% |
|
|
(664 |
) |
|
|
(1.6 |
)% |
Overhead rate adjustments to inventory |
|
|
(760 |
) |
|
|
(2.3 |
)% |
|
|
(1,073 |
) |
|
|
(2.6 |
)% |
Product liability |
|
|
(283 |
) |
|
|
(0.9 |
)% |
|
|
(348 |
) |
|
|
(0.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
5,595 |
|
|
|
17.6 |
% |
|
$ |
6,199 |
|
|
|
14.9 |
% |
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
2007 |
|
2006 |
|
Net sales |
|
$ |
122,427 |
|
|
|
100.0 |
% |
|
$ |
124,315 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold, before
LIFO and overhead rate adjustments to
inventory and product liability |
|
|
(92,504 |
) |
|
|
(75.6 |
)% |
|
|
(92,122 |
) |
|
|
(74.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance gross margin* |
|
|
29,923 |
|
|
|
24.4 |
% |
|
|
32,193 |
|
|
|
25.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFO income (expense) |
|
|
10,805 |
|
|
|
8.8 |
% |
|
|
(3,331 |
) |
|
|
(2.6 |
)% |
Overhead rate adjustments to inventory |
|
|
(4,986 |
) |
|
|
(4.0 |
)% |
|
|
(2,307 |
) |
|
|
(1.9 |
)% |
Product liability |
|
|
(1,455 |
) |
|
|
(1.2 |
)% |
|
|
(1,828 |
) |
|
|
(1.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
34,287 |
|
|
|
28.0 |
% |
|
$ |
24,727 |
|
|
|
19.9 |
% |
|
|
|
|
* |
|
Performance Gross Margin is a measure of gross margin before taking into account the impact of
LIFO and overhead rate adjustments to inventory, and before product liability expenses. |
Performance Gross Margin During the three and nine months ended September 30, 2007,
performance gross margin was consistent with the comparable prior year periods.
LIFODuring the three and nine months ended September 30, 2007, gross inventories were
reduced by $0.4 million and $27.0 million, respectively, compared to decreases in gross inventories
of $10.2 million and $5.9 million in the comparable prior year periods. The 2007 reduction
resulted in LIFO income and decreased cost of products sold of $0.2 million and $10.8 million for
the three and nine months ended September 30, 2007, respectively. LIFO expense of $0.7 million and
$3.3 million resulted in an increase in cost of products sold in the comparable prior year periods.
Inventories are not expected to fluctuate materially during the fourth quarter of 2007.
Overhead Rate ChangeThe change in inventory value as a result of a change in the overhead
rate used to absorb overhead expenses into inventory remaining on the balance sheet for the three
and nine months ended September 30, 2007, were reductions of $0.8 million and $5.0, respectively,
which recognized the continued progress made in lowering overhead rates. These reductions in
inventory value resulted in increases to cost of products sold.
The change in inventory value as a result of a change in the overhead rate used to absorb overhead
expenses into inventory remaining on the balance sheet in the three and nine months ended September
30, 2006, were decreases of $1.1 million and $2.3 million, respectively. These reductions in
inventory value resulted in increases to cost of products sold.
Product LiabilityDuring the three and nine months ended September 30, 2007, the Company
incurred product liability expense of $0.3 million and $1.5 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 2006 periods, product liability expenses
totaled $0.3 million and $1.8 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $6.5 million and $21.2 million for the three
and nine months ended September 30, 2007, respectively. This represents increases of $0.6 million
and $0.9 million from selling, general and administrative expenses of $5.9 million and $20.3
million in the comparable prior year periods. The increase for the three months ended September
30, 2007, reflects increased firearms promotional expenses.
21
The increase in selling, general and administrative expenses for the nine months ended
September 30, 2007, reflects increased personnel-related costs, partially offset by reductions in
advertising and sales promotion expenses. The increased personnel costs for the nine months ended
September 30, 2007, includes $1.1 million of severance costs incurred in the first quarter of 2007
related to the previously announced reduction-in-force program, offset by the $0.7 million expense
incurred in the first quarter of 2006 related to the retirement of the Companys former Chairman
and Chief Executive Officer.
Pension Curtailment Charge
During the quarter ended September 30, 2007, the Company amended its hourly and salaried
defined benefit pension plans so that employees will no longer accrue benefits under these plans
effective December 31, 2007. This action, which will freeze the benefits for essentially all
employees, will also prevent future hires from joining the plans, effective December 31, 2007.
Starting in 2008, the Company will provide supplemental discretionary contributions to
substantially all employees individual 401(k) accounts.
These amendments resulted in a $1.2 million pension curtailment charge that was recognized in
the quarter ended September 30, 2007.
In 2008 and future years, the Company will likely be required to make cash contributions to
the two defined benefit pension plans. 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, but could be as high as $10 million in aggregate.
In future years, the total annual cash outlays for retirement benefits, which would include
the continuing funding of the two defined benefit pension plans and the new supplemental
discretionary 401(k) contributions, are expected to be comparable to the current retirement funding
levels.
The Company anticipates terminating the two defined benefit pension plans in the future when
they are more fully funded. When the plans are terminated, the Company will likely incur a plan
termination charge. This charge, which would be as much as $15 million to $20 million if the plans
were terminated today, will likely be much less when actually terminated. Notwithstanding the
aforementioned termination charge, the Companys annual retirement benefit expense is not expected
to increase materially in the foreseeable future.
Impairment of Assets
In the quarter ended September 30, 2007, the Company recognized an asset impairment charge of
$0.5 million related to certain tooling and other equipment remaining in its Arizona foundry that
the Company now believes will not be recoverable.
Other Income
Other income-net for the three and nine months ended September 30, 2007, was $0.8 million and
$8.9 million, respectively. This represents a decrease of $0.4 million and an increase of $6.9
million from other income-net of $1.3 million and $2.0 million, respectively, in the comparable
prior year periods. The decrease for the quarter ended September 30, 2007, is attributable to the
gain on the sale of excess casting machinery and equipment in the third quarter of 2006. The
increase for the nine months ended September 30, 2007, is primarily attributable to a $5.2 million
gain on the sale of non-manufacturing real property in March 2007, a $1.5 million gain on the sale
of non-manufacturing real property in April 2007, and increased income from short-term investments
as a result of increased principal invested at higher interest rates.
22
Income Taxes and Net Income
The effective income tax rates for the nine months ended September 30, 2007, is 38.0%. The
Companys 2007 effective tax rate is lower than the 2006 effective tax rate of 40.1% principally as
a result of increased benefit of Federal manufacturing income tax credits.
As a result of the foregoing factors, net income was ($0.6) million and $12.6 million for the
three and nine months ended September 30, 2007, respectively. This represents a decrease of $1.6
million and an increase of $8.8 million from net income of $1.0 million and $3.8 million in the
comparable prior year periods.
Financial Condition
Operations
At September 30, 2007, the Company had cash, cash equivalents and short-term investments of
$63.6 million. The Companys pre-LIFO working capital of $124.9 million, less the LIFO reserve of
$45.1 million, results in working capital of $79.8 million and a current ratio of 5.5 to 1.
Cash provided by operating activities was $26.0 million and $11.4 million for the nine months
ended September 30, 2007 and 2006, respectively. The increase in cash provided for the nine months
ended September 30, 2007 is principally a result of a decrease in inventory, improved net income,
and various fluctuations in operating asset and liability accounts during the first nine months of
2007 compared to the first nine months of 2006.
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 that 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 cannot be obtained, the Companys manufacturing processes
could be interrupted and the Companys financial condition or results of operations could be
materially adversely affected.
Investing and Financing
Capital expenditures for the nine months ended September 30, 2007, totaled $3.1 million. For
the past two years, capital expenditures averaged approximately $1 million per quarter. The
Company expects to spend approximately $1 million on capital expenditures during the remainder of
2007 to purchase tooling for new product introductions and to upgrade and modernize manufacturing
equipment, primarily at the Newport Firearms and Pine Tree Castings Divisions. The Company
finances, and intends to continue to finance, these activities with funds provided by operations,
current cash, and short-term investments.
On January 26, 2007, the Company announced that its Board of Directors authorized a stock
repurchase program. The program allows the Company to repurchase up to $20 million of its common
stock from time to time on the open market or through privately negotiated transactions. No shares
were repurchased during the nine months ended September 30, 2007.
On March 8, 2007, the Company sold 42 parcels of non-manufacturing real property for $7.3
million to William B. Ruger, Jr., the Companys former Chief Executive Officer and Chairman of the
Board. The sale included substantially all of the Companys non-manufacturing 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.
23
On April 16, 2007, the Company sold a non-manufacturing facility in Arizona for $5.0 million.
This facility had not been used in the Companys operations for several years. The Company
realized a gain of approximately $1.5 million and net cash of $4.6 million from this sale.
During the quarter ended September 30, 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, which will freeze the benefits for substantially all employees,
will also prevent future hires from joining the plans, effective December 31, 2007. Starting in
2008, the Company will provide supplemental discretionary contributions to substantially all
employees individual 401(k) accounts.
The Company plans on contributing $5 million to its defined benefit pension plans in the
fourth quarter of 2007. In 2008 and future years, the Company will likely be required to make cash
contributions to the two defined benefit pension plans. 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, but could be as high as
$10 million in aggregate.
In future years, the total annual cash outlays for retirement benefits, which would include
the continuing funding of the two defined benefit pension plans and the new supplemental
discretionary 401(k) contributions, are expected to be comparable to the current retirement funding
levels.
There were no dividends paid for the nine months ended September 30, 2007. The payment of
future dividends depends on many factors, including consistent quarterly operating earnings,
internal estimates of future performance, then-current cash and short-term investments, and the
Companys need for funds. The Company does not expect to pay dividends in the near term, but will
reconsider a dividend from time to time.
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 the
issuance of short-term or long-term debt.
Firearms Litigation
(The following disclosures within Firearms Litigation are identical to the disclosures within
Note 8-Contingent Liabilities.)
As of September 30, 2007, 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 two
categories:
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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; and |
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those brought by cities or other governmental entities, and individuals against
firearms manufacturers, distributors and dealers 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, |
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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 Companys 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 further exist to the suits brought by governmental
entities based, among other reasons, on 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 manufacturers 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 Spitzers 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 plaintiffs petition for leave to appeal the
Intermediate Appellate Courts 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 Courts affirmance of dismissal; Chicago Illinois Supreme Court affirmed trial
courts 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 citys 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
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on present information, none of the Companys 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, 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, have appealed.
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 Protection of Lawful Commerce in Arms Act
(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.
In the previously reported New York City municipal case, the defendants moved to
dismiss the suit pursuant to the Protection of Lawful Commerce in Arms Act. The trial judge found
the Act to be constitutional but denied the defendants motion to dismiss the case, stating that
the Act was not applicable to the suit. The defendants were given leave to appeal and in fact have
appealed the decision to the U.S. Court of Appeals for the Second Circuit. That appeal remains
pending.
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the
NAACPs 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 NAACPs
motion to dismiss the defendants appeal of Judge Weinsteins order denying defendants motion to
strike his dicta made in his order dismissing the NAACPs 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. The Company was
voluntarily dismissed with prejudice on March 23, 2007 from the previously reported Arnold case.
The matter was thus concluded with no payment by the Company.
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
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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.
Currently, there are no product liability cases in which a dollar amount of damages is claimed. If
there were cases with claimed damages, the amount of damages claimed would be 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 Companys financial results for a particular period.
The Company has reported all cases instituted against it through June 30, 2007 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.
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 valuation of the future defined benefit pension obligations at December 31, 2006,
indicated that these plans were underfunded by $7.6 million and resulted in a cumulative other
comprehensive loss of $12.4 million on the Companys balance sheet at December 31, 2006.
The Company expects to realize its deferred tax assets through tax deductions against future
taxable income.
The effect of inflation on the Companys operations is most immediately felt in cost of
products sold because the Company values inventory on the LIFO basis. Generally under this method,
the cost of products sold reported in the financial statements approximates current costs and,
thus, reduces distortion in reported income that would result from the slower recognition of
increased costs when other methods are used. In the nine months ended September 30, 2007, however,
a significant reduction in inventories resulted in a liquidation of LIFO inventory quantities
carried at lower costs prevailing in prior years as compared with the current cost of purchases.
This resulted in LIFO income and decreased cost of products sold of $0.3 million and $10.9 million
for the three and nine months ended September 30, 2007, respectively.
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its critical accounting estimates and assumptions
described in the Companys 2006 Annual Report on Form 10-K filed on March 5, 2007, or the judgments
affecting the application of those estimates and assumptions.
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Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements, (FAS 157) and No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, (FAS 159). These Standards define fair value, establish a framework for
measuring fair value under generally accepted accounting principles, and expand disclosures about
fair value measurements. FAS 157 and FAS 159 are effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The
adoption of FAS 157 and FAS 159 are not expected to have a material impact on the Companys
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 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 Companys management, with the participation of the Companys Chief Executive Officer and
Treasurer and Chief Financial Officer, has evaluated the effectiveness of the Companys 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 30, 2007.
Based on the evaluation, the Companys Chief Executive Officer and Treasurer and Chief Financial
Officer have concluded that, as of September 30, 2007, such disclosure controls and procedures are
effective to ensure that information required to be disclosed in the Companys periodic reports
filed under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commissions rules and forms. Additionally, the
Companys 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 Companys control over financial reporting that occurred during the quarter ended
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September 30, 2007 that have materially affected, or are reasonably likely to materially affect,
the Companys 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.
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 30, 2007, 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 30,
2007.
During the three months ending September 30, 2007, no previously reported cases were settled.
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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, 2006. |
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ITEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES |
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ITEM 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
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ITEM 5.
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OTHER INFORMATION |
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ITEM 6. EXHIBITS
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Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
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.
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STURM, RUGER & COMPANY, INC. |
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Date: October 24, 2007
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S/THOMAS A. DINEEN |
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Thomas A. Dineen |
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Principal Financial Officer, |
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Vice President, Treasurer and Chief Financial
Officer |
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