SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
FOR
ANNUAL AND TRANSITION REPORTS
PURSUANT
TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934
(Mark
One)
x ANNUAL
REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2007
OR
o 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 0-4776
STURM,
RUGER & COMPANY, INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
06-0633559
(I.R.S.
Employer
Identification
No.)
|
|
Lacey
Place, Southport, Connecticut
(Address
of Principal Executive Offices)
|
06890
(Zip
Code)
|
(203)
259-7843
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
Common
Stock, $1 par value
|
Name
of Each Exchange on Which Registered
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of
Class)
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 filing requirements
for
the past 90 days. YES x
NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K x.
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 x
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 x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant computed by reference to the price at which
the
common equity was last sold, or the average bid and asked price of such common
equity, as of June 30, 2007:
Common
Stock, $1 par value - $351,994,000
The
number of shares outstanding of the registrant's common stock as of February
15,
2008:
Common
Stock, $1 par value - 20,788,000 shares
DOCUMENTS
INCORPORATED BY REFERENCE.
Portions
of the registrant’s Proxy Statement relating to its 2008 Annual Stockholders’
meeting, to be filed subsequently are incorporated by reference into Part III
of
this Report.
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TABLE
OF CONTENTS
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PART
I
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1
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9
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16
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16
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17
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17
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PART
II
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17
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21
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21
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45
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45
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74
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74
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75
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PART
III
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76
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76
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76
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76
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76
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PART
IV
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77
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80
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81
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84
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Exhibits
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86
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i
In
this
Annual Report on Form 10-K, Sturm, Ruger & Company, Inc. (the “Company”)
makes 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,
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.
PART
I
Company
Overview
Sturm,
Ruger & Company, Inc. (the “Company”) is principally engaged in the design,
manufacture, and sale of firearms to domestic
customers. Approximately 92% of the Company’s total sales for the
year ended December 31, 2007 were from the firearms segment, and 8% were from
investment castings. Export sales represent less than 6% of firearms
sales. The Company’s design and manufacturing operations are located
in the United States and substantially all product content is
domestic.
The
Company has been in the business since 1949 and was incorporated in its present
form under the laws of Delaware in 1969. The Company offers products
in four industry product categories – rifles, shotguns, pistols, and
revolvers. The Company’s firearms are sold through a select number of
independent wholesale distributors, principally to the commercial sporting
market.
The
Company manufactures and sells investment castings made from steel alloys for
both outside customers and internal use in the firearms
segment. Investment castings sold to outside customers, either
directly to or through manufacturers’ representatives, represented 8% of the
Company’s total sales for the year ended December 31, 2007. In July
2006, the Company announced the cessation of the titanium castings portion
of
its investment casting operations. This cessation of operations was
completed in 2007, at which time the Company consolidated its Arizona casting
operations into its New Hampshire casting operations.
For
the
years ended December 31, 2007, 2006, and 2005, net sales attributable to the
Company's firearms operations were approximately, $144.2 million, $139.1 million
and $132.8 million or 92%, 83%, and 86%, respectively, of total net
sales. The balance of the Company's net sales for the aforementioned
periods was attributable to its investment castings operations.
Firearms
Products
The
Company presently manufactures firearm products, under the “Ruger” name and
trademark, in the following industry categories:
1
| Rifles |
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Shotguns
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·
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Single-shot
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·
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Over
and Under
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·
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Autoloading
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·
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Side
by Side
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·
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Bolt-action
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·
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Lever
action
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| Pistols |
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Revolvers
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·
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Rimfire
autoloading
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·
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Single
action
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·
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Centerfire
autoloading
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·
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Double
action
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Most
firearms are available in several models based upon caliber, finish, barrel
length, and other features. Many of the firearms introduced by the
Company over the years have become “classics” which have retained their
popularity for decades and are sought by collectors.
Rifles
A
rifle
is a long gun with spiral grooves cut into the interior of the barrel to give
the bullet a stabilizing spin after it leaves the barrel. Sales of
rifles by the Company accounted for approximately $64.9 million, $58.4 million,
and $58.0 million, of revenues for the years 2007, 2006 and 2005,
respectively.
Shotguns
A
shotgun
is a long gun with a smooth barrel interior which fires lead or steel
pellets. Sales of shotguns by the Company accounted for approximately
$3.8 million, $5.5 million, and $9.7 million of revenues for the years 2007,
2006 and 2005, respectively.
Pistols
A
pistol
is a handgun in which the ammunition chamber is an integral part of the barrel
and which typically is fed ammunition from a magazine contained in the grip.
Sales of pistols by the Company accounted for approximately $33.4 million,
$31.9
million, and $32.5 million of revenues for the years 2007, 2006 and 2005,
respectively.
Revolvers
A
revolver is a handgun that has a cylinder that holds the ammunition in a series
of chambers which are successively aligned with the barrel of the gun during
each firing cycle. There are two general types of revolvers,
single-action and double-action. To fire a single-action revolver,
the hammer is pulled back to cock the gun and align the cylinder before the
trigger is pulled. To fire a double-action revolver, a single trigger
pull advances the cylinder and cocks and releases the hammer. Sales
of revolvers by the Company accounted for approximately $35.6 million, $37.6
million, and $27.5 million of revenues for the years 2007, 2006, and 2005,
respectively.
The
Company also manufactures and sells accessories and replacement parts for its
firearms. These sales accounted for approximately $6.5 million, $5.7
million, and $5.1 million of revenues for the years 2007, 2006 and 2005,
respectively.
2
Investment
Casting
Products
The
Company manufactures and sells investment castings made from steel alloys for
both outside customers and internal use in the firearms
segment. Investment castings sold to outside customers, either
directly to or through manufacturers’ representatives, represented 8% of the
Company’s total sales for the year ended December 31, 2007. In July
2006, the Company announced the cessation of the titanium castings portion
of
its investment casting operations. This cessation of operations was
completed in 2007, at which time the Company consolidated its Arizona casting
operations into its New Hampshire casting operations.
Net
sales
attributable to the Company’s investment casting operations (excluding
intercompany transactions) accounted for approximately $12.3 million, $28.5
million, and $21.9 million, or 8%, 17%, and 14% of the Company’s total net sales
for 2007, 2006, and 2005, respectively.
Manufacturing
Firearms
The
Company produces one model of pistol and all of its rifles, shotguns, and
revolvers at the Newport, New Hampshire facility. All other pistols
are produced at the Prescott, Arizona facility.
Many
of
the basic metal component parts of the firearms manufactured by the Company
are
produced by the Company's castings facilities through a process known as
precision investment casting. See "Manufacturing-Investment Castings"
for a description of the investment casting process. The Company
initiated the use of this process in the production of component parts for
firearms in 1953. The Company believes that the investment casting
process provides greater design flexibility and results in component parts
which
are generally close to their ultimate shape and, therefore, require less
machining than processes requiring machining a solid billet of metal to obtain
a
part. Through the use of investment castings, the Company endeavors
to produce durable and less costly component parts for its
firearms.
All
assembly, inspection, and testing of firearms manufactured by the Company are
performed at the Company's manufacturing facilities. Every firearm,
including every chamber of every revolver manufactured by the Company, is
test-fired prior to shipment.
Investment
Castings
To
produce a product by the investment casting method, a wax model of the part
is
created and coated (“invested”) with several layers of ceramic
material. The shell is then heated to melt the interior wax which is
poured off, leaving a hollow mold. To cast the desired part, molten metal is
poured into the mold and allowed to cool and solidify. The mold is
then broken off to reveal a near net shape cast metal part.
In
July
2006, the Company announced the cessation of the titanium castings portion
of
its investment casting operations. This cessation of operations was
completed in 2007, at which time the Company consolidated its Arizona casting
operations into its New Hampshire casting operations. The Company
only produces ferrous investment castings.
3
Marketing
and
Distribution
Firearms
The
Company's firearms are primarily marketed through a network of selected
Federally-licensed independent wholesale distributors who purchase the products
directly from the Company. They resell to Federally-licensed retail
firearms dealers who in turn resell to legally authorized
end-users. All retail purchasers are subject to a point-of-sale
background check by law enforcement. These end-users include
sportsmen, hunters, law enforcement and other governmental organizations, and
gun collectors. Each distributor carries the entire line of firearms
manufactured by the Company for the commercial market. Currently, 15
distributors service the domestic commercial market, with an additional 12
distributors servicing the domestic law enforcement market and two distributors
servicing the Canadian market. Six of the Company’s distributors service both
the domestic commercial market and the domestic law enforcement
market.
One
customer accounted for 13% of firearms sales in both 2007 and 2006, and 12%
and
11% of consolidated sales in 2007 and 2006, respectively. A second
customer accounted for approximately 12%, 13%, and 13% of net firearms sales
and
11%, 10%, and 11% of consolidated net sales in 2007, 2006, and 2005,
respectively. A third customer accounted for approximately 12% of the
Company's net firearms sales and 10% of consolidated net sales in
2005. A fourth customer accounted for approximately 12%, 13%, and 16%
of net firearms sales in 2007, 2006, and 2005, respectively, and 11%, 11%,
and
14% of consolidated net sales in 2007, 2006, and 2005,
respectively.
The
Company employs eight employees and one independent contractor who service
these
distributors and call on dealers and law enforcement
agencies. Because the ultimate demand for the Company's firearms
comes from end-users, rather than from the Company's distributors, the Company
believes that the loss of any distributor would not have a material long-term
adverse effect on the Company, but may have a material impact on the Company’s
financial results for a particular period. The Company considers its
relationships with its distributors to be satisfactory.
The
Company also exports its firearms through a network of selected commercial
distributors and directly to certain foreign customers, consisting primarily
of
law enforcement agencies and foreign governments. Foreign sales were
less than 6% of the Company's consolidated net sales for each of the past three
fiscal years.
No
material portion of the Company's business is subject to renegotiation of
profits or termination of contracts at the election of a government
purchaser.
Prior
to
2006, the Company received one cancelable annual 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. As of February 1, 2008, the order backlog was $20
million. As of February 1, 2007, order backlog was approximately $23
million.
4
The
Company does not consider its overall firearms business to be predictably
seasonal; however, sales of many models of firearms are usually lower in the
third quarter of the fiscal year.
Investment
Castings
The
investment casting segment's principal markets are commercial, sporting goods,
and military. Sales are made directly to customers or through
manufacturers’ representatives. The Company produces various products for a
number of customers in a variety of industries, including over 20 firearms
and
firearms component manufacturers. The investment castings segment
provides castings for the Company’s firearms segment.
The
Company continues to evaluate the viability and profitability of the commercial
castings market. The Company significantly increased prices to most external
customers in the second half of the 2007, seeking to improve margins and free
up
available capacity for additional internal use. Certain customers
accepted the price increases while others moved their business away from the
Company as anticipated.
Competition
Firearms
Competition
in the firearms industry is intense and comes from both foreign and domestic
manufacturers. While some of these competitors concentrate on a
single industry product category, such as rifles or pistols, several competitors
manufacture products in the same four industry categories as the Company
(rifles, shotguns, pistols, and revolvers). Some of these competitors
are subsidiaries of larger corporations than the Company with substantially
greater financial resources than the Company, which could affect the Company’s
ability to compete. The principal methods of competition in the industry are
product innovation, quality, availability, and price. The Company
believes that it can compete effectively with all of its present
competitors.
Investment
Castings
There
are
a large number of investment castings manufacturers, both domestic and foreign,
with which the Company competes. Competition varies based on the type
of investment castings products and the end-use of the product (commercial,
sporting goods, or military). Many of these competitors are larger
corporations than the Company with substantially greater financial resources
than the Company, which could affect the Company’s ability to compete with these
competitors. The principal methods of competition in the industry are
quality, price, and production lead time. The Company believes that
it can compete effectively with its present domestic
competitors. However, it is unknown if the Company can compete with
foreign competitors in the long-term.
5
Employees
As
of
February 1, 2008, the Company employed approximately 1,100 full-time employees
of which approximately 56% had at least ten years of service with the
Company.
None
of
the Company's employees are subject to a collective bargaining
agreement. The Company has never experienced a strike during its
history and believes its employee relations are satisfactory.
Research
and
Development
In
2007,
2006, and 2005, the Company spent approximately $0.7 million, $0.6 million,
and
$0.8 million, respectively, on research activities relating to the development
of new products and the improvement of existing products. As of
February 15, 2008, the Company had approximately 10 employees whose primary
responsibilities were research and development activities.
Patents
and
Trademarks
The
Company owns various United States and foreign patents and trademarks which
have
been secured over a period of years and which expire at various times. It is
the
policy of the Company to apply for patents and trademarks whenever new products
or processes deemed commercially valuable are developed or marketed by the
Company. However, none of these patents and trademarks are considered
to be basic to any important product or manufacturing process of the Company
and, although the Company deems its patents and trademarks to be of value,
it
does not consider its business materially dependent on patent or trademark
protection.
Environmental
Matters
The
Company is committed to achieving high standards of environmental quality and
product safety, and strives to provide a safe and healthy workplace for its
employees and others in the communities in which it operates. The
Company has programs in place that monitor compliance with various environmental
regulations. However, 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. These regulations are integrated into the Company’s
manufacturing, assembly, and testing processes. The Company believes
that it is generally in compliance with applicable environmental regulations
and
the outcome of any environmental proceedings and orders will not have a material
effect on the financial position of the Company, but could have a material
impact on the financial results for a particular period.
Executive
Officers of the
Company
Set
forth
below are the names, ages, and positions of the executive officers of the
Company. Officers serve at the discretion of the Board of Directors
of the Company.
6
|
Name
|
Age
|
Position
With Company
|
|
Michael
O. Fifer
|
50
|
Chief
Executive Officer
|
|
Stephen
L. Sanetti
|
58
|
Vice
Chairman of the Board of Directors, President, and General
Counsel
|
|
Thomas
A. Dineen
|
39
|
Vice
President, Treasurer and Chief Financial Officer
|
|
Christopher
J. Killoy
|
49
|
Vice
President of Sales and Marketing
|
|
Robert
R. Stutler
|
64
|
Vice
President of Prescott Operations (Retired 2/15/2008)
|
|
Mark
T. Lang
|
51
|
Group
Vice President
|
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Thomas
P. Sullivan
|
47
|
Vice
President of Newport Operations
|
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Leslie
M. Gasper
|
54
|
Corporate
Secretary
|
Michael
O. Fifer joined the Company as Chief Executive Officer on September 25, 2006,
and was named to the Board of Directors on October 19, 2006. Prior to
joining the Company, Mr. Fifer was President of the Engineered Products Division
of Mueller Industries, Inc. Prior to joining Mueller Industries, Inc., Mr.
Fifer
was President, North American Operations, Watts Water Technologies.
Stephen
L. Sanetti became President on May 6, 2003. Mr. Sanetti has served as
General Counsel since 1980. Prior to May 6, 2003, Mr. Sanetti had
been Vice Chairman and Senior Executive Vice President since October 24,
2000. Mr. Sanetti has been a Director since March 1,
1998. Prior to October 24, 2000, he had been Vice President, General
Counsel of the Company since 1993.
Thomas
A.
Dineen became Vice President on May 24, 2006. Previously he served as
Treasurer and Chief Financial Officer since May 6, 2003 and had been Assistant
Controller since 2001. Prior to that, Mr. Dineen had served as
Manager, Corporate Accounting since 1997.
Christopher
J. Killoy rejoined the Company as Vice President of Sales and Marketing on
November 27, 2006. Mr. Killoy originally joined the Company in 2003
as Executive Director of Sales and Marketing, and subsequently served as Vice
President of Sales and Marketing from November 1, 2004 to January 25,
2005.
Robert
R.
Stutler retired on February 15, 2008. Mr. Stutler became Vice
President of Operations for the Company’s Prescott, Arizona Firearms and Foundry
Divisions on March 17, 2006. Previously he served as General Manager
of Prescott Operations since 2002 and General Manager of Prescott Firearms
Division from 1990 to 2002. Mr. Stutler joined the Company in
1987.
7
Mark
T.
Lang joined the Company as Group Vice President on February 18,
2008. Mr. Lang will initially be responsible for management of the
Prescott Firearms Division following the retirement of Mr.
Stutler. Prior to joining the Company, Mr. Lang was President of the
Custom Products Business at Mueller Industries, Inc. Prior to joining
Mueller, Mr. Lang was the Vice President of Operations for the Automotive
Division of Thomas and Betts, Inc.
Thomas
P.
Sullivan joined the Company as Vice President of Newport Operations for the
Newport, New Hampshire Firearms and Pine Tree Castings divisions on August
14,
2006. Prior to joining the Company, Mr. Sullivan was Vice President of Lean
Enterprises at IMI Norgren Ltd.
Leslie
M.
Gasper has been Secretary of the Company since 1994. Prior to this,
she was the Administrator of the Company’s pension plans, a position she held
for more than five years prior thereto.
Where
You Can Find More
Information
The
Company is a reporting company and is therefore subject to the informational
requirements of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), and accordingly files its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form
8-K,
and other information with the Securities and Exchange Commission (the "SEC").
The public may read and copy any materials filed with the SEC at the SEC's
Public Reference Room at 100 F Street, NE, Washington, DC
20549. Please call the SEC at (800) SEC-0330 for further information
on the Public Reference Room. As an electronic filer, the Company's
public filings are maintained on the SEC's Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address of that website is
http://www.sec.gov.
The
Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Definitive Proxy Statements, Current Reports on Form 8-K and amendments to
those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act accessible free of charge through the Company's Internet site after the
Company has electronically filed such material with, or furnished it to, the
SEC. The address of that website is http://www.ruger.com. However,
such reports may not be accessible through the Company's website as promptly
as
they are accessible on the SEC’s website.
Additionally,
the Company’s corporate governance materials, including its Corporate Governance
Guidelines; the charters of the Audit, Compensation, and Nominating and
Corporate Governance committees; and the Code of Business Conduct and Ethics
may
also be found under the “Stockholder Relations” section of the Company’s
Internet site at www.ruger.com. A copy of the foregoing corporate governance
materials are available upon written request of the Corporate Secretary at
Sturm, Ruger & Company, Inc., Lacey Place, Southport, Connecticut
06890.
8
In
evaluating the Company’s business, the following risk factors, as well as other
information in this report, should be carefully considered.
Firearms
Legislation
(The
following disclosures within “Firearms Legislation” are identical to the
disclosures within “Firearms Legislation” in Item 7-Management’s Discussion and
Analysis of Financial Condition and Results of Operations.)
The
sale,
purchase, ownership, and use of firearms are subject to thousands of federal,
state and local governmental regulations. The basic federal laws are
the National Firearms Act, the Federal Firearms Act, and the Gun Control Act
of
1968. These laws generally prohibit the private ownership of fully
automatic weapons and place certain restrictions on the interstate sale of
firearms unless certain licenses are obtained. The Company does not
manufacture fully automatic weapons, other than for the law enforcement market,
and holds all necessary licenses under these federal laws. From time
to time, congressional committees review proposed bills relating to the
regulation of firearms. These proposed bills generally seek either to
restrict or ban the sale and, in some cases, the ownership of various types
of
firearms. Several states currently have laws in effect similar to the
aforementioned legislation.
Until
November 30, 1998, the “Brady Law” mandated a nationwide five-day waiting period
and background check prior to the purchase of a handgun. As of
November 30, 1998, the National Instant Check System, which applies to both
handguns and long guns, replaced the five-day waiting period. The
Company believes that the “Brady Law” and the National Instant Check System have
not had a significant effect on the Company’s sales of firearms, nor does it
anticipate any impact on sales in the future. On September 13, 1994,
the “Crime Bill” banned so-called “assault weapons.” All the
Company’s then-manufactured commercially-sold long guns were exempted by name as
“legitimate sporting firearms.” This ban expired by operation of law
on September 13, 2004. The Company remains strongly opposed to laws
which would restrict the rights of law-abiding citizens to lawfully acquire
firearms. The Company believes that the lawful private ownership of firearms
is
guaranteed by the Second Amendment to the United States Constitution and that
the widespread private ownership of firearms in the United States will
continue. However, there can be no assurance that the regulation of
firearms will not become more restrictive in the future and that any such
restriction would not have a material adverse effect on the business of the
Company.
Firearms
Litigation
(The
following disclosures within
“Firearms Litigation” are identical to the disclosures within “Firearms
Litigation” in Item 7-Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Note 6 of the notes to the financial
statements-Contingent Liabilities.)
As
of
December 31, 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:
9
|
(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 Company’s products.
|
The
Company has expended significant amounts of financial resources and management
time in connection with product liability litigation. Management
believes that, in every case involving firearms, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses 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 manufacturer’s
lawfully made products; and 2) liability of firearms manufacturers could not
be
apportioned under a market share theory. More recently, the New York Court
of
Appeals on October 21, 2003 declined to hear the appeal from the decision of
the
New York Supreme Court, Appellate Division, affirming the dismissal of New
York
Attorney General Eliot Spitzer’s public nuisance suit against the Company and
other manufacturers and distributors of firearms. In its decision, the Appellate
Division relied heavily on Hamilton in
concluding that it was “legally inappropriate,” “impractical,” “unrealistic” and
“unfair” to attempt to hold firearms manufacturers responsible under theories of
public nuisance for the criminal acts of others.
10
Of
the
lawsuits brought by municipalities, counties or a state Attorney General, twenty
have been concluded: Atlanta– dismissal
by
intermediate Appellate Court, no further appeal; Bridgeport– dismissal
affirmed by Connecticut Supreme Court; County of Camden–
dismissal
affirmed by U.S. Third Circuit Court of Appeals; Miami– dismissal
affirmed by intermediate appellate court, Florida Supreme Court declined review;
New Orleans–
dismissed
by Louisiana Supreme Court, United States Supreme Court declined
review; Philadelphia– U.S.
Third Circuit Court of Appeals affirmed dismissal, no further appeal; Wilmington– dismissed
by trial court, no appeal; Boston– voluntary
dismissal with prejudice by the City at the close of fact discovery; Cincinnati–
voluntarily
withdrawn after a unanimous vote of the city council; Detroit– dismissed
by
Michigan Court of Appeals, no appeal; Wayne County–
dismissed
by Michigan Court of Appeals, no appeal; New York State– Court
of Appeals denied plaintiff’s petition for leave to appeal the Intermediate
Appellate Court’s dismissal, no further appeal; Newark– Superior
Court of New Jersey Law Division for Essex County dismissed the case with
prejudice; City of
Camden– dismissed on July 7, 2003, not reopened; Jersey City–
voluntarily dismissed and not re-filed; St. Louis– Missouri
Supreme Court denied plaintiffs’ motion to appeal Missouri Appellate Court’s
affirmation of dismissal; Chicago– Illinois
Supreme Court affirmed trial court’s dismissal; and Los Angeles City,
Los
Angeles
County, San
Francisco– Appellate Court affirmed summary judgment in favor of
defendants, no further appeal; and Cleveland– dismissed
on January 24, 2006 for lack of prosecution.
The
dismissal of the Washington, D.C.
municipal lawsuit was sustained on appeal, but individual plaintiffs were
permitted to proceed to discovery and attempt to identify the manufacturers
of
the firearms used in their shootings as “machine guns” under the city’s “strict
liability” law. On April 21, 2005, the D.C. Court of Appeals, in an
en banc hearing,
unanimously dismissed all negligence and public nuisance claims, but let stand
individual claims based upon a Washington, D.C. act imposing “strict liability”
for manufacturers of “machine guns.” Based on present information,
none of the Company’s products has been identified with any of the criminal
assaults which form the basis of the individual claims. The writ of
certiorari to the United States Supreme Court regarding the constitutionality
of
the Washington, D.C. act was denied and the case was remanded to the trial
court
for further proceedings. The defendants subsequently moved to dismiss
the case based upon the Protection of Lawful Commerce in Arms Act, which motion
was granted on May 22, 2006. The individual plaintiffs and the
District of Columbia, which has subrogation claims in regard to the individual
plaintiffs, appealed. On January 10, 2008, the District of Columbia
Court of Appeals unanimously upheld the dismissal. Plaintiffs have
until February 25, 2008, to move for rehearing en banc.
11
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. On October 29, 2007, the Indiana Appellate Court affirmed,
holding that the PLCAA does not apply to the City’s claims. A
petition for rehearing was filed in the Appellate Court and denied on January
9,
2008. A Petition to Transfer the appeal to the Supreme Court of
Indiana was filed on February 7, 2008.
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 NAACP’s
claims. On July 21, 2003, Judge Jack B. Weinstein entered an order
dismissing the NAACP lawsuit,
but
this order contained lengthy dicta which defendants believe are contrary to
law
and fact. Appeals by both sides were filed, but plaintiffs withdrew
their appeal. On August 3, 2004, the United States Court of Appeals
for the Second Circuit granted the NAACP’s motion to dismiss the defendants’
appeal of Judge Weinstein’s order denying defendants’ motion to strike his dicta
made in his order dismissing the NAACP’s case, and the defendants’ motion for
summary disposition was denied as moot. The ruling of the Second
Circuit effectively confirmed the decision in favor of defendants and brought
this matter to a conclusion.
Legislation
has been passed in approximately 34 states precluding suits of the type brought
by the municipalities mentioned above. On the Federal level, the
“Protection of Lawful Commerce in Arms Act” was signed by President Bush on
October 26, 2005. The Act requires dismissal of suits against
manufacturers arising out of the lawful sale of their products for harm
resulting from the criminal or unlawful misuse of a firearm by a third
party. The Company is pursuing dismissal of each action involving
such claims, including the municipal cases described above. 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.
12
Provision
is made for product liability claims based upon many factors related to the
severity of the alleged injury and potential liability exposure, based upon
prior claim experience. Because our experience in defending these
lawsuits and claims is that unfavorable outcomes are typically not probable
or
estimable, only in rare cases is an accrual established for such
costs. In most cases, an accrual is established only for estimated
legal defense costs. Product liability accruals are periodically
reviewed to reflect then-current estimates of possible liabilities and expenses
incurred to date and reasonably anticipated in the future. Threatened
product liability claims are reflected in our product liability accrual on
the
same basis as actual claims; i.e., an accrual is made for reasonably anticipated
possible liability and claims-handling expenses on an ongoing
basis.
A
range
of reasonably possible loss relating to unfavorable outcomes cannot be
made. However, in product liability cases in which a dollar amount of
damages is claimed, the amount of damages claimed, which totaled $5 million
and
$0 at December 31, 2007 and 2006, respectively, are set forth as an indication
of possible maximum liability that the Company might be required to incur in
these cases (regardless of the likelihood or reasonable probability of any
or
all of this amount being awarded to claimants) as a result of adverse judgments
that are sustained on appeal.
As
of
December 31, 2007 and 2006, the Company was a defendant in 5 and 4 lawsuits,
respectively, involving its products and is aware of other such
claims. During the year ended December 31, 2007 and 2006,
respectively, 2 and 2 claims were filed against the Company, 1 and 2 claims
were
dismissed, and 0 and 2 claims were settled. The average cost
per settled claim was $47,000 in 2006.
During
the years ended December 31, 2007 and 2006, the Company incurred product
liability expense of $1.7 million and $2.5 million, respectively, which includes
the cost of outside legal fees, insurance, and other expenses incurred in the
management and defense of product liability matters.
The
Company management monitors the status of known claims and the product liability
accrual, which includes amounts for asserted and unasserted
claims. While it is not possible to forecast the outcome of
litigation or the timing of costs, in the opinion of management, after
consultation with special and corporate counsel, it is not probable and is
unlikely that litigation, including punitive damage claims, will have a material
adverse effect on the financial position of the Company, but may have a material
impact on the Company’s financial results for a particular period.
The
Company has reported all cases instituted against it through September 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.
13
Balance
Sheet Rollforward for Product Liability Reserve
(Dollars
in thousands)
|
Cash
Payments
|
||||||||||||||||||||||||||||
|
Balance
Beginning of Year (a)
|
Accrued
Legal Expense (b)
|
Legal
Fees (c)
|
Settlements
(d)
|
Insurance
Premiums
|
Admin.
Expense
|
Balance
End of Year (a)
|
||||||||||||||||||||||
|
2005
|
$ | 3,132 | $ | 2,514 | $ | (2,935 | ) | (515 | ) | N/A | N/A | $ | 2,196 | |||||||||||||||
|
2006
|
2,196 | 688 | (1,000 | ) | (143 | ) | N/A | N/A | 1,741 | |||||||||||||||||||
|
2007
|
1,741 | 639 | (447 | ) | - | N/A | N/A | 1,933 | ||||||||||||||||||||
Income
Statement Detail for Product Liability Expense
(Dollars
in thousands)
|
Accrued
Legal Expense (b)
|
Insurance
Premium Expense (e)
|
Admin.
Expense (f)
|
Total
Product Liability Expense
|
||||||||||||||||||
|
2005
|
$ | 2,514 | $ | 1,338 | $ | 1,041 | $ | 4,893 | |||||||||||||
|
2006
|
688 | 1,141 | 691 | 2,520 | |||||||||||||||||
|
2007
|
639 | 748 | 299 | 1,686 | |||||||||||||||||
Notes
|
(a)
|
The
beginning and ending liability balances represent accrued legal
fees only.
Settlements and administrative costs are expensed as incurred.
Only in
rare instances is an accrual established for
settlements.
|
|
(b)
|
The
expense accrued in the liability is for legal fees
only.
|
|
(c)
|
Legal
fees represent payments to outside counsel related to product liability
matters.
|
|
(d)
|
Settlements
represent payments made to plaintiffs or allegedly injured parties
in
exchange for a full and complete release of
liability.
|
|
(e)
|
Insurance
expense represents the cost of insurance
premiums.
|
14
|
(f)
|
Administrative
expense represents personnel related and travel expenses of Company
employees and firearm experts related to the management and monitoring
of
product liability matters.
|
There
were no insurance recoveries during any of the above years.
Environmental
The
Company is subject to numerous federal, state and local laws and governmental
regulations and related state laws. These laws generally relate to potential
obligations to remove or mitigate the environmental effects of the disposal
or
release of certain pollutants at the Company’s manufacturing facilities and at
third-party or formerly owned sites at which contaminants generated by the
Company may be located. This requires the Company to make capital and other
expenses.
The
Company is committed to achieving high standards of environmental quality and
product safety, and strives to provide a safe and healthy workplace for its
employees and others in the communities in which it operates. In an effort
to
comply with federal and state laws and regulations, the Company has programs
in
place that monitor compliance with various environmental regulations. However,
in the normal course of its 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. However, the Company cannot assure that the outcome
of any environmental proceedings and orders will not have a material adverse
effect on the business.
Reliance
on Two
Facilities
The
Newport, New Hampshire and Prescott, Arizona facilities are critical to the
Company’s success. These facilities house the Company’s principal production,
research, development, engineering, design, and shipping. Any event that causes
a disruption of the operation of either of these facilities for even a
relatively short period of time might have a material adverse affect on the
Company’s ability to produce and ship products and to provide service to its
customers.
Availability
of Raw
Materials
Third
parties supply the Company with various raw materials for its firearms and
castings, such as fabricated steel components, walnut, birch, beech, maple
and
laminated lumber for rifle and shotgun stocks, wax, ceramic material, metal
alloys, various synthetic products and other component parts. There
is a limited supply of these materials in the marketplace at any given time,
which can cause the purchase prices to vary based upon numerous market
factors. The Company believes that it has adequate quantities of raw
materials in inventory to provide ample time to locate and obtain additional
items at then-current market cost without interruption of its manufacturing
operations. However, if market conditions result in a significant
prolonged inflation of certain prices or if adequate quantities of raw materials
can not be obtained, the Company’s manufacturing processes could be interrupted
and the Company’s financial condition or results of operations could be
materially adversely affected.
15
None
ITEM
2—PROPERTIES
The
Company’s manufacturing operations are carried out at two facilities. The
following table sets forth certain information regarding each of these
facilities:
|
Approximate
Aggregate
Usable
Square
Feet
|
Status
|
Segment
|
|
|
Newport,
New Hampshire
|
350,000
|
Owned
|
Firearms/Castings
|
|
Prescott,
Arizona
|
230,000
|
Leased
|
Firearms
|
Each
facility contains enclosed ranges for testing firearms and also contains modern
tool room facilities. The lease of the Prescott facility provides for rental
payments, which are approximately equivalent to estimated rates for real
property taxes. The Company consolidated its casting operations in
its Newport, New Hampshire foundry in 2007.
The
Company has three other facilities that were not used in its manufacturing
operations in 2007:
|
Approximate
Aggregate
Usable
Square
Feet
|
Status
|
Segment
|
|
|
Southport,
Connecticut (Station Street property)
|
5,000
|
Owned
|
Not
Utilized
|
|
Southport,
Connecticut
(Lacey
Place property)
|
25,000
|
Owned
|
Corporate
|
|
Newport,
New Hampshire
(Dorr
Woolen Building)
|
300,000
|
Owned
|
Firearms
(a)
|
|
(a) |
In
2005, the Company relocated its firearms shipping department into
a
portion of the the Dorr Woolen Building. In 2006, certain of the
Company’s
sales department personnel were moved into the same
facility. |
There
are
no mortgages or any other major encumbrance on any of the real estate owned
by
the Company. The Company sold some of its non-manufacturing real
property assets in 2007. The three non-manufacturing facilities
identified above are listed for sale.
The
Company’s principal executive offices are located in Southport,
Connecticut. The Company believes that its existing facilities are
suitable and adequate for its present purposes.
16
The
nature of the legal proceedings against the Company is discussed at Note 6
of
the notes to the financial statements in this Annual Report on Form 10-K report,
which is incorporated herein by reference.
The
Company has reported all cases instituted against it through September 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
December 31, 2007.
During
the three months ending December 31, 2007, no previously reported cases were
settled.
For
a
description of all pending lawsuits against the Company through September 30,
2007, reference is made to the discussion under the caption “Item 1. LEGAL
PROCEEDINGS” of the Company’s Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1999, March 31 and September 30, 2000, and June 30,
2007.
ITEM
4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
|
ITEM 5—
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES
|
The
Company’s Common Stock is traded on the New York Stock Exchange under the symbol
“RGR.” At February 1, 2008, the Company had 1,769 stockholders of
record.
The
following table sets forth, for the periods indicated, the high and low sales
prices for the Common Stock as reported on the New York Stock Exchange and
dividends paid on Common Stock.
17
|
High
|
Low
|
Dividends
Per
Share
|
||||||||||
|
2006:
|
||||||||||||
|
First
Quarter
|
$ | 8.03 | $ | 6.75 | - | |||||||
|
Second
Quarter
|
7.78 | 5.56 | - | |||||||||
|
Third
Quarter
|
7.85 | 5.65 | - | |||||||||
|
Fourth
Quarter
|
10.78 | 7.74 | - | |||||||||
|
2007:
|
||||||||||||
|
First
Quarter
|
$ | 13.27 | $ | 8.91 | - | |||||||
|
Second
Quarter
|
15.49 | 11.77 | - | |||||||||
|
Third
Quarter
|
20.94 | 13.86 | - | |||||||||
|
Fourth
Quarter
|
18.35 | 7.22 | - | |||||||||
Issuer Repurchase
of Equity Securities
|
Dates
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased Under the Program
|
Approximate
Dollar Value of Shares that may yet be Purchased Under the
Program
|
||||
|
October
1 – December 31, 2007
|
2,216,000
|
$ 8.99
|
2,216,000
|
$ 0
(Note 1)
|
||||
|
Total
|
2,216,000
|
$ 8.99
|
2,216,000
|
$ 0
|
||||
|
(1) |
In the first quarter of 2007, the Board of Directors authorized a $20 million stock repurchase program. Through December 31, 2007 all share repurchases were open market purchases. |
On
September 26, 2006, the Company repurchased 4,272,000 shares of its common
stock, representing 15.9% of the outstanding shares, from entities controlled
by
members of the Ruger family at a price of $5.90 per share. These purchases
were
made with cash held by the Company and no debt was incurred.
18
Comparison
of Five-Year Cumulative Total Return*
Sturm,
Ruger & Company, Inc., Standard & Poor’s 500 And
Value
Line Recreation Index
(Performance
Results Through 12/31/07)
Assumes
$100 invested at the close of trading 12/02 in Sturm, Ruger & Company, Inc.
common stock, Standard & Poor’s 500,
and
Recreation Index.
*Cumulative
total return assumes reinvestment of dividends.
Source: Value
Line, Inc.
Factual
material is obtained from sources believed to be reliable, but the publisher
is
not responsible for any errors or omissions contained herein.
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
|
Sturm,
Ruger & Company, Inc.
|
100.00
|
128.37
|
107.51
|
86.46
|
118.41
|
102.13
|
|
Standard
& Poor’s 500
|
100.00
|
126.38
|
137.75
|
141.88
|
161.20
|
166.89
|
|
Recreation
|
100.00
|
149.92
|
203.02
|
189.39
|
213.50
|
190.57
|
19
Securities
Authorized for
Issuance Under Equity Compensation Plans
The
following table provides information regarding compensation plans under which
equity securities of the Company are authorized for issuance as of December
31,
2007:
|
Equity
Compensation Plan Information
|
|||
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
Equity
compensation plans approved by security holders
|
|||
|
1998
Stock Incentive Plan
|
600,000
|
$7.77
per share
|
-
|
|
2001
Stock Option Plan for Non-Employee Directors
|
180,000
|
$8.75
per share
|
-
|
|
2007
Stock Incentive Plan
|
311,250
|
$13.06
per share
|
2,238,750
|
|
Equity
compensation plans not approved by security holders
|
|||
|
None.
|
|||
|
Total
|
1,091,250
|
$9.44
per share
|
2,238,750
|
20
|
(Dollars
in thousands, except per share data)
|
||||||||||||||||||||
| December 31, | ||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Net
firearms sales
|
$ | 144,222 | $ | 139,110 | $ | 132,805 | $ | 124,924 | $ | 130,558 | ||||||||||
|
Net
castings sales
|
12,263 | 28,510 | 21,917 | 20,700 | 17,359 | |||||||||||||||
|
Total
net sales
|
156,485 | 167,620 | 154,722 | 145,624 | 147,917 | |||||||||||||||
|
Cost
of products sold
|
117,186 | 139,610 | 124,826 | 115,725 | 113,189 | |||||||||||||||
|
Gross
profit
|
39,299 | 28,010 | 29,896 | 29,899 | 34,728 | |||||||||||||||
|
Income
before income taxes
|
16,659 | 1,843 | 1,442 | 8,051 | 20,641 | |||||||||||||||
|
Income
taxes
|
6,330 | 739 | 578 | 3,228 | 8,277 | |||||||||||||||
|
Net
income
|
$ | 10,329 | 1,104 | 864 | 4,823 | 12,364 | ||||||||||||||
|
Basic
and diluted earnings per share
|
0.46 | 0.04 | 0.03 | 0.18 | 0.46 | |||||||||||||||
|
Cash
dividends per share
|
$ | 0.00 | $ | 0.00 | $ | 0.30 | $ | 0.60 | $ | 0.80 | ||||||||||
| December 31, | ||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Working
capital
|
$ | 53,264 | $ | 60,522 | $ | 83,522 | $ | 90,947 | $ | 102,715 | ||||||||||
|
Total
assets
|
101,882 | 117,066 | 139,639 | 147,460 | 162,873 | |||||||||||||||
|
Total
stockholders’ equity
|
76,069 | 87,326 | 111,578 | 120,687 | 133,640 | |||||||||||||||
|
Book
value per share
|
$ | 3.570 | $ | 3.86 | $ | 4.15 | $ | 4.48 | $ | 4.97 | ||||||||||
|
Return
on stockholders’ equity
|
12.6 | % | 1.3 | % | 0.8 | % | 4.0 | % | 9.3 | % | ||||||||||
|
Current
ratio
|
3.6
to 1
|
3.8
to 1
|
5.5
to 1
|
5.7
to 1
|
5.7
to 1
|
|||||||||||||||
|
Common
shares outstanding
|
20,571,800 | 22,638,700 | 26,910,700 | 26,910,700 | 26,910,700 | |||||||||||||||
|
Number
of stockholders of record
|
1,769 | 1,851 | 1,922 | 1,977 | 2,036 | |||||||||||||||
|
Number
of employees
|
1,154 | 1,108 | 1,250 | 1,291 | 1,251 | |||||||||||||||
|
ITEM 7—
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Company
Overview
Sturm,
Ruger & Company, Inc. (the “Company”) is principally engaged in the design,
manufacture, and sale of firearms to domestic customers. Approximately 92%
of
the Company’s total sales for the year ended December 31, 2007 were from the
firearms segment, and 8% were from investment castings. Export sales represent
less than 6% of firearms sales. The Company’s design and
manufacturing operations are located in the United States and substantially
all
product content is domestic. The Company’s firearms are sold through a select
number of independent wholesale distributors principally to the commercial
sporting market.
21
The
Company manufactures and sells investment castings made from steel alloys for
both outside customers and internal use in the firearms
segment. Investment castings sold to outside customers, either
directly to or through manufacturers’ representatives, represented 8% of the
Company’s total sales for the year ended December 31, 2007. In July
2006, the Company announced the cessation of the titanium castings portion
of
its investment casting operations. This cessation of operations was
completed in 2007, at which time the Company consolidated its Arizona casting
operations into its New Hampshire casting operations.
Because
most of the Company’s competitors are not subject to public filing requirements
and industry-wide data is generally not available in a timely manner, the
Company is unable to compare its performance to other companies or specific
current industry trends. Instead, the Company measures itself against
its own historical results.
The
Company does not consider its overall firearms business to be predictably
seasonal; however, sales of many models of firearms are usually lower in the
third quarter of the year.
Results
of
Operations
Year
ended December 31, 2007, as compared to year ended December 31,
2006:
Summary
Unit Data
Firearms
unit data for orders, production, shipments and ending inventory, and castings
setups (a measure of foundry production) are as follows:
|
2007
|
2006
|
2005
|
||||||||
|
Units
Ordered
|
485,000
|
Note
(1)
|
Note
(1)
|
|||||||
|
Units
Produced
|
464,919
|
419,834
|
414,600
|
|||||||
|
Units
Shipped
|
481,832
|
475,858
|
460,243
|
|||||||
|
Units
– Company Inventory
|
38,309
|
55,222
|
111,246
|
|||||||
|
Units
– Distributor Inventory (Note
2)
|
62,018
|
57,126
|
70,498
|
|||||||
|
Units
on Backorder
|
36,514
|
Note
(1)
|
Note
(1)
|
|||||||
|
Castings
Setups
|
156,133
|
169,077
|
174,443
|
22
Note
1: Prior to 2006, 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. Because of this change,
comparable data for orders received and units on backorder for prior periods
is
not meaningful.
Note
2: Distributor ending inventory as provided by the Company’s
distributors.
Orders
Received
The
Company saw unusually high bookings during the 1st
quarter
of 2007 and then unusually low bookings during the 3rd
quarter
of 2007. Bookings picked up again during the 4th
quarter, gaining strength during the quarter. The Company’s
distributors indicated anecdotally that this order pattern was in line with
what
the overall industry experienced during 2007. This order pattern in
2007 was more volatile than the modest seasonality typically encountered in
other years. Certain product lines were on backorder throughout the
year, including new product introductions and low-volume products that were
not
in regular production throughout the year. The Company initiated
sales promotions during the 3rd
and
4th
quarters of the year to encourage demand for those product lines where
manufacturing capacity exceeded current demand.
Production
Throughout
2007, the Company continued to work on the transition from large-scale batch
production to lean manufacturing, with an emphasis on setting up manufacturing
cells that facilitate flow production and pull systems. To date, the
Company has converted over 70% of its batch manufacturing processes to
single-piece or small-batch flow cells. In addition to continuing to
set up flow cells, the next phase of the lean transition includes developing
pull systems to link the assembly cells, component manufacturing cells, and
parts suppliers.
In
the
first half of 2007, unit shipments exceeded production and there was a
significant reduction in finished goods inventory. There was also a
significant reduction in work-in-process inventory in the first half of 2007
as
available work-in-process inventory allowed the Company to produce more units
than its staffing and manufacturing processes would have otherwise
allowed.
As
a
result of reducing gross inventory by $28.3 million in the second half of 2006
and by $26.6 million in the first half of 2007, including significant reductions
in work-in-process inventory, many issues with design for manufacturability,
poor machinery and tool reliability, weak manufacturing processes, long machine
changeover times, and vendor supply were identified. The Company has
made partial progress in addressing these issues with careful re-engineering
of
both our product and component designs and manufacturing processes as problems
were identified, with the net result for certain product lines of significantly
reduced factory throughput time, improved quality, and modestly improved
productivity. The rate of product returns (from firearms in service
less than 1 year) dropped by approximately 30% from the first quarter of 2007
to
the fourth quarter of 2007. The Company was also able to increase
unit production by approximately 10% from 2006 to 2007.
23
During
the 2nd
half of
2007, the Company slowed its rapid, wide-spread draw down of inventory and
increased the foundry output to replenish component part
shortages. Gross inventory was relatively unchanged during the 2nd
half of
2007. Production rates started to increase late in 2007 as a result
of the months of effort spent addressing manufacturing process and
design-for-manufacturability issues and as a result of the increased
availability of investment cast component parts. Nonetheless, the
improvement process is ongoing with much work, especially engineering, still
to
be done to continue with the lean transition and to increase production
capacity.
Sales
Consolidated
net sales were $156.5 million in 2007. This represents a decrease of
$11.1 million or 6.6% from 2006 consolidated net sales of $167.6
million.
Firearms
segment net sales were $144.2 million in 2007. This represents an
increase of $5.1 million or 3.7% from 2006 firearm net sales of $139.1
million. Firearms unit shipments increased 1% in 2007 due to
increased shipments of rifles and pistols, offset by a decline in shipments
of
revolvers and shotguns. A modest price increase and a shift in
product mix toward firearms with greater unit sales prices resulted in the
greater percentage increase in sales than unit shipments.
Casting
segment net sales were $12.3 million in 2007. This represents a
decrease of $16.2 million or 57.0% from 2006 casting sales of $28.5
million.
The
casting sales decrease in 2007 primarily reflects the cessation of titanium
casting operations, as previously announced by the Company in July
2006. In 2007, titanium casting sales were $3.2 million or 26% of
total casting sales compared to $16.2 million or 56% in 2006. In
addition, the Company significantly increased prices to most external customers
in the second half of the 2007, seeking to improve margins and free up available
capacity for additional internal use. Certain customers accepted the
price increases while others moved their business away from the Company as
anticipated.
Cost
of Products Sold and
Gross Margin
Consolidated
cost of products sold was $117.2 million in 2007. This represents a
decrease of $22.4 million or 16.1% from 2006 consolidated cost of products
sold
of $139.6 million.
The
gross
margin as a percent of sales was 25.1% in 2007. This represents an
increase from the 2006 gross margin of 16.7% as illustrated below:
24
|
December
31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Net
sales
|
$ | 156,485 | 100.0 | % | $ | 167,620 | 100.0 | % | ||||||||
|
Total
cost of products sold, before LIFO and overhead rate adjustments
to
inventory and product liability
|
123,170 | 78.7 | % | 135,881 | 81.1 | % | ||||||||||
|
Performance
gross margin *
|
33,315 | 21.3 | % | 31,739 | 18.9 | % | ||||||||||
|
LIFO
and overhead rate inventory adjustments and product
liability
|
(5,984 | ) | (3.8 | )% | 3,729 | 2.2 | % | |||||||||
|
Gross
margin
|
$ | 39,299 | 25.1 | % | $ | 28,010 | 16.7 | % | ||||||||
|
*
|
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.
|
Excess
and Obsolete
Inventory—Prior to 2006, the Company adjusted production schedules to
consume on-hand raw material and WIP inventories, regardless of customer demand
for the finished goods so produced. This practice led to increased
investment in inventory, and an unbalanced finished goods
inventory.
Consistent
with the change in the manner in which distributors order from the Company,
the
Company significantly changed its production scheduling philosophy from an
annual production cycle to a customer-demand pull system in the fourth quarter
of 2006. Under the Company’s new system, production is driven solely
by customer demand.
As
a
result of this new production philosophy, it became apparent that the Company
had inventory in excess of its needs over the foreseeable
future. Therefore, in 2006, the Company evaluated the
adequacy of the excess and obsolescence inventory reserve and concluded that
additional reserves were required to reflect the estimated recoverable value
of
excess inventories below LIFO carrying cost. The required reserve was
estimated at $5.5 million as of December 31, 2006.
The
Company employed the same methodology and parameters in 2007, which resulted
in
a reserve balance as of December 31, 2007 of $4.1 million. This
reduction was principally caused by the increased impact of LIFO in 2007 as
evidenced by the LIFO reserve representing 73% of gross inventories at December
31, 2007, compared to 66% at December 31, 2006.
Performance
Gross
Margin—In 2007, performance gross margin was $33.3 million or 21.3% of
sales. This was an increase of $1.6 million or 5.0% from the 2006
performance gross margin of $31.7 million or 18.9% of
sales.
25
LIFO—In
2007, gross
inventories were reduced by $23.1 million compared to decreases in gross
inventories of $24.0 million in 2006. The 2007 inventory reduction
resulted in LIFO income and decreased cost of products sold of $9.1 million
compared to LIFO income and decreased cost of products sold of $1.2 million
in
2006.
Overhead
Rate
Change—In 2007, the change in inventory value resulting from the change
in the overhead rate used to absorb overhead expenses into inventory was a
decrease of $1.4 million. This reduction in inventory value resulted
in an increase to cost of products sold.
In
2006,
the change in inventory value resulting from the change in the overhead rate
used to absorb overhead expenses into inventory was a decrease of $2.9
million. This reduction in inventory value resulted in an increase to
cost of products sold.
Product
Liability—During the years ended December 31, 2007 and 2006, the Company
incurred product liability expense of $1.7 million and $2.5 million,
respectively, which includes the cost of outside legal fees, insurance, and
other expenses incurred in the management and defense of product liability
matters. See note 6 to the notes to the financial statements
“Contingent Liabilities” for further discussion of the Company’s product
liability.
Gross
Margin—Gross
margin was $39.3 million or 25.1% of sales in 2007. This is an
increase of $11.3 million or 40.3% from 2006 gross margin of $28.0 million
or
16.7% of sales.
Selling,
General and
Administrative
Selling,
general and administrative expenses were $28.8 million in 2007. This
represents an increase of $0.9 million or 3.0% from 2006 selling, general and
administrative expenses of $27.9 million. The increase reflects
greater personnel-related expenses including equity-based compensation expense
such as stock-option expense and performance-stock-option expense, partially
offset by a reduction in advertising and sales promotion expenses.
Pension
Curtailment
Charge
In
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 “freezes” the benefits for all
employees and prevents 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 2007.
Other
Operating Expenses
(Income), net
Other
operating expenses (income), net consist of the following:
26
|
Year
ended December 31,
|
2007
|
2006
|
|||||||
|
Gain
on sale of operating assets (a)
|
$ | (472 | ) | $ | (929 | ) | |||
|
Impairment
of operating assets (b)
|
489 | 494 | |||||||
|
Gain
on sale of real estate (c)
|
(1,521 | ) | (397 | ) | |||||
|
Impairment
of real estate held for sale (d)
|
1,775 | - | |||||||
|
Total
other operating expenses (income), net
|
$ | 271 | $ | (832 | ) | ||||
(a) The
gain on sale of operating assets was generated primarily from the sale of used
machinery and equipment. Most of the used machinery and equipment
sold in 2007 and 2006 was related to titanium investment casting.
(b) In
2007, the Company recognized an impairment charge of $0.5 million related to
machinery and equipment previously in the Company’s Arizona investment casting
operations. In 2006, the Company recognized an impairment charge of
$0.5 million related to building improvements at the Dorr
Building. The Company had planned to establish a titanium investment
castings foundry at Dorr, but that plan was aborted in 2006.
(c) On
April 16, 2007, the Company sold a
facility in Arizona for $5.0 million. This facility had not been used in the
Company’s operations for several years. The Company realized a gain of
approximately $1.5 million from this sale. In 2006, the $0.4 million gain
on sale of real estate reflects the sale of non-manufacturing real
property. The Company has three additional non-manufacturing
properties listed for sale, two in Connecticut and one in New
Hampshire.
(d) In
the fourth quarter of 2007, the Company recognized an asset impairment charge
of
$1.8 million related to the Dorr Building, a non-manufacturing property in
New
Hampshire that has been for sale for an extended period of time without any
meaningful market interest.
Operating
Income—Operating Income was $9.1 million or 5.8% of sales in
2007. This is an increase of $8.2 million from 2006 operating income
of $0.9 million or 0.6% of sales.
Gain
on Sale of Real
Estate
In
2007,
the $5.2 million gain on sale of real estate reflects the sale of largely
undeveloped non-manufacturing real property held for investment in March of
2007.
Interest
income
Interest
income was $2.4 million in 2007. This represents an increase of $1.3
million from 2006 interest income of $1.1 million. The increase is
attributable to increased principal invested in 2007 compared to
2006.
27
Income
Taxes and Net
Income
The
effective income tax rate in 2007 was 38.0%. This compares favorably
to the 2006 effective income tax rate of 40.1%. The reduction in 2007
results from an increase in the domestic production activities
deduction.
As
a
result of the foregoing factors, consolidated net income was $10.3 million
in
2007. This represents an increase of $9.2 million from 2006
consolidated net income of $1.1 million.
Results
of
Operations
Year
ended December 31, 2006, as compared to year ended December 31,
2005:
Sales
Consolidated
net sales were $167.6 million in 2006. This represents an increase of
$12.9 million or 8.3% from 2005 consolidated net sales of $154.7
million.
Firearms
segment net sales were $139.1 million in 2006. This represents an increase
of
$6.3 million or 4.7% from 2005 firearm net sales of $132.8
million. Firearms unit shipments increased 3% in 2006 due to
increased shipments of revolvers, partially offset by a decline in shipments
of
shotguns, pistols, and rifles. Effective January 1, 2006, the Company
instituted a unilateral minimum distributor resale price policy for its
firearms, which remains in effect. This change in policy was well
received by the Company’s distributors and did not appear to have an adverse
effect on the Company’s firearm sales.
Casting
segment net sales were $28.5 million in 2006. This represents an
increase of $6.6 million or 30.1% from 2005 casting sales of $21.9
million.
The
casting sales increase was due primarily to the acceleration of titanium
shipments related to the cessation of titanium casting operations, as previously
announced by the Company in July 2006. Titanium casting sales
accounted for $16.2 million or 56% of casting sales in 2006. The
Company continues to manufacture and sell steel investment castings for a wide
variety of customers and end uses.
Cost
of Products Sold and
Gross Margin
Consolidated
cost of products sold was $139.6 million in 2006. This represents an
increase of $14.8 million or 11.9% from 2005 consolidated cost of products
sold
of $124.8 million.
The
gross
margin as a percent of sales was 16.7% in 2006. This represents a
decline from the 2005 gross margin of 19.3% as illustrated below:
28
|
December
31,
|
||||||||||||||||
|
2006
|
2005
|
|||||||||||||||
|
Net
sales
|
$ | 167,620 | 100.0 | % | $ | 154,722 | 100.0 | % | ||||||||
|
Total
cost of products sold, before LIFO and overhead rate inventory adjustments
and product liability (Note 1)
|
135,881 | 81.1 | % | 121,198 | 78.3 | % | ||||||||||
|
Performance
gross margin*
|
31,739 | 18.9 | % | 33,524 | 21.7 | % | ||||||||||
|
LIFO
and overhead rate inventory adjustments and product liability (Note
2)
|
3,729 | 2.2 | % | 3,628 | 2.4 | % | ||||||||||
|
Gross
margin
|
$ | 28,010 | 16.7 | % | $ | 29,896 | 19.3 | % | ||||||||
|
*
|
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.
|
Note
1: Performance gross margin was favorably impacted by stronger sales,
and was adversely impacted by an excess and obsolete inventory charge of $3.2
million, compared to $0.5 million in 2005. The impact of the
excess and obsolete inventory charge was 1.9% of sales in 2006 as compared
to
0.3% of sales in 2005.
Note
2: Gross margin was favorably impacted by a LIFO liquidation of $7.1
million and a reduction in product liability of $2.4 million, and was adversely
impacted by a reduction in inventory value of $2.9 million related to overhead
rate changes.
Excess
and Obsolete
Inventory—In prior years, the Company received one cancelable annual
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. In the past, the Company adjusted production
schedules to consume on-hand raw material and WIP inventories, regardless of
customer demand for the finished goods so produced. This practice led
to increased investment in inventory, and an unbalanced finished goods
inventory.
As
a
result of this new production philosophy, it became apparent the Company had
inventory in excess of its needs over the foreseeable future. Given
ever-changing market conditions, customer preferences and the anticipated
introduction of new products, the Company concluded that it was not prudent
nor
supportable to carry inventory at full cost beyond that needed during the next
36 months. Therefore the Company evaluated the adequacy of the excess
and obsolescence inventory reserve and concluded that additional reserves were
required to reflect the estimated recoverable value of excess inventories below
LIFO carrying cost. The required reserve was estimated based on the
following parameters, and resulted in an excess and obsolete expense of $3.2
million and a reserve balance of $5.5 million:
29
|
Projected
Year
Of
Consumption
|
Required
Reserve
%
|
||
|
2007
|
2%
|
||
|
2008
|
10%
|
||
|
2009
|
35%
|
||
|
2010
and
thereafter
|
90%
|
LIFO—During
2006,
gross inventories were reduced by $24.0 million. This reduction
resulted in a liquidation of LIFO inventory quantities carried at lower costs
that prevailed in prior years as compared with the current cost of purchases,
the effect of which decreased costs of products sold by approximately $7.1
million. There was no LIFO liquidation in 2005.
Reduction
in inventory generated positive cash flow for the Company, partially offset
by
the tax impact of the consequent LIFO liquidation, which generated negative
cash
flow as it created taxable income, resulting in higher tax
payments.
Product
Liability—During the years ended December 31, 2006 and 2005, the Company
incurred product liability expense of $2.5 million and $4.9 million,
respectively, which includes the cost of outside legal fees, insurance, and
other expenses incurred in the management and defense of product liability
matters. See Footnote 6 “Contingent Liabilities” for further
discussion of the Company’s product liability.
Overhead
Rate
Change—In 2006, the change in inventory value resulting from the change
in the overhead rate used to absorb overhead expenses into inventory was a
decrease of $2.9 million. This reduction in inventory value resulted
in an increase to cost of products sold.
In
2005,
the change in inventory value as a result of a change in the overhead rate
used
to absorb overhead expenses into inventory was an increase of $6.8
million. This increase in inventory value resulted in a decrease to
cost of products sold.
Fourth
Quarter
Charge—In the fourth quarter of 2006, a $2.5 million non-cash inventory
valuation adjustment, net of the LIFO impact, was recorded to recognize
inefficiencies in labor and overhead during a period of rapid inventory
reduction. This over-absorption of labor and overhead was quantified
by a physical inventory taken in the fourth quarter.
Due
to
the timing of the physical inventory, the Company was unable to quantify the
impact of this delayed recognition of labor and overhead inefficiencies, if
any,
on the financial results of prior quarters. As a consequence, raw
material and work in process physical inventories are being performed at the
end
of each quarter until a permanent corrective action is established and
determined to be adequate, making these physical inventories
unnecessary. These physical inventories were taken each quarter in
2007 and are expected to continue in 2008.
30
Selling,
General and
Administrative
Selling,
general and administrative expenses were $27.9 million in 2006. This
represents a decrease of $0.2 million or 0.5% from 2005 selling, general and
administrative expenses of $28.1 million. The decrease reflects a
reduction in advertising and sales promotion expenses, partially offset by
increased personnel-related expenses including $0.7 million related to the
retirement of the former Chairman and Chief Executive Officer.
Other
Operating Expenses
(Income), net
Other
operating expenses (income), net consist of the following:
|
Year
ended December 31,
|
2006
|
2005
|
|||||||
|
Gain
on sale of operating assets (a)
|
$ | (929 | ) | - | |||||
|
Impairment
of operating assets (b)
|
494 | 483 | |||||||
|
Gain
on sale of real estate (c)
|
(397 | ) | - | ||||||
|
Total
other operating expenses (income), net
|
$ | (832 | ) | $ | 483 | ||||
(a) The
gain on sale of operating assets is generated primarily from the sale of used
machinery and equipment. Most of the machinery and equipment sold in
2006 was related to titanium investment casting.
(b) In
2006, the Company recognized an impairment charge of $0.5 million related to
building improvements at the Dorr Building. The Company had planned
to establish a titanium investment castings foundry at Dorr, but that plan
was
aborted in 2006. In 2005, the Company recognized an impairment charge
of $0.5 million related to certain corporate assets and certain machinery and
equipment in the castings segment.
(c) In
2006, the $0.4 million gain on sale of real estate reflects the sale of
non-manufacturing real property.
Operating
Income—Operating Income was $0.9 million or 0.6% of sales in
2006. This is a decrease of $0.4 million from 2005 operating income
of $1.4 million or 0.9% of sales.
Interest
Income
Interest
income was $1.1 million in 2006. This represents an increase of $0.3
million from 2005 interest income of $0.8 million. The increase is
attributable to more favorable interest rates in 2006..
31
Income
Taxes and Net
Income
The
effective income tax rate of 40.1% in 2006 remained consistent with the income
tax rate in 2005.
As
a
result of the foregoing factors, consolidated net income was $1.1 million in
2006. This represents an increase of $0.2 million or 27.8% from 2005
consolidated net income of $0.9 million.
Financial
Condition
Operations
At
December 31, 2007, the Company had cash, cash equivalents and short-term
investments of $35.6 million. The Company’s pre-LIFO working capital
of $100.2 million, less the LIFO reserve of $46.9 million, resulted in working
capital of $53.3 million and a current ratio of 3.6 to 1.
Cash
provided by operating activities was $17.5 million, $30.2 million, and $5.2
million in 2007, 2006, and 2005, respectively. The decrease in cash
provided in 2007 compared to 2006 is principally attributable to comparable
reductions in gross inventory, offset by a more significant reduction in the
LIFO reserve in 2007, and increased voluntary pension plan contributions in
2007. The increase in cash provided in 2006 compared to 2005 is
principally a result of a $24.3 million decrease in inventory in 2006 and various fluctuations
in
operating asset and liability accounts during 2006 compared to
2005.
Third
parties supply the Company with various raw materials for its firearms and
castings, such as fabricated steel components, walnut, birch, beech, maple
and
laminated lumber for rifle and shotgun stocks, wax, ceramic material, metal
alloys, various synthetic products and other component parts. There
is a limited supply of these materials in the marketplace at any given time,
which can cause the purchase prices to vary based upon numerous market
factors. The Company believes that it has adequate quantities of raw
materials in inventory to provide ample time to locate and obtain additional
items at then-current market cost without interruption of its manufacturing
operations. However, if market conditions result in a significant
prolonged inflation of certain prices or if adequate quantities of raw materials
can not be obtained, the Company’s manufacturing processes could be interrupted
and the Company’s financial condition or results of operations could be
materially adversely affected.
Investing
and
Financing
Capital
expenditures were $4.5 million, $3.9 million, and $4.5 million in 2007, 2006,
and 2005, respectively. In 2008, the Company expects to spend
approximately $5 million on capital expenditures 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,
all of these activities with funds provided by operations and current cash
and
short-term investments.
On
January 26, 2007, the Company announced that its Board of Directors authorized
a
stock repurchase program. During the fourth quarter of 2007, the
Company repurchased 2,216,000 shares of its common stock, representing 9.7%
of
the outstanding shares, in the open market at an average price of $8.99 per
share. On September 26, 2006, the Company repurchased 4,272,000 shares of its
common stock, representing 15.9% of the then outstanding shares, from entities
controlled by members of the Ruger family at a price of $5.90 per share. These
purchases were made with cash held by the Company and no debt was
incurred.
32
There
were no dividends paid in 2007 or 2006. The payment of future
dividends depends on many factors, including internal estimates of future
performance, then-current cash and short-term investments, and the Company’s
need for funds. The Company does not expect to pay dividends in the
near term.
On
March 8, 2007, the Company sold 42
parcels of non-manufacturing real property for $7.3 million to William B. Ruger,
Jr., the Company’s former Chief Executive Officer and Chairman of the Board. The
sale included substantially all of the Company’s raw land real property assets
in New Hampshire. The sales price was based upon an independent appraisal,
and
the Company recognized a gain of $5.2 million on the sale.
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 Company’s operations for several years. The Company realized a
gain of approximately $1.5 million from this sale.
In
2007,
the Company amended its hourly and salaried defined benefit pension plans so
that employees will no longer accrue benefits under them effective December
31,
2007. This action “freezes” the benefits for all employees and prevents 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.
In
late
2007, after authorizing the “freeze” amendment to its hourly and salaried
defined benefit pension plans, the Company contributed an additional $5 million
to the plans. The intent of this discretionary contribution is
to reduce the amount of time that the Company will be required to continue
to
operate the frozen plans. The ongoing cost of running the plans (even
if frozen) is approximately $200,000 per year, which includes PBGC premiums,
actuary and audit fees, and other expenses.
In
2008
and future years, the Company will be required to make cash contributions to
the
two defined benefit pension plans according to the new rules of the Pension
Protection Act of 2006. The annual contributions will be based on the
amount of the unfunded plan liabilities derived from the frozen benefits and
will not include liabilities for any future accrued benefits for any new or
existing participants. The total amount of these future cash
contributions will be dependent on the investment returns generated by the
plans’ assets and the then-applicable discount rates used to calculate the
plans’ liabilities. The 2008 cash contribution for the defined benefit plans is
not expected to exceed $1 million.
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 previous retirement funding levels.
33
In
February 2008, the Company made lump sum benefit payments to two participants
in
its only non-qualified defined benefit plan, the Supplemental Executive
Retirement Plan (SERP). These payments, which totaled $2.1 million,
represented the actuarial present value of the participants’ accrued benefit as
of the date of payment. Only one, retired participant remains in this
plan.
Historically,
the Company has not required external financing. Based on its
unencumbered assets, the Company believes it has the ability to raise
substantial amounts of cash through issuance of short-term or long-term
debt. In the fourth quarter of 2007, the Company secured a $25
million credit facility, which terminates on December 13, 2008. This
credit facility remains unused.
Contractual
Obligations
The
table
below summarizes the Company’s significant contractual obligations at December
31, 2007, and the effect such obligations are expected to have on the Company’s
liquidity and cash flows in future periods. This table excludes
amounts already recorded on the Company’s balance sheet as current liabilities
at December 31, 2007.
“Purchase
Obligations” as used in the below table includes all agreements to purchase
goods or services that are enforceable and legally binding on the Company and
that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and
the
approximate timing of the transaction. Certain of the Company’s
purchase orders or contracts for the purchase of raw materials and other goods
and services that may not necessarily be enforceable or legally binding on
the
Company, are also included in “Purchase Obligations” in the
table. Certain of the Company’s purchase orders or contracts
therefore included in the table may represent authorizations to purchase rather
than legally binding agreements. The Company expects to fund all of
these commitments with cash flows from operations and current cash and
short-terms investments.
|
Payment
due by period (in thousands)
|
|||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
||||||||||||||||
|
Long-Term
Debt Obligations
|
- | - | - | - | - | ||||||||||||||||
|
Capital
Lease Obligations
|
- | - | - | - | - | ||||||||||||||||
|
Operating
Lease Obligations
|
- | - | - | - | - | ||||||||||||||||
|
Purchase
Obligations
|
$ | 25,300 | $ | 25,300 | - | - | - | ||||||||||||||
|
Other
Long-Term Liabilities
Reflected
on the
Registrant’s
Balance
Sheet
under GAAP
|
- | - | - | - | - | ||||||||||||||||
|
Total
|
$ | 25,300 | $ | 25,300 | - | - | - | ||||||||||||||
34
The
expected timing of payment of the obligations discussed above is estimated
based
on current information. Timing of payments and actual amounts paid
may be different depending on the time of receipt of goods or services or
changes to agreed-upon amounts for some obligations.
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 $0.4 to $0.7 million exist. The Company
had previously recorded $0.4 million relating to these additional state income
taxes, including approximately $0.2 million for the payment of interest and
penalties. This amount is included in income taxes payable at
December 31, 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.
Firearms
Legislation
(The
following disclosures within “Firearms Legislation” are identical to the
disclosures within Item 1A-Risk Factors “Firearms Legislation.)
The
sale,
purchase, ownership, and use of firearms are subject to thousands of federal,
state and local governmental regulations. The basic federal laws are
the National Firearms Act, the Federal Firearms Act, and the Gun Control Act
of
1968. These laws generally prohibit the private ownership of fully
automatic weapons and place certain restrictions on the interstate sale of
firearms unless certain licenses are obtained. The Company does not
manufacture fully automatic weapons, other than for the law enforcement market,
and holds all necessary licenses under these federal laws. From time
to time, congressional committees review proposed bills relating to the
regulation of firearms. These proposed bills generally seek either to
restrict or ban the sale and, in some cases, the ownership of various types
of
firearms. Several states currently have laws in effect similar to the
aforementioned legislation.
Until
November 30, 1998, the “Brady Law” mandated a nationwide five-day waiting period
and background check prior to the purchase of a handgun. As of
November 30, 1998, the National Instant Check System, which applies to both
handguns and long guns, replaced the five-day waiting period. The
Company believes that the “Brady Law” and the National Instant Check System have
not had a significant effect on the Company’s sales of firearms, nor does it
anticipate any impact on sales in the future. On September 13, 1994,
the “Crime Bill” banned so-called “assault weapons.” All the
Company’s then-manufactured commercially-sold long guns were exempted by name as
“legitimate sporting firearms.” This ban expired by operation of law
on September 13, 2004. The Company remains strongly opposed to laws
which would restrict the
35
rights
of
law-abiding citizens to lawfully acquire firearms. The Company believes that
the
lawful private ownership of firearms is guaranteed by the Second Amendment
to
the United States Constitution and that the widespread private ownership of
firearms in the United States will continue. However, there can be no
assurance that the regulation of firearms will not become more restrictive
in
the future and that any such restriction would not have a material adverse
effect on the business of the Company.
Firearms
Litigation
(The
following disclosures within “Firearms Litigation” are identical to the
disclosures within Item 1A-Risk Factors “Firearms Litigation” and Note 6 to the
notes to the financial statements-Contingent Liabilities.)
As
of
December 31, 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 Company’s products.
|
The
Company has expended significant amounts of financial resources and management
time in connection with product liability litigation. Management
believes that, in every case involving firearms, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses 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.
36
The
only
case against the Company alleging liability for criminal shootings by
third-parties to ever be permitted to go before a constitutional jury, Hamilton, et al.
v.
Accu-tek, et al., resulted in a defense verdict in favor of the Company
on February 11, 1999. In that case, numerous firearms manufacturers
and distributors had been sued, alleging damages as a result of alleged
negligent sales practices and “industry-wide” liability. The Company
and its marketing and distribution practices were exonerated from any claims
of
negligence in each of the seven cases decided by the jury. In
subsequent proceedings involving other defendants, the New York Court of Appeals
as a matter of law confirmed that 1) no legal duty existed under the
circumstances to prevent or investigate criminal misuses of a manufacturer’s
lawfully made products; and 2) liability of firearms manufacturers could not
be
apportioned under a market share theory. More recently, the New York Court
of
Appeals on October 21, 2003 declined to hear the appeal from the decision of
the
New York Supreme Court, Appellate Division, affirming the dismissal of New
York
Attorney General Eliot Spitzer’s public nuisance suit against the Company and
other manufacturers and distributors of firearms. In its decision, the Appellate
Division relied heavily on Hamilton in
concluding that it was “legally inappropriate,” “impractical,” “unrealistic” and
“unfair” to attempt to hold firearms manufacturers responsible under theories of
public nuisance for the criminal acts of others.
Of
the
lawsuits brought by municipalities, counties or a state Attorney General, twenty
have been concluded: Atlanta– dismissal
by
intermediate Appellate Court, no further appeal; Bridgeport– dismissal
affirmed by Connecticut Supreme Court; County of Camden–
dismissal
affirmed by U.S. Third Circuit Court of Appeals; Miami– dismissal
affirmed by intermediate appellate court, Florida Supreme Court declined review;
New Orleans–
dismissed
by Louisiana Supreme Court, United States Supreme Court declined
review; Philadelphia– U.S.
Third Circuit Court of Appeals affirmed dismissal, no further appeal; Wilmington– dismissed
by trial court, no appeal; Boston– voluntary
dismissal with prejudice by the City at the close of fact discovery; Cincinnati–
voluntarily
withdrawn after a unanimous vote of the city council; Detroit– dismissed
by
Michigan Court of Appeals, no appeal; Wayne County–
dismissed
by Michigan Court of Appeals, no appeal; New York State– Court
of Appeals denied plaintiff’s petition for leave to appeal the Intermediate
Appellate Court’s dismissal, no further appeal; Newark– Superior
Court of New Jersey Law Division for Essex County dismissed the case with
prejudice; City of
Camden– dismissed on July 7, 2003, not reopened; Jersey City–
voluntarily dismissed and not re-filed; St. Louis– Missouri
Supreme Court denied plaintiffs’ motion to appeal Missouri Appellate Court’s
affirmation of dismissal; Chicago– Illinois
Supreme Court affirmed trial court’s dismissal; and Los Angeles City,
Los
Angeles
County, San
Francisco– Appellate Court affirmed summary judgment in favor of
defendants, no further appeal; and Cleveland– dismissed
on January 24, 2006 for lack of prosecution.
37
The
dismissal of the Washington, D.C.
municipal lawsuit was sustained on appeal, but individual plaintiffs were
permitted to proceed to discovery and attempt to identify the manufacturers
of
the firearms used in their shootings as “machine guns” under the city’s “strict
liability” law. On April 21, 2005, the D.C. Court of Appeals, in an
en banc hearing,
unanimously dismissed all negligence and public nuisance claims, but let stand
individual claims based upon a Washington, D.C. act imposing “strict liability”
for manufacturers of “machine guns.” Based on present information,
none of the Company’s products has been identified with any of the criminal
assaults which form the basis of the individual claims. The writ of
certiorari to the United States Supreme Court regarding the constitutionality
of
the Washington, D.C. act was denied and the case was remanded to the trial
court
for further proceedings. The defendants subsequently moved to dismiss
the case based upon the Protection of Lawful Commerce in Arms Act, which motion
was granted on May 22, 2006. The individual plaintiffs and the
District of Columbia, which has subrogation claims in regard to the individual
plaintiffs, appealed. On January 10, 2008, the District of Columbia
Court of Appeals unanimously upheld the dismissal. Plaintiffs have
until February 25, 2008, to move for rehearing en banc.
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. On October 29, 2007, the Indiana Appellate Court affirmed,
holding that the PLCAA does not apply to the City’s claims. A
petition for rehearing was filed in the Appellate Court and denied on January
9,
2008. A Petition to Transfer the appeal to the Supreme Court of
Indiana was filed on February 7, 2008.
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 NAACP’s
claims. On July 21, 2003, Judge Jack B. Weinstein entered an order
dismissing the NAACP lawsuit,
but
this order contained lengthy dicta which defendants believe are contrary to
law
and fact. Appeals by both sides were filed, but plaintiffs withdrew
their appeal. On August 3, 2004, the United States Court of Appeals
for the Second Circuit granted the NAACP’s motion to dismiss the defendants’
appeal of Judge Weinstein’s order denying defendants’ motion to strike his dicta
made in his order dismissing the NAACP’s case, and the defendants’ motion for
summary disposition was denied as moot. The ruling of the Second
Circuit effectively confirmed the decision in favor of defendants and brought
this matter to a conclusion.
Legislation
has been passed in approximately 34 states precluding suits of the type brought
by the municipalities mentioned above. On the Federal level, the
“Protection of Lawful Commerce in Arms Act” was signed by President Bush on
October 26, 2005. The Act requires dismissal of suits against
manufacturers arising out of the lawful sale of their products for harm
resulting from the criminal or unlawful misuse of a firearm by a third
party. The Company is pursuing dismissal of each action involving
such claims, including the municipal cases described above. 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.
38
Punitive
damages, as well as compensatory damages, are demanded in certain of the
lawsuits and claims. Aggregate claimed amounts presently exceed
product liability accruals and applicable insurance coverage. For
claims made after July 10, 2000, coverage is provided on an annual basis for
losses exceeding $5 million per claim, or an aggregate maximum loss of $10
million annually, except for certain new claims which might be brought by
governments or municipalities after July 10, 2000, which are excluded from
coverage.
Product
liability claim payments are made when appropriate if, as, and when claimants
and the Company reach agreement upon an amount to finally resolve all
claims. Legal costs are paid as the lawsuits and claims develop, the
timing of which may vary greatly from case to case. A time schedule
cannot be determined in advance with any reliability concerning when payments
will be made in any given case.
Provision
is made for product liability claims based upon many factors related to the
severity of the alleged injury and potential liability exposure, based upon
prior claim experience. Because our experience in defending these
lawsuits and claims is that unfavorable outcomes are typically not probable
or
estimable, only in rare cases is an accrual established for such
costs. In most cases, an accrual is established only for estimated
legal defense costs. Product liability accruals are periodically
reviewed to reflect then-current estimates of possible liabilities and expenses
incurred to date and reasonably anticipated in the future. Threatened
product liability claims are reflected in our product liability accrual on
the
same basis as actual claims; i.e., an accrual is made for reasonably anticipated
possible liability and claims-handling expenses on an ongoing
basis.
A
range
of reasonably possible loss relating to unfavorable outcomes cannot be
made. However, in product liability cases in which a dollar amount of
damages is claimed, the amount of damages claimed, which totaled $5 million
and
$0 at December 31, 2007 and 2006, respectively, are set forth as an indication
of possible maximum liability that the Company might be required to incur in
these cases (regardless of the likelihood or reasonable probability of any
or
all of this amount being awarded to claimants) as a result of adverse judgments
that are sustained on appeal.
As
of
December 31, 2007 and 2006, the Company was a defendant in 5 and 4 lawsuits,
respectively, involving its products and is aware of other such
claims. During the year ended December 31, 2007 and 2006,
respectively, 2 and 2 claims were filed against the Company, 1 and 2 claims
were
dismissed, and 0 and 2 claims were settled. The average cost
per settled claim was $47,000 in 2006.
During
the years ended December 31, 2007 and 2006, the Company incurred product
liability expense of $1.7 million and $2.5 million, respectively, which includes
the cost of outside legal fees, insurance, and other expenses incurred in the
management and defense of product liability matters.
39
The
Company management monitors the status of known claims and the product liability
accrual, which includes amounts for asserted and unasserted
claims. While it is not possible to forecast the outcome of
litigation or the timing of costs, in the opinion of management, after
consultation with special and corporate counsel, it is not probable and is
unlikely that litigation, including punitive damage claims, will have a material
adverse effect on the financial position of the Company, but may have a material
impact on the Company’s financial results for a particular period.
The
Company has reported all cases instituted against it through September 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.
40
Balance
Sheet Rollforward for Product Liability Reserve
(Dollars
in thousands)
|
Cash
Payments
|
||||||||||||||||||||||||||||
|
Balance
Beginning of Year (a)
|
Accrued
Legal Expense (b)
|
Legal
Fees (c)
|
Settlements
(d)
|
Insurance
Premiums
|
Admin.
Expense
|
Balance
End of Year (a)
|
||||||||||||||||||||||
|
2005
|
$ | 3,132 | $ | 2,514 | $ | (2,935 | ) | (515 | ) | N/A | N/A | $ | 2,196 | |||||||||||||||
|
2006
|
2,196 | 688 | (1,000 | ) | (143 | ) | N/A | N/A | 1,741 | |||||||||||||||||||
|
2007
|
1,741 | 639 | (447 | ) | - | N/A | N/A | 1,933 | ||||||||||||||||||||
Income
Statement Detail for Product Liability Expense
(Dollars
in thousands)
|
Accrued
Legal Expense (b)
|
Insurance
Premium Expense (e)
|
Admin.
Expense (f)
|
Total
Product Liability Expense
|
||||||||||||||||||
|
2005
|
$ | 2,514 | $ | 1,338 | $ | 1,041 | $ | 4,893 | |||||||||||||
|
2006
|
688 | 1,141 | 691 | 2,520 | |||||||||||||||||
|
2007
|
639 | 748 | 299 | 1,686 | |||||||||||||||||
Notes
|
(a)
|
The
beginning and ending liability balances represent accrued legal
fees only.
Settlements and administrative costs are expensed as incurred.
Only in
rare instances is an accrual established for
settlements.
|
|
(b)
|
The
expense accrued in the liability is for legal fees
only.
|
|
(c)
|
Legal
fees represent payments to outside counsel related to product liability
matters.
|
|
(d)
|
Settlements
represent payments made to plaintiffs or allegedly injured parties
in
exchange for a full and complete release of
liability.
|
41
|
(e)
|
Insurance
expense represents the cost of insurance
premiums.
|
|
(f)
|
Administrative
expense represents personnel related and travel expenses of Company
employees and firearm experts related to the management and monitoring
of
product liability matters.
|
There
were no insurance recoveries during any of the above years.
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,
2007
and 2006 indicated that these plans were underfunded by $4.8 million and $7.6
million, respectively, and resulted in a cumulative other comprehensive loss
of
$13.4 million and $12.4 million on the Company’s balance sheet at December 31,
2007 and 2006, respectively.
The
Company expects to realize its deferred tax assets through tax deductions
against future taxable income.
Critical
Accounting
Policies
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make assumptions
and estimates that affect the reported amounts of assets and liabilities as
of
the balance sheet date and revenues and expenses recognized and incurred during
the reporting period then ended. The Company bases estimates on prior
experience,
facts
and
circumstances, and other assumptions, including those reviewed with actuarial
consultants and independent counsel, when applicable, that are believed to
be
reasonable. However, actual results may differ from these
estimates.
The
Company believes the determination of its product liability accrual is a
critical accounting policy. The Company’s management reviews every
lawsuit and claim at the outset and is in contact with independent and corporate
counsel on an ongoing basis. The provision for product liability
claims is based upon many factors, which vary for each case. These
factors include the type of claim, nature and extent of injuries, historical
settlement ranges, jurisdiction where filed, and advice of
counsel. An accrual is established for each lawsuit and claim, when
appropriate, based on the nature of each such lawsuit or claim.
42
Amounts
are charged to product liability expense in the period in which the Company
becomes aware that a claim or, in some instances a threat of claim, has been
made when potential losses or costs of defense can be reasonably
estimated. Such amounts are determined based on the Company’s
experience in defending similar claims. Occasionally, charges are
made for claims made in prior periods because the cumulative actual costs
incurred for that claim, or reasonably expected to be incurred in the future,
exceed amounts already provided. Likewise credits may be taken if
cumulative actual costs incurred for that claim, or reasonably expected to
be
incurred in the future, are less than amounts previously provided.
While
it
is not possible to forecast the outcome of litigation or the timing of costs,
in
the opinion of management, after consultation with independent and corporate
counsel, it is not probable and is unlikely that litigation, including punitive
damage claims, will have a material adverse effect on the financial position
of
the Company, but may have a material impact on the Company’s financial results
for a particular period.
The
Company believes the valuation of its inventory and the related excess and
obsolescence reserve is also a critical accounting
policy. Inventories are carried at the lower of cost, principally
determined by the last-in, first-out (LIFO) method, or market. An
actual valuation of inventory under the LIFO method is made at the end of each
year based on the inventory levels and prevailing inventory costs existing
at
that time.
The
Company determines its excess and obsolescence reserve by projecting the year
in
which inventory will be consumed into a finished product. Given
ever-changing market conditions, customer preferences and the anticipated
introduction of new products, it does not seem prudent nor supportable to carry
inventory at full cost beyond that needed during the next 36
months. Therefore, the Company estimates its excess and obsolescence
inventory reserve based on the following parameters:
|
Projected
Year
Of
Consumption
|
Required
Reserve
%
|
||
|
2007
|
2%
|
||
|
2008
|
10%
|
||
|
2009
|
35%
|
||
|
2010
and
thereafter
|
90%
|
Recent
Accounting
Pronouncements
In
September 2006, FASB issued FAS No. 157, “Fair Value Measurements” (FAS
157). FAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value
measurements. The
43
provisions
of FAS 157 are effective for the fiscal year beginning January 1,
2008. The FASB has deferred the implementation of FAS 157 by one year
for certain non-financial assets and liabilities such as this will be effective
for the fiscal year beginning January 1, 2009. The adoption of FAS
157 is not expected to have a material impact on the Company’s financial
position, results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“FAS 141R”). FAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill
acquired. FAS 141R also establishes disclosure requirements to enable
the evaluation of the nature and financial effects of the business combination.
FAS 141R is effective for the fiscal year beginning January 1, 2009, and will
be
adopted by the Company in the first quarter of 2009. The adoption of
FAS 141R is not expected to have a material impact on the Company’s financial
position, results of operations and cash flows.
Forward-Looking
Statements
and Projections
The
Company may, from time to time, make forward-looking statements and projections
concerning future expectations. Such statements are based on current
expectations and are subject to certain qualifying risks and uncertainties,
such
as market demand, sales levels of firearms, anticipated castings sales and
earnings, the need for external financing for operations or capital
expenditures, the results of pending litigation against the Company including
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.
44
The
Company is exposed to changing interest rates on its investments, which consists
primarily of United States Treasury instruments with short-term (less than
one
year) maturities and cash. The interest rate market risk implicit in
the Company's investments at any given time is low, as the investments mature
within short periods and the Company does not have significant exposure to
changing interest rates on invested cash.
The
Company has not undertaken any actions to cover interest rate market risk and
is
not a party to any interest rate market risk management activities.
A
hypothetical ten percent change in market interest rates over the next year
would not materially impact the Company’s earnings or cash flows. A
hypothetical ten percent change in market interest rates would not have a
material effect on the fair value of the Company’s investments.
ITEM
8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO
FINANCIAL STATEMENTS
|
Sturm,
Ruger & Company, Inc. Financial Statements Reports
of Independent Registered Public Accounting Firm
|
46
|
|
Balance
Sheets at December 31, 2007 and 2006
|
48
|
|
Statements
of Income for the years ended December 31, 2007, 2006 and
2005
|
50
|
|
Statements
of Stockholders’ Equity for the years ended December 31, 2007, 2006 and
2005
|
51
|
|
Statements
of Cash Flows for the years ended December 31, 2007, 2006 and
2005
|
52
|
|
Notes
to financial statements
|
53
|
45
Report
of Independent Registered Public
Accounting Firm
To
the Board of Directors and
Stockholders
Sturm,
Ruger & Company,
Inc.
We
have audited Sturm, Ruger &
Company, Inc.'s internal control over financial reporting as of December
31,
2007, based oncriteria
established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Sturm, Ruger & Company,
Inc.’s management is responsible for maintaining effective internal control
over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in Management’s Report on Internal
Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express an opinion on the Company's internal control
over
financial reporting based on our audit.
We
conducted our audit in accordance
with the standards of the Public Company Accounting Oversight
Board
(United
States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting
was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the
risk
that a material weakness exists, and testing and evaluating the design
and
operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A
company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with
the
policies or procedures may deteriorate.
In
our opinion, Sturm, Ruger &
Company, Inc. maintained, in all material respects, effective internal
control
over financial reporting as of December 31, 2007, based oncriteria
established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We
have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United
States),
the balance sheets of Sturm, Ruger & Company, Inc. as of December 31, 2007
and 2006, and the related statements of income, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2007
and our
report dated February 22, 2008 expressed an unqualified
opinion.
/s/
McGladrey & Pullen,
LLP
Stamford,
Connecticut
February22,
2008
46
Report
of Independent Registered Public
Accounting Firm
To
the Board of Directors and
Stockholders
Sturm,
Ruger & Company,
Inc.
We
have audited the balance sheets of
Sturm, Ruger & Company, Inc. as of December 31, 2007 and 2006, and the
related statements of income, stockholders’ equity and cash flows for each of
the three years in the period ended December 31, 2007. Our audits also
included
the financial statement schedule of Sturm, Ruger & Company, Inc. listed in
Item 15(a). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of Sturm, Ruger & Company, Inc. as of December 31, 2007 and 2006,
and the results of its operations and its cash flows for each of the three
years
in the period ended December 31, 2007, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We
also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United
States),
Sturm, Ruger & Company, Inc.’s internal control over financial reporting as
of December 31, 2007, based oncriteria
established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)and our report dated
February 22, 2008
expressed an unqualified opinion on the effectiveness of Sturm, Ruger &
Company, Inc.’s internal control over financial reporting.
/s/
McGladrey & Pullen,
LLP
Stamford,
Connecticut
February
22, 2008
47
Balance
Sheets
(Dollars
in thousands, except per share data)
|
December
31,
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 5,106 | $ | 7,316 | ||||
|
Short-term
investments
|
30,504 | 22,026 | ||||||
|
Trade
receivables, net
|
15,636 | 18,007 | ||||||
|
Gross
inventories:
|
64,330 | 87,477 | ||||||
|
Less
LIFO reserve
|
(46,890 | ) | (57,555 | ) | ||||
|
Less
excess and obsolescence reserve
|
(4,143 | ) | (5,516 | ) | ||||
|
Net
inventories
|
13,297 | 24,406 | ||||||
|
Deferred
income taxes
|
5,878 | 8,347 | ||||||
|
Prepaid
expenses and other current assets
|
3,091 | 1,683 | ||||||
|
Total
Current Assets
|
73,512 | 81,785 | ||||||
|
Property,
Plant, and Equipment
|
126,496 | 128,042 | ||||||
|
Less
allowances for depreciation
|
(104,418 | ) | (105,081 | ) | ||||
|
Net
property, plant and equipment
|
22,078 | 22,961 | ||||||
|
Deferred
income taxes
|
3,626 | 3,630 | ||||||
|
Other
assets
|
2,666 | 8,690 | ||||||
|
Total
Assets
|
$ | 101,882 | $ | 117,066 | ||||
See
accompanying notes to financial statements.
48
|
December
31,
|
2007
|
2006
|
||||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Trade
accounts payable and accrued expenses
|
$ | 8,102 | $ | 6,342 | ||||
|
Product
liability
|
1,208 | 904 | ||||||
|
Employee
compensation and benefits
|
4,860 | 6,416 | ||||||
|
Workers’
compensation
|
5,667 | 6,547 | ||||||
|
Income
taxes payable
|
411 | 1,054 | ||||||
|
Total
Current Liabilities
|
20,248 | 21,263 | ||||||
|
Accrued
pension liability
|
4,840 | 7,640 | ||||||
|
Product
liability
|
725 | 837 | ||||||
|
Contingent
liabilities (Note 6)
|
- | - | ||||||
|
Stockholders’
Equity
|
||||||||
|
Common
stock, non-voting, par value $1:
Authorized
shares – 50,000; none issued
|
||||||||
|
Common
stock, par value $1:
Authorized
shares – 40,000,000
2007-22,787,812
issued,
20,571,817
outstanding
2006-22,638,700
issued and outstanding
|
22,788 | 22,639 | ||||||
|
Additional
paid-in capital
|
1,836 | 2,615 | ||||||
|
Retained
earnings
|
84,834 | 74,505 | ||||||
|
Less:
Treasury stock – 2,215,995 shares, at cost
|
(20,000 | ) | - | |||||
|
Accumulated
other comprehensive loss
|
(13,389 | ) | (12,433 | ) | ||||
|
Total
Stockholders’ Equity
|
76,069 | 87,326 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 101,882 | $ | 117,066 | ||||
See
accompanying notes to financial statements.
49
Statements
of
Income
(In
thousands, except per share data)
|
Year
ended December 31,
|
2007
|
2006
|
2005
|
|||||||||
|
Net
firearms sales
|
$ | 144,222 | $ | 139,110 | $ | 132,805 | ||||||
|
Net
castings sales
|
12,263 | 28,510 | 21,917 | |||||||||
|
Total
net sales
|
156,485 | 167,620 | 154,722 | |||||||||
|
Cost
of products sold
|
117,186 | 139,610 | 124,826 | |||||||||
|
Gross
profit
|
39,299 | 28,010 | 29,896 | |||||||||
|
Expenses:
|
||||||||||||
|
Selling
|
15,092 | 15,810 | 17,271 | |||||||||
|
General
and administrative
|
13,678 | 12,110 | 10,788 | |||||||||
|
Pension
plan curtailment charge
|
1,143 | - | - | |||||||||
|
Other
operating expenses (income), net
|
271 | (832 | ) | 483 | ||||||||
|
Total
expenses
|
30,184 | 27,088 | 28,542 | |||||||||
|
Operating
income
|
9,115 | 922 | 1,354 | |||||||||
|
Other
income:
|
||||||||||||
|
Gain
on sale of real estate
|
5,168 | - | - | |||||||||
|
Interest
income
|
2,368 | 1,062 | 786 | |||||||||
|
Other
income (expense), net
|
8 | (141 | ) | (698 | ) | |||||||
|
Total
other income, net
|
7,544 | 921 | 88 | |||||||||
|
Income
before income taxes
|
16,659 | 1,843 | 1,442 | |||||||||
|
Income
taxes
|
6,330 | 739 | 578 | |||||||||
|
Net
income
|
$ | 10,329 | $ | 1,104 | $ | 864 | ||||||
|
Basic
and Diluted Earnings Per Share
|
$ | 0.46 | $ | 0.04 | $ | 0.03 | ||||||
|
Cash
Dividends Per Share
|
$ | 0.00 | $ | 0.00 | $ | 0.30 | ||||||
See
accompanying notes to financial statements.
50
Statements
of Stockholders’
Equity
(Dollars
in thousands)
|
Common
Stock
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other Comprehensive Loss
|
Total
|
|||||||||||||||||||
|
Balance
at December 31, 2004
|
$ | 26,911 | $ | 2,508 | $ | 101,543 | - | $ | (10,275 | ) | $ | 120,687 | ||||||||||||
|
Net
income
|
864 | 864 | ||||||||||||||||||||||
|
Additional
minimum pension
liability,
net of deferred taxes
of
$1,267
|
(1,900 | ) | (1,900 | ) | ||||||||||||||||||||
|
Comprehensive
income
|
(1,036 | ) | ||||||||||||||||||||||
|
Cash
dividends
|
(8,073 | ) | (8,073 | ) | ||||||||||||||||||||
|
Balance
at December 31, 2005
|
26,911 | 2,508 | 94,334 | - | (12,175 | ) | 111,578 | |||||||||||||||||
|
Net
income
|
1,104 | 1,104 | ||||||||||||||||||||||
|
Pension
liability, net of deferred
taxes
of $172
|
(258 | ) | (258 | ) | ||||||||||||||||||||
|
Stock-based
compensation, net
of
tax
|
107 | |||||||||||||||||||||||