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, 2009
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 if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES
o NO
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES
o NO
x
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 Smaller reporting
company 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, 2009:
Common
Stock, $1 par value - $233,905,000
The
number of shares outstanding of the registrant's common stock as of February 19,
2010:
Common
Stock, $1 par value - 19,072,780 shares
DOCUMENTS
INCORPORATED BY REFERENCE.
Portions
of the registrant’s Proxy Statement relating to the 2010 Annual Meeting of
Stockholders to be held April 28, 2010 are incorporated by reference into Part
III (Items 10 through 14) of this Report.
1
TABLE OF CONTENTS
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PART
I
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Item
1.
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4
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Item
1A.
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10
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Item
1B.
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15
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Item
2.
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16
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Item
3.
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16
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Item
4.
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17
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PART
II
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Item
5.
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18
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Item
6.
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21
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Item
7.
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22
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Item
7A.
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45
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Item
8.
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46
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Item
9.
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74
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Item
9A.
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74
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Item
9B.
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75
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PART
III
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Item
10.
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76
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Item
11.
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76
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Item
12.
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76
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Item
13.
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76
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Item
14.
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76
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2
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PART
IV
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Item
15.
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77
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82
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83
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88
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Exhibits
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90
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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
ITEM
1—BUSINESS
Company
Overview
Sturm,
Ruger & Company, Inc. (the “Company”) is principally engaged in the design,
manufacture, and sale of firearms to domestic
customers. Approximately 98% of the Company’s total sales for the
year ended December 31, 2009 were from the firearms segment, and approximately
2% were from investment castings. Export sales represent less than 4%
of firearms sales. The Company’s design and manufacturing operations
are located in the United States and most 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 approximately
2% of the Company’s total sales for the year ended December 31,
2009.
For the
years ended December 31, 2009, 2008, and 2007, net sales attributable to the
Company's firearms operations were approximately, $266.6 million, $174.4 million
and $144.2 million or approximately 98%, 96%, and 92%, 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:
|
Rifles
|
Shotguns
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||||||
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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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·
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Autoloading
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|||||
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·
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Bolt-action
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||||||
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·
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Modern
sporting
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||||||
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Pistols
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Revolvers
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||||||
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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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·
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Centerfire
autoloading
|
·
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Double
action
|
||||
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 $102.2 million, $69.4 million,
and $64.9 million, of revenues for the years 2009, 2008 and 2007,
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
$1.2 million, $1.5 million, and $3.8 million of revenues for the years 2009,
2008 and 2007, 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 $87.5 million, $52.5
million, and $33.4 million of revenues for the years 2009, 2008 and 2007,
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 $58.3 million, $41.0
million, and $35.6 million of revenues for the years 2009, 2008, and 2007,
respectively.
The
Company also manufactures and sells accessories and replacement parts for its
firearms. These sales accounted for approximately $17.4 million, $9.9
million, and $6.5 million of revenues for the years 2009, 2008 and 2007,
respectively.
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 approximately
2% of the Company’s total sales for the year ended December 31,
2009.
Net sales
attributable to the Company’s investment casting operations (excluding
intercompany transactions) accounted for approximately $4.4 million, $7.1
million, and $12.3 million, or approximately 2%, 4%, and 8% of the Company’s
total net sales for 2009, 2008, and 2007, 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.
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, 14
distributors service the domestic commercial market, with an additional 19
distributors servicing the domestic law enforcement market and two distributors
servicing the Canadian market. Five of the Company’s distributors service both
the domestic commercial market and the domestic law enforcement
market.
One
customer accounted for approximately 15%, 18% and 13% of net firearm sales and
15%, 17% and 12% of consolidated sales in 2009, 2008, and 2007,
respectively. A second customer accounted for approximately 11%, 13%,
and 13% of net firearms sales and 11%, 12%, and 12% of consolidated net sales in
2009, 2008, and 2007, respectively. A third customer accounted for
approximately 11%, 12%, and 12% of net firearms sales and 11%, 11%, and 11% of
consolidated net sales in 2009, 2008, and 2007, respectively. A
fourth customer accounted for approximately 11% and 10% of the Company's net
firearms sales and consolidated net sales in 2009 and 2008,
respectively. A fifth customer accounted for approximately 10% of net
firearms sales and consolidated sales in 2009. A sixth customer
accounted for 11% of net firearm sales and 10% of consolidated sales in
2007.
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.
Effective
December 1, 2006 the Company began receiving firm, non-cancelable purchase
orders on a frequent basis from each of its distributors, with most orders for
immediate delivery. As of February 1, 2010, the order backlog was
approximately $70 million. As of February 1, 2009, order backlog was
approximately $87 million.
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 approximately 24
firearms and firearms component manufacturers. The investment
castings segment provides castings for the Company’s firearms
segment.
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.
Employees
As of
February 1, 2010, the Company employed approximately 1,150 full-time employees
of which approximately 54% had at least ten years of service with the
Company.
None of
the Company's employees are subject to a collective bargaining
agreement.
Research and
Development
In 2009,
2008, and 2007, the Company spent approximately $2.0 million, $1.5 million, and
$0.7 million, respectively, on research activities relating to the development
of new products and the improvement of existing products. As of
February 15, 2010, the Company had approximately 17 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.
|
Name
|
Age
|
Position
With Company
|
|
Michael
O. Fifer
|
52
|
Chief
Executive Officer
|
|
Thomas
A. Dineen
|
41
|
Vice
President, Treasurer and Chief Financial Officer
|
|
Christopher
J. Killoy
|
51
|
Vice
President of Sales and Marketing
|
|
Mark
T. Lang
|
53
|
Group
Vice President
|
|
Thomas
P. Sullivan
|
49
|
Vice
President of Newport Operations
|
|
Leslie
M. Gasper
|
56
|
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.
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.
Mark T.
Lang joined the Company as Group Vice President on February 18,
2008. Mr. Lang is responsible for management of the Prescott Firearms
Division and the Company’s acquisition efforts. 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.
ITEM 1A—RISK FACTORS
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 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 Note 17 of the
notes to the financial statements-Contingent Liabilities.)
As of
December 31, 2009, the Company was a defendant in approximately seven (7)
lawsuits and is aware of certain other such claims.
Lawsuits
involving the Company’s products generally fall into one of two
categories:
|
(i)
|
Those
that claim damages from the Company related to allegedly defective product
design and/or manufacture which stem from a specific
incident. Pending lawsuits and claims are based principally on
the theory of “strict liability” but also may be based on negligence,
breach of warranty, and other legal theories;
or
|
|
(ii)
|
Those
brought by cities or other governmental entities, and individuals against
firearms manufacturers, distributors and retailers seeking to recover
damages allegedly arising out of the misuse of firearms by third-parties
in the commission of homicides, suicides and other shootings involving
juveniles and adults.
|
As to
lawsuits of the first type, 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.
The only
remaining lawsuit of the second type is the lawsuit filed by the City of
Gary. The complaint in that case seeks damages, among other things,
for the costs of medical care, police and emergency services, public health
services, and other services as well as punitive damages. In
addition, nuisance abatement and/or injunctive relief is sought to change the
design, manufacture, marketing and distribution practices of the various
defendants. The suit alleges, among other claims, negligence in the
design of products, public nuisance, negligent distribution and marketing,
negligence per se and deceptive advertising. The case does not allege
a specific injury to a specific individual as a result of the misuse or use of
any of the Company’s products. Market share allegations have been held
inapplicable by the Indiana Supreme Court.
The
Indiana Court of Appeals affirmed the dismissal of the Gary case by the
trial court, but the Indiana Supreme Court reversed this dismissal and remanded
the case for discovery proceedings on December 23, 2003. On November
23, 2005, the defendants filed a motion to dismiss pursuant to the 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. On February 8, 2008, a Petition to
Transfer the appeal to the Supreme Court of Indiana was filed. The
petition was denied on January 13, 2009 and the case was remanded to the trial
court. No trial date has been set.
In
addition to the foregoing, on August 18, 2009, the Company was served with a
complaint captioned Steamfitters Local 449
Pension Fund, on Behalf of Itself and All Others Similarly Situated v. Sturm,
Ruger & Co. Inc., et
al.
pending in the United States District Court for the District of
Connecticut. The complaint seeks unspecified damages for alleged
violations of the Securities Exchange Act of 1934 and is a purported class
action on behalf of purchasers of the Company’s common stock between April 23,
2007 and October 29, 2007. On October 9, 2009, the Company waived
service of a complaint captioned Alan R. Herrett,
Individually and On Behalf of All Others Similarly Situated v. Sturm, Ruger
& Co. Inc., et
al.
pending in the United States District Court for the District of
Connecticut. This matter is based upon the same facts and basic
allegations set forth in the Steamfitters Local 449
Pension Fund litigation. On October 12, 2009, a motion to
consolidate the two actions was filed by counsel for the
Steamfitters. On January 11, 2010, the court entered an order
consolidating the two matters. The January 11, 2010 order also sets a
briefing schedule for plaintiffs to file a consolidated amended complaint and
for defendants, including the Company, to file a responsive
pleading.
On
September 11, 2009, the Company was served with a complaint captioned Secretary of Labor v. Sturm,
Ruger & Co. Inc. pending before the Occupational Safety and Health
Review Commission. The complaint arises out of a Notice of Contest
filed by the Company pursuant to an OSHA inspection conducted at the Company’s
manufacturing facility in Newport, New Hampshire. The matter was settled by
agreement of the parties in December 2009.
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 $7.7 million
and $12.2 at December 31, 2009 and 2008, 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, 2009 and 2008, the Company was a defendant in 5 and 6 lawsuits,
respectively, involving its products and is aware of other such
claims. During the year ended December 31, 2009 and 2008,
respectively, 2 and 1 claims were filed against the Company, 2 and 0 claims were
dismissed, and 1 and 0 claims were settled.
During
the years ended December 31, 2009 and 2008, the Company incurred product
liability expense of $1.6 million and $0.9 million, respectively, which includes
the cost of outside legal fees, insurance, and other expenses incurred in the
management and defense of product liability matters.
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.
A
roll-forward of the product liability reserve and detail of product liability
expense for the three years ended December 31, 2009 follows:
Balance
Sheet Roll-forward 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) |
|
|
2007
|
$1,741
|
$639
|
$(447)
|
$ -
|
N/A
|
N/A
|
$1,933
|
|
2008
|
1,933
|
176
|
(358)
|
(7)
|
N/A
|
N/A
|
1,744
|
|
2009
|
1,744
|
873
|
(274)
|
(261)
|
N/A
|
N/A
|
2,082
|
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 |
||||
|
2007
|
$639
|
$748
|
$299
|
$1,686
|
|||
|
2008
|
176
|
739
|
-
|
915
|
|||
|
2009
|
873
|
745
|
-
|
1,618
|
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.
|
|
(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.
ITEM
1B—UNRESOLVED STAFF COMMENTS
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 four other facilities that were not used in its manufacturing
operations in 2009:
|
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)(a)
|
45,000
|
Owned
|
Firearms
|
|
Enfield,
Connecticut
|
10,000
|
Leased
|
Firearms
|
|
(a)
|
In
2005, the Company relocated its firearms shipping department into a
portion of the Dorr Woolen Building. In 2006, certain of the
Company’s sales department personnel were moved into the same
facility. Approximately 255,000 square feet of the Dorr Woolen
Building was demolished in the fall of
2009.
|
There are
no mortgages or any other major encumbrance on any of the real estate owned by
the Company.
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.
ITEM 3—LEGAL PROCEEDINGS
The
nature of the legal proceedings against the Company is discussed at Note 17 to
this Form 10-K report, which is incorporated herein by reference.
The
Company has reported all cases instituted against it through October 3, 2009,
and the results of those cases, where terminated, to the SEC on its previous
Form 10-Q and 10-K reports, to which reference is hereby made.
One case
was formally instituted against the Company during the three months ending
December 31, 2009:
On
October 9, 2009, the Company waived service of a complaint captioned Alan R. Herrett,
Individually and On Behalf of All Others Similarly Situated v. Sturm, Ruger
& Co., Inc., et
al.
pending in the United States District Court for the District of
Connecticut. This matter is based upon the same facts and basic
allegations set forth in the previously reported Steamfitters 449 Local
Pension Fund on Behalf of Itself and All Others Similarly Situated v. Sturm,
Ruger & Co., Inc., et
al. On October 12,
2009, a motion to consolidate the two actions was filed by counsel for the
Steamfitters. On January 11, 2010, the court entered an order
consolidating the two matters. The January 11, 2010 order also sets a
briefing schedule for plaintiffs to file a consolidated amended complaint and
for defendants, including the Company, to file a responsive
pleading.
During
the three months ending December 31, 2009, no previously reported cases were
settled.
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, 2010, the Company had 1,834 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.
|
High
|
Low
|
Dividends
Per
Share
|
||||||||||
|
2008:
|
||||||||||||
|
First
Quarter
|
$ | 9.32 | $ | 7.32 | - | |||||||
|
Second
Quarter
|
8.88 | 6.95 | - | |||||||||
|
Third
Quarter
|
7.84 | 5.60 | - | |||||||||
|
Fourth
Quarter
|
7.44 | 4.36 | - | |||||||||
|
2009:
|
||||||||||||
|
First
Quarter
|
$ | 13.06 | $ | 5.98 | - | |||||||
|
Second
Quarter
|
13.71 | 10.08 | $ | 0.086 | ||||||||
|
Third
Quarter
|
15.20 | 11.16 | 0.123 | |||||||||
|
Fourth
Quarter
|
13.70 | 9.61 | 0.096 | |||||||||
Issuer Repurchase of Equity
Securities
None.
|
Comparison
of Five-Year Cumulative Total Return*
|
|
Sturm,
Ruger & Co., Inc., Standard & Poor’s 500,Recreation And Value Line
Smith & Wesson Holding
Index
|
|
(Performance
Results Through 12/31/09)
|
Assumes
$100 invested at the close of trading 12/04 in Sturm, Ruger & Co., Inc.
common stock, Standard
& Poor’s 500, Recreation, and Smith & Wesson Holding.
*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.
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||
|
Sturm,
Ruger & Co., Inc.
|
100.00 | 80.42 | 110.13 | 94.99 | 68.49 | 114.33 | ||||||||||||||||||
|
Standard
& Poor’s 500
|
100.00 | 103.00 | 117.03 | 121.16 | 74.53 | 92.01 | ||||||||||||||||||
|
Recreation
|
100.00 | 93.29 | 105.16 | 93.87 | 59.33 | 97.11 | ||||||||||||||||||
|
Smith
& Wesson Holding
|
100.00 | 224.57 | 590.86 | 348.57 | 129.71 | 233.71 | ||||||||||||||||||
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,
2009:
|
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
|
590,000
|
$7.78
per share
|
-
|
|
2001
Stock Option Plan for Non-Employee Directors
|
160,000
|
$8.60
per share
|
-
|
|
2007
Stock Incentive Plan
|
808,250
|
$10.04
per share
|
1,733,750
|
|
Equity
compensation plans not approved by security holders
|
|||
|
None.
|
|||
|
Total
|
1,558,250
|
$9.00
per share
|
1,733,750
|
|
*
|
Restricted
stock units are settled in shares of the Company's common stock on a
one-for-one basis. Accordingly, such units have been excluded
for purposes of computing the weighted-average exercise
price."
|
ITEM
6—SELECTED FINANCIAL DATA
|
(Dollars
in thousands, except per share data)
|
||||||||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Net
firearms sales
|
$ | 266,566 | $ | 174,416 | $ | 144,222 | $ | 139,110 | $ | 132,805 | ||||||||||
|
Net
castings sales
|
4,419 | 7,067 | 12,263 | 28,510 | 21,917 | |||||||||||||||
|
Total
net sales
|
270,985 | 181,483 | 156,485 | 167,620 | 154,722 | |||||||||||||||
|
Cost
of products sold
|
183,380 | 138,730 | 117,186 | 139,610 | 124,826 | |||||||||||||||
|
Gross
profit
|
87,605 | 42,753 | 39,299 | 28,010 | 29,896 | |||||||||||||||
|
Income
before income taxes
|
44,360 | 13,978 | 16,659 | 1,843 | 1,442 | |||||||||||||||
|
Income
taxes
|
16,857 | 5,312 | 6,330 | 739 | 578 | |||||||||||||||
|
Net
income
|
$ | 27,503 | $ | 8,666 | $ | 10,329 | $ | 1,104 | $ | 864 | ||||||||||
|
Basic
and diluted earnings per share
|
1.44 | 0.43 | 0.46 | 0.04 | 0.03 | |||||||||||||||
|
Cash
dividends per share
|
$ | 0.31 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.30 | ||||||||||
|
December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Working
capital
|
$ | 65,377 | $ | 46,250 | $ | 53,264 | $ | 60,522 | $ | 83,522 | ||||||||||
|
Total
assets
|
141,679 | 112,760 | 101,882 | 117,066 | 139,639 | |||||||||||||||
|
Total
stockholders’ equity
|
95,516 | 65,603 | 76,069 | 87,326 | 111,578 | |||||||||||||||
|
Book
value per share
|
$ | 5.01 | $ | 3.44 | $ | 3.57 | $ | 3.86 | $ | 4.15 | ||||||||||
|
Return
on stockholders’ equity
|
34.1 | % | 12.2 | % | 12.6 | % | 1.3 | % | 0.8 | % | ||||||||||
|
Current
ratio
|
3.0
to 1
|
2.6
to 1
|
3.6
to 1
|
3.8
to 1
|
5.5
to 1
|
|||||||||||||||
|
Common
shares outstanding
|
19,072,800 | 19,047,300 | 20,571,800 | 22,638,700 | 26,910,700 | |||||||||||||||
|
Number
of stockholders of record
|
1,827 | 1,841 | 1,769 | 1,851 | 1,922 | |||||||||||||||
|
Number
of employees
|
1,145 | 1,145 | 1,154 | 1,108 | 1,250 | |||||||||||||||
|
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 98% of the Company’s total sales for 2009
were firearms sales, and 2% were investment castings sales. Export
sales represent less than 4% of total sales. The Company’s design and
manufacturing operations are located in the United States and almost all product
content is domestic. The Company’s firearms are sold through a select
number of independent wholesale distributors, principally to the commercial
sporting market.
The
Company manufactures investment castings made from steel alloys for internal use
in its firearms and utilizes excess investment casting capacity to manufacture
and sell castings to unaffiliated, third-party customers.
Because
most of the Company’s competitors are not subject to public filing requirements
and industry-wide data is generally not available in a timely manner, the
Company is unable to compare its performance to other companies or specific
current industry trends. Instead, the Company measures itself against
its own historical results.
The
Company does not consider its overall firearms business to be predictably
seasonal; however, sales of many models of firearms are usually lower in the
third quarter of the year.
|
Results of Operations
- 2009
|
|
Product
Demand
|
Incoming
unit orders in 2009 increased 23% from 2008, and 98% from 2007. The
extraordinary retail demand that began in the latter months of 2008 caused
independent distributors to place very large orders for our products in 2009,
particularly during the first half of the year when orders from distributors
substantially exceeded their sales of our products to retailers. This
resulted in the Company having an abnormally large backlog of unshipped
distributor orders throughout 2009.
The
Company has temporarily placed less emphasis on incoming orders as a proxy for
market demand. Instead, the Company is using the following estimate
of sell-through of our products from distributors to retailers as a proxy for
actual market demand and as a metric for planning production. Note,
however, that we believe a portion of the 2009 sell-through from distributors to
retailers resulted in an inventory build at retail rather than sales from
retailers to consumers.
|
2009
|
2008
|
2007
|
||||||||||
|
Units
Ordered
|
958,700 | 776,400 | 485,000 | |||||||||
|
Estimated
Units Sold from Distributors to Retailers (1)
|
887,400 | 631,000 | 476,900 | |||||||||
|
Units
on Backorder
|
181,000 | 175,900 | 36,500 | |||||||||
|
(1)
|
The
estimates for each period were calculated by taking the beginning
inventory at the distributors, plus shipments from the Company to
distributors during the period, less the ending inventory at distributors.
These estimates are only a proxy for actual market demand as
they:
|
|
|
·
|
Rely
on data provided by independent distributors that are not verified by the
Company,
|
|
|
·
|
Do
not consider potential timing issues within the distribution channel,
including goods-in-transit, and
|
|
·
|
Do
not consider fluctuations in inventory at
retail.
|
Estimated
sell-through of our products from distributors to retail in 2009 increased by
approximately 40% from 2008, and 86% from 2007. This annual growth
substantially exceeds the 10% and 25% growth in National Instant Criminal
Background Check System (NICS*) background checks over the same
periods. This suggests the likelihood of market share gain by the
Company during the past two years, and was the result of the introduction of new
products and increased production and shipments of legacy
products. The total number of NICS background checks for the past
three years follows:
Number of
NICS* background checks (in 000’s)
|
2009
|
2008
|
2007
|
||||||||||
|
Total
NICS* Background
Checks
|
14,000 | 12,700 | 11,200 | |||||||||
|
|
*
|
While
NICS background checks are not a precise measure of retail activity, they
are commonly used as a proxy for retail demand. NICS background
checks are performed when the ownership of most firearms, either new or
used, is transferred by a Federal Firearms Licensee. NICS
background checks are also performed for permit applications, permit
renewals, and other administrative reasons.
|
Annual Summary Unit
Data
Firearms
unit data for orders, production, shipments and backorders follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Units
Ordered
|
958,700 | 776,400 | 485,000 | |||||||||
|
Units
Produced
|
934,200 | 600,600 | 464,900 | |||||||||
|
Units
Shipped
|
925,800 | 626,500 | 481,800 | |||||||||
|
Average
Sales Price
|
$ | 288 | $ | 278 | $ | 299 | ||||||
|
Units
on Backorder
|
181,000 | 175,900 | 36,500 | |||||||||
The
Company’s finished goods unit inventory levels increased slightly in 2009 from
the recent historic low levels at the end of 2008. Strong consumer
demand drove down inventories at both the Company and distributors in
2008. Increased production and shipments to distributors allowed for
the replenishment of inventory at distributors, and to a lesser extent at the
Company, during the latter months of 2009. Inventory data
follows:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Units
– Company Inventory
|
20,100 | 12,400 | 38,300 | |||||||||
|
Units
– Distributor Inventory (2)
|
96,200 | 57,500 | 62,000 | |||||||||
|
Total
inventory(3)
|
116,300 | 69,900 | 100,300 | |||||||||
|
|
(2)
|
Distributor
ending inventory as provided by the independent distributors of the
Company’s products. These numbers do not include
goods-in-transit inventory that has been shipped from the Company but not
yet received by the distributors.
|
|
|
(3)
|
This
total does not include inventory at retailers. The Company does
not have access to data on retailer
inventories.
|
Orders Received and Ending
Backlog
(in
millions except average sales price, including Federal Excise Tax):
|
2009
|
2008
|
2007
|
||||||||||
|
Orders
Received
|
$ | 299.4 | $ | 233.8 | $ | 156.4 | ||||||
|
Average
Sales Price of Orders Received (4)
|
$ | 312 | $ | 301 | $ | 322 | ||||||
|
Ending
Backlog
|
$ | 59.6 | $ | 47.8 | $ | 17.9 | ||||||
|
Average
Sales Price of Ending Backlog (4)
|
$ | 330 | $ | 269 | $ | 444 | ||||||
|
|
(4)
|
Average
sales price for orders received and ending backlog is net of Federal
Excise Tax of 10% for handguns and 11% for long
guns.
|
The
increase in orders received and the ending backlog is due to the strong demand
for new products and the increase in overall market demand that started in late
2008.
In 2009,
the average sales price of orders received and ending backlog increased from
2008 due to a significant increase in orders for certain higher-priced rifles,
including the SR-556, which was introduced in 2009.
In 2008,
the average sales price of orders received and ending backlog decreased from
2007 due to:
|
·
|
the
large quantity of new handgun products in the backlog with lower unit
sales prices, and
|
|
·
|
the
cancellation of $3.7 million of orders for Gold Label side-by-side
shotguns with higher unit sales prices, that were received prior to
2008.
|
Production
Production
rates, which started to increase late in 2007, continued to improve throughout
2008 and 2009. In response to the significant increase in demand in
2009, the Company increased production in 2009 by 56% from 2008 and 101% from
2007.
This
increased production was facilitated by the Company’s implementation of lean
manufacturing, an ongoing process that started in 2006, including:
|
·
|
transitioning
from large-scale batch production to lean
manufacturing,
|
|
·
|
establishing
single-piece flow cells for small parts
manufacturing,
|
|
·
|
refining
existing cells,
|
|
·
|
developing
pull systems and managing vendors,
|
|
·
|
increasing
capacity for the products with the greatest unmet demand,
and
|
|
·
|
re-engineering
existing product designs for improved
manufacturability.
|
Year
ended December 31, 2009, as compared to year ended December 31,
2008:
Sales
Consolidated
net sales were $271.0 million in 2009. This represents an increase of
$89.5 million or 49.3% from 2008 consolidated net sales of $181.5
million.
Firearms
segment net sales were $266.6 million in 2009. This represents an
increase of $92.2 million or 52.8% from 2008 firearm net sales of $174.4
million. Firearms unit shipments increased 47.8% in 2009 due to
increased shipments of pistols, rifles and revolvers. This increase
is attributable to the introduction of new products in 2009, increased
production of mature products, and increased overall industry
demand. A shift in product mix toward firearms with higher unit sales
prices, including some new products, resulted in the relatively lower percentage
increase in unit shipments compared to the percentage increase in
sales.
Casting
segment net sales were $4.4 million in 2009. This represents a
decrease of $2.7 million or 37.5% from 2008 casting sales of $7.1
million.
Cost of Products Sold and
Gross Margin
Consolidated
cost of products sold was $183.4 million in 2009. This represents an
increase of $44.7 million or 32.2% from 2008 consolidated cost of products sold
of $138.7 million.
The gross
margin as a percent of sales was 32.3% in 2009. This represents an
increase from the 2008 gross margin of 23.6% as illustrated below:
(in
thousands)
|
Year
Ended December 31
|
2009
|
2008
|
||||||||||||||
|
Net
sales
|
$ | 270,985 | 100.0 | % | $ | 181,483 | 100.0 | % | ||||||||
|
Cost
of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability and product recall
|
183,540 | 67.7 | % | 136,172 | 75.0 | % | ||||||||||
|
LIFO
expense (income)
|
(4,216 | ) | (1.6 | )% | 781 | 0.4 | % | |||||||||
|
Overhead
rate adjustments to inventory
|
1,324 | 0.5 | % | (1,389 | ) | (0.7 | )% | |||||||||
|
Labor
rate adjustments to inventory
|
436 | 0.2 | % | (1,251 | ) | (0.7 | )% | |||||||||
|
Product
liability
|
1,618 | 0.6 | % | 915 | 0.5 | % | ||||||||||
|
Product
recalls
|
678 | 0.3 | % | 3,502 | 1.9 | % | ||||||||||
|
Total
cost of products sold
|
183,380 | 67.7 | % | 138,730 | 76.4 | % | ||||||||||
|
Gross
margin
|
$ | 87,605 | 32.3 | % | $ | 42,753 | 23.6 | % | ||||||||
Cost of products sold,
before LIFO, overhead and labor rate adjustments to inventory, product
liability, and product recall- In 2009, cost of products sold, before
LIFO, overhead and labor rate adjustments to inventory, product liability, and
product recall decreased as a percentage of sales by 7.3% compared to
2008. The decrease was primarily related to increased comparable
period sales and production while holding fixed-overhead expenses fairly
stable. Labor efficiency also improved in 2009.
LIFO- Gross
inventories were reduced by $8.8 million in 2009 and $4.5 million in
2008. In 2009, the Company recognized a LIFO credit resulting in
decreased cost of products sold of $4.2 million. In 2008, the Company
recognized a LIFO charge and increased cost of products sold of $0.8
million.
Overhead Rate Change-
The net impact on inventory in 2009 from the change in the overhead rates used
to absorb overhead expenses into inventory was a decrease of $1.3 million,
reflecting improvement in overhead efficiency. This decrease in
inventory value resulted in a corresponding increase to cost of sales in
2009. In 2008, the change in inventory value resulting from the
change in the overhead rate used to absorb overhead expenses into inventory was
an increase of $1.4 million. This increase in inventory value
resulted in a corresponding decrease to cost of products sold.
Labor Rate
Adjustments- In 2009, the change in inventory value resulting from the
change in the labor rates used to absorb labor expenses into inventory was a
decrease of $0.4 million, reflecting improvement in labor
efficiency. This decrease in inventory value resulted in a
corresponding increase to cost of products sold. The net impact in
2008 from the change in the labor rates used to absorb labor expenses into
inventory was an increase to inventory of $1.3 million. This increase
in inventory value resulted in a corresponding decrease to cost of
sales.
Product Liability—In
2009 and 2008, the Company incurred product liability expense of $1.6 million
and $0.9 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 Note 12 to the notes to the financial
statements “Contingent Liabilities” for further discussion of the Company’s
product liability.
Product Recalls—There
were no product recalls initiated in 2009. In 2008, the Company
received a small number of reports from the field that its SR9 pistols, and
later, its LCP pistols, could discharge if dropped onto a hard
surface. The Company began recalling SR9 pistols in April 2008 and
LCP pistols in October 2008 to offer free safety retrofits. The cost
of these safety retrofit programs totaled $0.7 million and $3.5 million in 2009
and 2008, respectively. The Company believes that costs incurred for these
ongoing retrofit programs in future years will not be significant.
Gross Margin—Gross
margin was $87.6 million or 32.3% of sales in 2009. This is an
increase of $44.8 million or 105% from 2008 gross margin of $42.8 million or
23.6% of sales.
Selling, General and
Administrative
Selling,
general and administrative expenses were $42.5 million in 2009. This
represents an increase of $12.4 million or 41.1% from 2008 selling, general and
administrative expenses of $30.1 million. The increase reflects
increased advertising and sales promotion expenses and greater personnel-related
expenses including stock-based compensation and bonuses.
Other Operating Expenses
(Income), net
Other
operating expenses (income), net consist of the following (in
thousands):
|
2009
|
2008
|
|||||||
|
Gain
on sale of operating assets (a)
|
$ | (45 | ) | $ | (95 | ) | ||
|
Frozen
defined benefit pension plan expense (income)
|
1,266 | (745 | ) | |||||
|
Total
other operating expenses (income), net
|
$ | 1,221 | $ | (840 | ) | |||
|
(a)
|
The
gain on sale of operating assets was generated primarily from the sale of
used machinery and equipment.
|
Operating
Income—Operating Income was $43.9 million or 16.2% of sales in
2009. This is a 224% increase of $30.4 million from 2008 operating
income of $13.5 million or 7.5% of sales.
Royalty
Income
Royalty
income was $0.5 million in 2009. This represents an increase of $0.4
million from 2008 royalty income of $0.1 million. The increase is
primarily attributable to increased income from licensing
agreements.
Interest
income
Interest
income was $0.1 million in 2009. This represents a decrease of $0.3
million from 2008 interest income of $0.4 million. The decrease is
attributable primarily to decreased interest rates in 2009.
Income Taxes and Net
Income
The
effective income tax rate in 2009 was 38.0%, which is consistent with the 2008
effective income tax rate of 38.0%.
As a
result of the foregoing factors, consolidated net income was $27.5 million in
2009. This represents an increase of $18.8 million from 2008
consolidated net income of $8.7 million.
Quarterly
Data
To
supplement the summary annual unit data and discussion above, the same data for
the last eight quarters follows:
|
2009
|
||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | |||||||||||||
|
Units
Ordered (1)
|
173,000 | 80,000 | 204,700 | 501,000 | ||||||||||||
|
Units
Produced
|
234,600 | 242,500 | 247,300 | 209,900 | ||||||||||||
|
Units
Shipped
|
228,500 | 237,400 | 246,200 | 213,700 | ||||||||||||
|
Estimated
Units Sold from
Distributors
to Retailers
|
209,400 | 214,500 | 227,500 | 236,000 | ||||||||||||
|
Average
Sales Price
|
$ | 276 | $ | 295 | $ | 286 | $ | 283 | ||||||||
|
Units
on Backorder(1)
|
181,000 | 240,700 | 412,300 | 458,900 | ||||||||||||
|
Units
– Company Inventory
|
20,100 | 15,100 | 9,600 | 8,800 | ||||||||||||
|
Units
– Distributor Inventory (2)
|
96,200 | 76,800 | 53,900 | 35,200 | ||||||||||||
|
2008
|
||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | |||||||||||||
|
Units
Ordered
|
270,400 | 125,700 | 120,300 | 260,100 | ||||||||||||
|
Units
Produced
|
167,100 | 158,900 | 150,600 | 124,000 | ||||||||||||
|
Units
Shipped
|
208,100 | 146,000 | 136,700 | 135,700 | ||||||||||||
|
Estimated
Units Sold from
Distributors
to Retailers
|
216,400 | 143,100 | 135,600 | 135,900 | ||||||||||||
|
Average
Sales Price
|
$ | 275 | $ | 276 | $ | 270 | $ | 296 | ||||||||
|
Units
on Backorder
|
175,900 | 115,300 | 137,700 | 157,100 | ||||||||||||
|
Units
– Company Inventory
|
12,400 | 52,600 | 40,200 | 24,900 | ||||||||||||
|
Units
– Distributor Inventory (2)
|
57,500 | 65,800 | 62,900 | 61,800 | ||||||||||||
|
(1)
|
During
the third quarter of 2009, the Company unilaterally cancelled all of the
unshipped orders for Mini-14 and Mini-Thirty autoloading rifles, and asked
the distributors to submit new orders that better represented their
forecasted needs. The cancellation of these unshipped orders,
partially offset by the submission of new orders for these products,
resulted in a net reduction to the backlog of approximately 34,000 units
or $20 million. Had these orders not been cancelled, the Units
Ordered in the third quarter would have been approximately 114,000
units.
|
|
(2)
|
Distributor
ending inventory as provided by the independent distributors of the
Company’s products.
|
(in
millions except average sales price, including Federal Excise
Tax)
|
2009
|
||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | |||||||||||||
|
Orders
Received(3)
|
$ | 47.6 | $ | 15.7 | $ | 81.8 | $ | 154.3 | ||||||||
|
Average
Sales Price of Orders Received(3)(4)
|
$ | 275 | $ | 196 | $ | 400 | $ | 308 | ||||||||
|
Ending
Backlog(3)
|
$ | 59.6 | $ | 78.0 | $ | 138.0 | $ | 136.3 | ||||||||
|
Average
Sales Price of Ending Backlog(3)(4)
|
$ | 330 | $ | 324 | $ | 335 | $ | 297 | ||||||||
|
2008
|
||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | |||||||||||||
|
Orders
Received
|
$ | 86.1 | $ | 33.5 | $ | 37.0 | $ | 73.8 | ||||||||
|
Average
Sales Price of Orders Received(4)
|
$ | 287 | $ | 267 | $ | 275 | $ | 257 | ||||||||
|
Ending
Backlog
|
$ | 47.8 | $ | 27.9 | $ | 33.7 | $ | 40.7 | ||||||||
|
Average
Sales Price of Ending Backlog(4)
|
$ | 269 | $ | 242 | $ | 245 | $ | 234 | ||||||||
|
(3)
|
See
description in Note 1 above for information relating to Q3 2009 order
cancellations. The cancellation of these orders reduced Orders Received in
the third quarter of 2009 by $20 million and decreased the Average Sales
Price of Orders Received by $115 per unit. Had these orders not
been cancelled, the Average Sales Price of Orders Received would have been
$311 per unit. The Average Sales Price of the Ending Backlog
was also impacted for the same
reasons.
|
|
(4)
|
Average
sales price for orders received and ending backlog is net of Federal
Excise Tax of 10% for handguns and 11% for long
guns.
|
Fourth Quarter Gross Margin
Analysis
The gross
margin as a percent of sales for the fourth quarter of 2009 and 2008 was 33.3%
and 28.6%, respectively. Details of the gross margin are illustrated
below:
(in
thousands)
|
Three
Months Ended December 31
|
2009
|
2008
|
||||||||||||||
|
Net
sales
|
$ | 63,879 | 100.0 | % | $ | 58,491 | 100.0 | % | ||||||||
|
Cost
of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability and product recall
|
45,678 | 71.5 | % | 44,177 | 75.5 | % | ||||||||||
|
LIFO
expense (income)
|
(1,536 | ) | (2.4 | )% | (3,026 | ) | (5.2 | )% | ||||||||
|
Overhead
rate adjustments to inventory
|
(1,408 | ) | (2.2 | )% | 90 | 0.2 | % | |||||||||
|
Labor
rate adjustments to inventory
|
(323 | ) | (0.5 | )% | 60 | 0.1 | % | |||||||||
|
Product
liability
|
171 | 0.2 | % | 420 | 0.7 | % | ||||||||||
|
Product
recalls
|
32 | 0.1 | % | 25 | 0.1 | % | ||||||||||
|
Total
cost of products sold
|
42,614 | 66.7 | % | 41,746 | 71.4 | % | ||||||||||
|
Gross
margin
|
$ | 21,265 | 33.3 | % | $ | 16,745 | 28.6 | % | ||||||||
Note: For
a discussion of the above table, please see “Cost of Products Sold and Gross
Margin” discussion above.
Results of Operations -
2008
Year
ended December 31, 2008, as compared to year ended December 31,
2007:
Annual
Summary Unit Data
Firearms
unit data for orders, production, shipments and ending inventory, and castings
setups (a measure of foundry production) are as follows:
|
2008
|
2007
|
2006
|
2005
|
|
|
Units
Ordered
|
776,400
|
485,000
|
(1)
|
(1)
|
|
Units
Produced
|
600,600
|
464,900
|
419,800
|
414,600
|
|
Units
Shipped
|
626,500
|
481,800
|
475,900
|
460,200
|
|
Average
Sales Price
|
$278
|
$299
|
$292
|
$289
|
|
Units
on Backorder
|
175,900
|
36,500
|
(1)
|
(1)
|
|
Units
– Company Inventory
|
12,400
|
38,300
|
55,200
|
111,246
|
|
Units
– Distributor Inventory (2)
|
57,500
|
62,000
|
57,100
|
70,498
|
|
Castings
Setups
|
144,600
|
156,100
|
169,100
|
174,443
|
Orders Received and Ending
Backlog
(in
millions except average sales price, including Federal Excise Tax):
|
2008
|
2007
|
|||||||
|
Orders
Received
|
$ | 233.8 | $ | 156.4 | ||||
|
Average
Sales Price of Orders Received (3)
|
$ | 301 | $ | 322 | ||||
|
Ending
Backlog (3)
|
$ | 47.8 | $ | 17.9 | ||||
|
Average
Sales Price of Ending Backlog (3)
|
$ | 269 | $ | 444 | ||||
|
(1)
|
Prior
to 2006, the Company received one cancelable annual firearms order in
December from each independent distributor. 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.
|
|
(2)
|
Distributor
ending inventory as provided by the independent distributors of the
Company’s products.
|
|
(3)
|
Average
sales price for orders received and ending backlog is net of Federal
Excise Tax of 10% for handguns and 11% for long
guns.
|
The
increase in orders received in 2008 is attributable to the
following:
|
|
1.
|
Increased
demand for firearms during the fourth
quarter,
|
|
|
2.
|
New
products introduced in 2008, and
|
|
|
3.
|
Increased
production and order fulfillment in
2008.
|
The
product mix of orders received in 2008 shows an increase in demand for firearms
related to self defense, including the LCP pistol, which was introduced in the
first quarter of 2008.
The
decrease in the average sales price of the units in backlog in 2008 is due to
the large quantity of new products in the backlog with lower unit sales prices
and a reduction in backlog for certain rifle products where production has
increased to meet demand.
Orders
for certain discontinued models totaling $3.7 million at the end of 2007 were
cancelled and have been eliminated from the 2008 backlog
information. These orders were included in the backlog for 2007, and
their elimination had a significant impact on the change in average sales price
of the ending backlog from 2007 to 2008.
The
increase in the order backlog is due to the strong incoming order rate for new
products and the increase in overall demand that occurred in the fourth
quarter.
Production
Production
rates, which started to increase late in 2007, continued to improve throughout
2008. This allowed for a 29% increase in unit production from 2007 to
2008.
Inventories
The
Company’s finished goods unit inventory levels decreased in 2008, ending at a
recent historic low.
Quarterly Summary Unit
Data
To
supplement the summary annual unit data and discussion above, the same data for
the last eight quarters follows:
|
2008
|
||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | |||||||||||||
|
Units
Ordered
|
270,400 | 125,700 | 120,300 | 260,100 | ||||||||||||
|
Units
Produced
|
167,100 | 158,900 | 150,600 | 124,000 | ||||||||||||
|
Units
Shipped
|
208,100 | 146,000 | 136,700 | 135,700 | ||||||||||||
|
Average
Sales Price
|
$ | 275 | $ | 276 | $ | 270 | $ | 296 | ||||||||
|
Units
on Backorder
|
175,900 | 115,300 | 137,700 | 157,100 | ||||||||||||
|
Units
– Company Inventory
|
12,400 | 52,600 | 40,200 | 24,900 | ||||||||||||
|
Units
– Distributor Inventory (1)
|
57,500 | 65,800 | 62,900 | 61,800 | ||||||||||||
|
2007
|
||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | |||||||||||||
|
Units
Ordered
|
113,100 | 80,900 | 115,300 | 175,700 | ||||||||||||
|
Units
Produced
|
104,900 | 100,800 | 132,000 | 127,200 | ||||||||||||
|
Units
Shipped
|
111,900 | 98,600 | 129,600 | 141,700 | ||||||||||||
|
Average
Sales Price
|
$ | 283 | $ | 297 | $ | 306 | $ | 308 | ||||||||
|
Units
on Backorder
|
36,500 | 35,700 | 53,400 | 68,300 | ||||||||||||
|
Units
– Company Inventory
|
38,300 | 45,300 | 43,100 | 40,700 | ||||||||||||
|
Units
– Distributor Inventory (1)
|
62,000 | 70,500 | 78,800 | 60,000 | ||||||||||||
|
(1)
|
Distributor
ending inventory as provided by the independent distributors of the
Company’s products.
|
Orders Received and Ending
Backlog
(in
millions except average sales price, including Federal Excise Tax)
|
2008
|
||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | |||||||||||||
|
Orders
Received
|
$ | 86.1 | $ | 33.5 | $ | 37.0 | $ | 73.8 | ||||||||
|
Average
Sales Price of Orders Received
|
$ | 287 | $ | 267 | $ | 275 | $ | 257 | ||||||||
|
Ending
Backlog
|
$ | 47.8 | $ | 27.9 | $ | 33.7 | $ | 40.7 | ||||||||
|
Average
Sales Price of Ending Backlog
|
$ | 269 | $ | 242 | $ | 245 | $ | 234 | ||||||||
|
2007
|
||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | |||||||||||||
|
Orders
Received
|
$ | 32.8 | $ | 25.4 | $ | 39.1 | $ | 58.9 | ||||||||
|
Average
Sales Price of Orders Received
|
$ | 262 | $ | 284 | $ | 307 | $ | 303 | ||||||||
|
Ending
Backlog
|
$ | 17.9 | $ | 16.2 | $ | 23.3 | $ | 27.9 | ||||||||
|
Average
Sales Price of Ending Backlog
|
$ | 444 | $ | 411 | $ | 395 | $ | 370 | ||||||||
|
Note:
|
Average
sales price for orders received and ending backlog is net of Federal
Excise Tax of 10% for handguns and 11% for long
guns.
|
Sales
Consolidated
net sales were $181.5 million in 2008. This represents an increase of
$25.0 million or 16.0% from 2007 consolidated net sales of $156.5
million.
Firearms
segment net sales were $174.4 million in 2008. This represents an
increase of $30.2 million or 20.9% from 2007 firearm net sales of $144.2
million. Firearms unit shipments increased 30.0% in 2008 due to
increased shipments of pistols, rifles and revolvers. This increase
is attributable to the introduction of new products in 2008, increased
production of mature products, and increased overall industry
demand. A shift in product mix toward firearms with lower unit sales
prices, including some new products, resulted in the greater percentage increase
in unit shipments than sales.
Casting
segment net sales were $7.1 million in 2008. This represents a
decrease of $5.2 million or 42.4% from 2007 casting sales of $12.3
million.
The
casting sales decrease in 2008 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 of total
casting sales. In 2007, the Company significantly increased prices to
certain external customers, 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 $138.7 million in 2008. This represents an
increase of $21.5 million or 18.4% from 2007 consolidated cost of products sold
of $117.2 million.
The gross
margin as a percent of sales was 23.6% in 2008. This represents a
decrease from the 2007 gross margin of 25.1% as illustrated below:
(in
thousands)
|
Year
Ended December 31
|
2008
|
2007
|
||||||||||||||
|
Net
sales
|
$ | 181,483 | 100.0 | % | $ | 156,485 | 100.0 | % | ||||||||
|
Cost
of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability and product recall
|
136,172 | 75.0 | % | 123,170 | 78.7 | % | ||||||||||
|
LIFO
expense (income)
|
781 | 0.4 | % | (9,074 | ) | (5.8 | )% | |||||||||
|
Overhead
rate adjustments to inventory
|
(1,389 | ) | (0.7 | )% | 1,404 | 0.9 | % | |||||||||
|
Labor
rate adjustments to inventory
|
(1,251 | ) | (0.7 | )% | - | - | ||||||||||
|
Product
liability
|
915 | 0.5 | % | 1,686 | 1.1 | % | ||||||||||
|
Product
recalls
|
3,502 | 1.9 | % | - | - | |||||||||||
|
Total
cost of products sold
|
138,730 | 76.4 | % | 117,186 | 74.9 | % | ||||||||||