UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________

 

FORM 10-Q

(Mark One)

 

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 2, 2016

 

OR

 

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_______________ to _______________

 

Commission file number 1-10435

 

STURM, RUGER & COMPANY, INC.
(Exact name of registrant as specified in its charter)

 

Delaware   06-0633559
(State or other jurisdiction of   (I.R.S. employer
incorporation or organization)   identification no.)
     
Lacey Place, Southport, Connecticut   06890
(Address of principal executive offices)   (Zip code)

 

(203) 259-7843

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes [ X ] No [    ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [    ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ X ] Accelerated filer [    ] Non-accelerated filer [    ] Smaller reporting company [    ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ] No [ X ]

 

The number of shares outstanding of the issuer's common stock as of April 29, 2016: Common Stock, $1 par value –18,962,738.

 

Page 1 of 28

 

 

 

INDEX

 

STURM, RUGER & COMPANY, INC.

 

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited)  
     
  Condensed consolidated balance sheets – April 2, 2016 and December 31, 2015 3
     
  Condensed consolidated statements of income and comprehensive income – Three months ended April 2, 2016 and March 28, 2015 5
     
  Condensed consolidated statement of stockholders’ equity – Three months ended April 2, 2016 6
     
  Condensed consolidated statements of cash flows Three months ended April 2, 2016 and March 28, 2015 7
     
  Notes to condensed consolidated financial statements – April 2, 2016 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
     
Item 4. Controls and Procedures 24
     
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 26
     
Item 1A. Risk Factors 26
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
Item 3. Defaults Upon Senior Securities 26
     
Item 4. Mining Safety Disclosures 26
     
Item 5. Other Information 26
     
Item 6. Exhibits 27
     
SIGNATURES 28

 

 

2 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

   April 2, 2016   December 31, 2015 
       (Note) 
         
Assets          
           
Current Assets          
Cash  $80,463   $69,225 
Trade receivables, net   74,746    71,721 
           
Gross inventories   77,015    81,278 
Less LIFO reserve   (42,714)   (42,061)
Less excess and obsolescence reserve   (2,027)   (2,118)
Net inventories   32,274    37,099 
           
Deferred income taxes   9,852    8,219 
Prepaid expenses and other current assets   3,631    3,008 
Total Current Assets   200,966    189,272 
           
Property, plant and equipment   304,745    308,597 
Less allowances for depreciation   (202,738)   (204,777)
Net property, plant and equipment   102,007    103,820 
           
           
Other assets   22,450    22,791 
Total Assets  $325,423   $315,883 

 

Note:

 

The consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

See notes to condensed consolidated financial statements.

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Index 

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(Dollars in thousands, except per share data)

 

   April 2, 2016   December 31, 2015 
       (Note) 
         
Liabilities and Stockholders’ Equity          
           
Current Liabilities          
Trade accounts payable and accrued expenses  $48,331   $42,991 
Product liability   1,235    642 
Employee compensation and benefits   18,555    28,298 
Workers’ compensation   5,068    5,100 
Income taxes payable   3,849    4,962 
Total Current Liabilities   77,038    81,993 
           
Product liability   89    102 
Deferred income taxes   8,548    6,050 
           
Contingent liabilities – Note 10        
           
           
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
     2016 – 24,025,085 issued,
                 18,962,738 outstanding
     2015 – 23,775,766 issued,
                 18,713,419 outstanding
   24,025    23,776 
Additional paid-in capital   24,765    29,591 
Retained earnings   255,685    239,098 
Less: Treasury stock – at cost
             2016 – 5,062,347 shares
             2015 – 5,062,347 shares
   (64,727)   (64,727)
Total Stockholders’ Equity   239,748    227,738 
Total Liabilities and Stockholders’ Equity  $325,423   $315,883 

 

Note:

 

The consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

See notes to condensed consolidated financial statements.

 

4 

Index 

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

 

   Three Months Ended 
   April 2, 2016   March 28, 2015 
         
Net firearms sales  $171,520   $135,579 
Net castings sales   1,589    1,375 
Total net sales   173,109    136,954 
           
Cost of products sold   113,996    95,557 
           
Gross profit   59,113    41,397 
           
Operating expenses:          
Selling   15,074    10,226 
General and administrative   7,838    7,377 
Total operating expenses   22,912    17,603 
           
Operating income   36,201    23,794 
           
Other income:          
Interest expense, net   (35)   (40)
Other income, net   206    469 
Total other income, net   171    429 
           
Income before income taxes   36,372    24,223 
           
Income taxes   13,094    8,720 
           
Net income and comprehensive income  $23,278   $15,503 
           
Basic earnings per share  $1.23   $0.83 
           
Diluted earnings per share  $1.21   $0.81 
           
Cash dividends per share  $0.35   $0.17 

 

 

See notes to condensed consolidated financial statements.

 

5 

Index 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)

 

   Common
Stock
   Additional
Paid-in
Capital
   Retained
Earnings
   Treasury
Stock
   Total 
                          
Balance at December 31, 2015   $23,776   $29,591   $239,098   $(64,727)  $227,738 
                          
Net income and comprehensive
          income
             23,278         23,278 
                          
Dividends paid              (6,636)        (6,636)
                          
Unpaid dividends accrued              (55)        (55)
                          
Recognition of stock-based
          compensation expense
        632              632 
                          
Vesting of RSU’s         (14,001)             (14,001)
                          
Tax benefit realized from vesting
          of RSU’s
        8,792              8,792 
                          
Common stock issued-
          compensation plans
   249    (249)              
Balance at April 2, 2016  $24,025   $24,765   $255,685   $(64,727)  $239,748 

 

 

See notes to condensed consolidated financial statements.

 

 

6 

Index 

STURM, RUGER & COMPANY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

   Three Months Ended 
   April 2, 2016   March 28, 2015 
         
Operating Activities          
Net income  $23,278   $15,503 
Adjustments to reconcile net income to cash provided by operating activities:          
Depreciation and amortization   8,344    8,957 
Slow moving inventory valuation adjustment   (91)   (748)
Stock-based compensation   632    1,151 
Loss on sale of assets   4    (60)
Deferred income taxes   865    3 
Impairment of assets       12 
Changes in operating assets and liabilities:          
Trade receivables   (3,025)   (13,296)
Inventories   4,916    16,145 
Trade accounts payable and accrued expenses   5,308    (2,690)
Employee compensation and benefits   (9,798)   2,476 
Product liability   580    (350)
Prepaid expenses, other assets and other liabilities   (471)   2,599 
Income taxes payable   (1,113)   3,081 
Cash provided by operating activities   29,429    32,783 
           
Investing Activities          
Property, plant and equipment additions   (6,346)   (4,302)
Proceeds from sale of assets       60 
Cash used for investing activities   (6,346)   (4,242)
           
Financing Activities          
Tax benefit from exercise of stock options and vesting of RSU’s   8,792    280 
Remittance of taxes withheld from employees related to
        share-based compensation
   (14,001)   (1,000)
Proceeds from exercise of stock options       97 
Repurchase of common stock       (2,841)
Dividends paid   (6,636)   (3,178)
Cash used for financing activities   (11,845)   (6,642)
           
Increase in cash and cash equivalents   11,238    21,899 
           
Cash and cash equivalents at beginning of period   69,225    8,901 
           
Cash and cash equivalents at end of period  $80,463   $30,800 

 

 

See notes to condensed consolidated financial statements.

 

7 

Index 

 

STURM, RUGER & COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share)

 

 

NOTE 1 - BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results of the interim periods. Operating results for the three months ended April 2, 2016 may not be indicative of the results to be expected for the full year ending December 31, 2016. These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

 

Organization:

 

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of sales are from firearms. Export sales represent approximately 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 also manufactures investment castings made from steel alloys and metal injection molding (“MIM”) parts for internal use in its firearms and for sale to unaffiliated, third-party customers. Less than 1% of sales are from the castings segment.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

 

Fair Value of Financial Instruments:

 

The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short-term maturity of these items.

 

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Index 

Use of Estimates:

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Reclassifications:

 

Certain prior period balances have been reclassified to conform to current year presentation.

 

Recent Accounting Pronouncements:

 

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), its long-awaited final standard on the accounting for leases. The most significant change in the new lease guidance requires lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under legacy U.S. GAAP. The new lease guidance is effective in fiscal years beginning after December 15, 2018 and interim periods thereafter. Early application is permitted for all entities. The Company is currently evaluating the effect that the standard will have on the consolidated financial statements.

 

 

NOTE 3 - INVENTORIES

 

Inventories are valued using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs existing at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation.

 

During the three month period ended April 2, 2016, inventory quantities were reduced. If this reduction remains through year-end, it will result in a liquidation of LIFO inventory quantities carried at lower costs prevailing in the prior year as compared with the current cost of purchases. Although the effect of such a liquidation cannot be precisely quantified at the present time, management believes that if a LIFO liquidation occurs in 2016, the impact would not be material to the Company’s results of operations for the period and would not have a material impact on the financial position of the Company.

 

Inventories consist of the following:

 

   April 2, 2016   December 31, 2015 
Inventory at FIFO          
Finished products  $12,060   $16,637 
Materials and work in process   64,955    64,641 
Gross inventories   77,015    81,278 
Less:  LIFO reserve   (42,714)   (42,061)
Less:  excess and obsolescence reserve   (2,027)   (2,118)
Net inventories  $32,274   $37,099 

 

 

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Index  

NOTE 4 - LINE OF CREDIT

 

The Company has a $40 million revolving line of credit with a bank. This facility is renewable annually and terminates on June 15, 2016. Borrowings under this facility bear interest at LIBOR (1.210% at April 2, 2016) plus 200 basis points. The Company is charged three-eighths of a percent (0.375%) per year on the unused portion. At April 2, 2016 and December 31, 2015, the Company was in compliance with the terms and covenants of the credit facility, which remains unused.

 

 

NOTE 5 - EMPLOYEE BENEFIT PLANS

 

The Company sponsors a 401(k) plan that covers substantially all employees. The Company matches a certain portion of employee contributions using the safe harbor guidelines contained in the Internal Revenue Code. Expenses related to these matching contributions totaled $1.0 million and $0.7 million for the three months ended April 2, 2016 and March 28, 2015, respectively. The Company plans to contribute approximately $3.0 million to the plan in matching employee contributions during the remainder of 2016.

 

In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $1.7 million and $1.2 million for the three months ended April 2, 2016, and March 28, 2015, respectively. The Company plans to contribute approximately $3.5 million in supplemental contributions to the plan during the remainder of 2016.

 

 

NOTE 6 - INCOME TAXES

 

The Company's 2016 and 2015 effective tax rates differ from the statutory federal tax rate due principally to state income taxes partially offset by tax benefits related to the American Jobs Creation Act of 2004. The Company’s effective income tax rate in both the three months ended April 2, 2016 and March 28, 2015 was 36.0%.

 

Income tax payments for the three months ended April 2, 2016 and March 28, 2015 totaled $4.6 million and $0.1 million, respectively.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2012.

 

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.

 

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NOTE 7 - EARNINGS PER SHARE

Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:

 

   Three Months Ended 
   April 2, 2016   March 28, 2015 
Numerator:          
Net income  $23,278   $15,503 
Denominator:          
Weighted average number of common shares outstanding – Basic   18,943,427    18,678,485 
           
Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans   225,150    561,052 
           
Weighted average number of common shares outstanding – Diluted   19,168,577    19,239,537 

 

The dilutive effect of outstanding options and restricted stock units is calculated using the treasury stock method. There were no stock options that were anti-dilutive and therefore not included in the diluted earnings per share calculation.

 

 

NOTE 8 - COMPENSATION PLANS

 

In April 2007, the Company adopted and the shareholders approved the 2007 Stock Incentive Plan (the “2007 SIP”) under which employees, independent contractors, and non-employee directors may be granted stock options, restricted stock, deferred stock awards, and stock appreciation rights, any of which may or may not require the satisfaction of performance objectives. Vesting requirements are determined by the Compensation Committee of the Board of Directors. The Company has reserved 2,550,000 shares for issuance under the 2007 SIP, of which 541,400 shares remain available for future grants as of April 2, 2016.

 

Compensation costs related to all share-based payments recognized in the statements of operations aggregated $0.6 million and $1.2 million for the three months ended April 2, 2016 and March 28, 2015, respectively.

 

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Stock Options

 

A summary of changes in options outstanding under the 2007 SIP is summarized below:

 

   Shares   Weighted
Average
Exercise
Price
   Grant Date
Fair Value
 
Outstanding at December 31, 2015   11,838   $8.95   $6.69 
Granted            
Exercised            
Expired            
Outstanding at April 2, 2016   11,838   $8.95   $6.69 

 

The aggregate intrinsic value (mean market price at April 2, 2016 less the weighted average exercise price) of options outstanding under the plans was approximately $0.7 million.

 

Restricted Stock Units

 

Beginning in the second quarter of 2009, the Company began granting restricted stock units to senior employees in lieu of incentive stock options. The vesting of these awards is dependent on the achievement of corporate objectives established by the Compensation Committee of the Board of Directors. Beginning in 2011, a three year vesting period was added to the performance criteria, which had the effect of requiring both the achievement of the corporate performance objectives and the satisfaction of the vesting period.

 

There were 1,794 restricted stock units issued in the three months ended April 2, 2016. Total compensation costs related to these restricted stock units are $0.1 million. These costs are being recognized ratably over vesting periods ranging from three to five years. Total compensation cost related to restricted stock units was $0.6 million and $1.2 million for the three months ended April 2, 2016 and March 28, 2015, respectively.

 

NOTE 9 - OPERATING SEGMENT INFORMATION

 

The Company has two reportable segments: firearms and castings. The firearms segment manufactures and sells rifles, pistols, and revolvers principally to a select number of independent wholesale distributors primarily located in the United States. The castings segment manufactures and sells steel investment castings and metal injection molding parts.

 

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Selected operating segment financial information follows:

 

(in thousands)  Three Months Ended 
   April 2, 2016   March 28, 2015 
Net Sales          
Firearms  $171,520   $135,579 
Castings          
Unaffiliated   1,589    1,375 
Intersegment   8,949    7,544 
    10,538    8,919 
Eliminations   (8,949)   (7,544)
   $173,109   $136,954 
           
Income (Loss) Before Income Taxes          
Firearms  $36,371   $25,431 
Castings   (68)   (1,471)
Corporate   69    263 
   $36,372   $24,223 

 

    April 2, 2016    December 31, 2015 
Identifiable Assets          
Firearms  $219,586   $221,670 
Castings   15,652    15,289 
Corporate   90,185    78,924 
   $325,423   $315,883 

 

 

NOTE 10 - CONTINGENT LIABILITIES

 

As of April 2, 2016, the Company was a defendant in four (4) lawsuits and is aware of certain other such claims. The lawsuits fall into three categories: traditional product liability litigation, patent litigation and municipal litigation, discussed in turn below.

 

Traditional Product Liability Litigation

 

Two of the four lawsuits mentioned above involve claims for damages related to allegedly defective products due to their design and/or manufacture. These lawsuits stem from specific incidents of personal injury and are based on traditional product liability theories such as strict liability, negligence and/or breach of warranty.

 

The Company management believes that the allegations in these cases are unfounded, that the incidents were unrelated to the design or manufacture of the firearm, and that there should be no recovery against the Company.

 

13 

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Patent Litigation

 

Davies Innovations, Inc. v. Sturm, Ruger & Company, Inc. is a patent litigation suit pending in the United States District Court for the Southern District of Texas, Galveston Division. The suit is based upon alleged patent infringement as the plaintiff claims that certain features of the Ruger SR-556 and SR-762 modern sporting rifles infringe its patent. The complaint seeks a judgment of infringement and unspecified monetary damages including costs, fees and treble damages.

 

The Company management believes that the allegations in this case are unfounded, that there is no infringement of plaintiff’s patent, that plaintiff’s patent is invalid, and that there should be no recovery against the Company.

 

Municipal Litigation

Municipal litigation generally includes those cases brought by cities or other governmental entities against firearms manufacturers, distributors and retailers seeking to recover damages allegedly arising out of the misuse of firearms by third-parties.

There is only one remaining lawsuit of this type, filed by the City of Gary in Indiana State Court, over fifteen years ago. 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.

After a long procedural history, the case was scheduled for trial on June 15, 2009. The case was not tried on that date and was largely dormant until a status conference was held on July 27, 2015. At that time, the court entered a scheduling order setting deadlines for plaintiff to file a Second Amended Complaint, for defendants to answer, and for defendants to file dispositive motions. The plaintiff did not file a Second Amended Complaint by the deadline.

Last year, Indiana passed a new law such that Indiana Code § 34-12-3-1 applies to the City's case. The defendants have filed a joint motion for judgment on the pleadings, asserting immunity under §34-12-3-1 and asking the court to re-visit the Court of Appeals' earlier decision holding the Protection of Lawful Commerce in Arms Act inapplicable to the City's claims. The motion has been briefed by the parties and is awaiting a hearing.

 

Summary of Claimed Damages and Explanation of Product Liability Accruals

 

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 product liability 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.

 

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

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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.

 

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 the Company’s 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 the Company’s 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 losses 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 $0.1 million and $0.0 million at December 31, 2015 and 2014, 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.

 

NOTE 11 - SUBSEQUENT EVENTS

 

On April 29, 2016, Board of Directors authorized a dividend of 48¢ per share, for shareholders of record as of May 13, 2016, payable on May 27, 2016.

 

The Company has evaluated events and transactions occurring subsequent to April 2, 2016 and determined that there were no other unreported events or transactions that would have a material impact on the Company’s results of operations or financial position.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

Company Overview

 

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of sales are from firearms. Export sales represent approximately 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 also manufactures investment castings made from steel alloys and metal injection molding (“MIM”) parts for internal use in its firearms and for sale to unaffiliated, third-party customers. Less than 1% of third-party sales are from the castings segment.

 

Orders for many models of firearms from the independent distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.

 

Results of Operations

 

Demand

 

The estimated unit sell-through of the Company’s products from the independent distributors to retailers increased 17% in the first quarter of 2016 from the comparable prior year period. For the same period, the National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) increased 18%. The increase in estimated sell-through of the Company’s products from the independent distributors to retailers is attributable to:

 

·the increase in overall industry demand,
·new product introductions, and
·increased production capacity and availability of products in demand.

 

New products, including the American Pistol, the Precision Rifle, the AR-556 modern sporting rifle, and the LC9s pistol, represented $50.3 million or 29% of firearm sales in the first quarter of 2016. New product sales include only major new products that were introduced in the past two years.

 

 

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Index 

Estimated sell-through from the independent distributors to retailers and total adjusted NICS background checks for the trailing five quarters follow:

 

   2016   2015 
   Q1   Q4   Q3   Q2   Q1 
                     
Estimated Units Sold from Distributors to Retailers (1)   571,000    552,700    374,900    379,400    486,800 
                          
Total adjusted NICS Background Checks (thousands) (2)   4,148    4,880    3,050    2,793    3,521 

 

(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.

 

(2)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.  

 

The adjusted NICS data presented above was derived by the NSSF by subtracting out NICS checks that are not directly related to the sale of a firearm, including checks used for concealed carry (“CCW”) permit application checks as well as checks on active CCW permit databases.

 

Orders Received and Ending Backlog

 

The Company uses the estimated unit sell-through of our products from the independent distributors to retailers, along with inventory levels at the independent distributors and at the Company, as the key metrics for planning production levels. The Company generally does not use the orders received or ending backlog for planning production levels.

 

The units ordered, value of orders received and ending backlog, net of excise tax, for the trailing five quarters are as follows (dollars in millions, except average sales price):

 

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Index 

 

(All amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns.)

 

   2016   2015 
   Q1   Q4   Q3   Q2   Q1 
                     
Units Ordered   969,400    696,400    207,500    262,400    350,700 
                          
Orders Received  $296.1   $203.4   $73.1   $71.9   $114.8 
                          
Average Sales Price of Units Ordered  $305   $292   $352   $274   $327 
                          
Ending Backlog  $276.1   $137.8   $80.5   $123.8   $185.1 
                          
Average Unit Sales Price of Ending Backlog  $313   $320   $379   $310   $319 

 

Production

 

The Company reviews the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, semi-monthly to plan production levels. These reviews resulted in increased total unit production of 36% for the first quarter of 2016 from the comparable prior year period and 18% from the fourth quarter of 2015.

 

Summary Unit Data

 

Firearms unit data for the trailing five quarters are as follows (dollar amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns):

 

   2016   2015 
   Q1   Q4   Q3   Q2   Q1 
                     
Units Ordered   969,400    696,400    207,500    262,400    350,700 
                          
Units Produced   502,100    425,400    439,900    487,000    369,000 
                          
Units Shipped   516,700    478,400    394,700    442,900    422,100 
                          
Average Sales Price of Units Shipped  $332   $315   $302   $314   $321 
                          
Units on Backlog   883,000    430,300    212,300    399,500    580,000 

 

Inventories

 

During the first quarter of 2016, the Company’s finished goods inventory decreased by 14,600 units and distributor inventories of the Company’s products decreased by 54,300 units.

 

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Index  

Inventory data for the trailing five quarters follows:

 

   2016   2015 
   Q1   Q4   Q3   Q2   Q1 
                     
Units – Company Inventory   72,800    87,400    140,400    95,200    51,100 
                          
Units – Distributor Inventory (1)   216,700    271,000    345,300    325,500    262,000 
                          
Total inventory (2)   289,500    358,400    485,700    420,700    313,100 

 

(1)Distributor ending inventory is provided by the Company’s independent distributors. These numbers do not include goods-in-transit inventory that has been shipped from the Company but not yet received by the distributors.

 

(2)This total does not include inventory at retailers. The Company does not have access to data on retailer inventories of the Company’s products.

 

Net Sales

 

Consolidated net sales were $173.1 million for the three months ended April 2, 2016, an increase of 26.4% from $137.0 million in the comparable prior year period.

 

Firearms net sales were $171.5 million for the three months ended April 2, 2016, an increase of 26.5% from $135.6 million in the comparable prior year period.

 

Firearms unit shipments increased 22.4% for the three months ended April 2, 2016 from the comparable prior year period.

 

Casting net sales were $1.6 million for the three months ended April 2, 2016, an increase of 15.6% from $1.4 million in the comparable prior year period.

 

Cost of Products Sold and Gross Profit

 

Consolidated cost of products sold was $114.0 million for the three months ended April 2, 2016, an increase of 19.3% from $95.6 million in the comparable prior year period.

 

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Index  

Gross margin was 34.1% for the three months ended April 2, 2016, compared to 30.2% in the comparable prior year period as illustrated below (in thousands):

   Three Months Ended 
   April 2, 2016   March 28, 2015 
                 
Net sales  $173,109    100.0%   $136,954    100.0% 
                     
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory and product liability   112,916    65.2%    94,810    69.2% 
                     
LIFO expense   653    0.4%    528    0.4% 
                     
Overhead rate adjustments to inventory   (485)   (0.2)%   404    0.3% 
                     
Labor rate adjustments to inventory   80        (34)    
                     
Product liability   832    0.5%    (151)   (0.1)%
                     
Total cost of products sold   113,996    65.9%    95,557    69.8% 
                     
Gross profit  $59,113    34.1%   $41,397    30.2% 

 

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability — During the three months ended April 2, 2016, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability decreased as a percentage of sales by 4.0% compared with the comparable 2015 period primarily due to increased overall volume which favorably leveraged manufacturing overhead and improved productivity.

 

LIFO — For the three months ended April 2, 2016, the Company recognized LIFO expense resulting in increased cost of products sold of $0.7 million. In the comparable 2015 period, the Company recognized LIFO expense resulting in increased cost of products sold of $0.5 million.

 

Overhead Rate Adjustments — The Company uses actual overhead expenses incurred as a percentage of sales-value-of-production over a trailing six month period to absorb overhead expense into inventory. During the three months ended April 2, 2016, the overhead rates used to absorb overhead expenses into inventory increased, resulting in an increase in inventory value of $0.5 million, and a corresponding decrease to cost of products sold. This increase in overhead rates was driven by a harmonization of the methodology used in the castings segment.

 

During the three months ended March 28, 2015, the Company was more efficient in overhead spending and the overhead rates used to absorb overhead expenses into inventory decreased, resulting in a decrease in inventory value of $0.4 million, and a corresponding increase to cost of products sold.

 

Labor Rate Adjustments — The Company uses actual direct labor expense incurred as a percentage of sales-value-of-production over a trailing six month period to absorb direct labor expense into inventory. During the three months ended April 2, 2016 and March 28, 2015, the impact of the labor rate adjustment was de minimus.

 

20 

Index  

Product Liability — This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. During the three months ended April 2, 2016 product liability expense was $0.8 million.

 

Due to favorable experience in product liability matters during the three months ended March 28, 2015, income of $0.2 million was recognized. See Note 10 to the notes to the condensed financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

 

Gross Profit — As a result of the foregoing factors, for the three months ended April 2, 2016, gross profit was $59.1 million, an increase of $17.7 from $41.4 million in the comparable prior year period.

 

Gross profit as a percentage of sales increased to 34.1% in the three months ended April 2, 2016 from 30.2% in the comparable prior year period.

 

Selling, General and Administrative, and Other Operating Expenses

 

Selling, general and administrative expenses were $22.9 million for the three months ended April 2, 2016, an increase of $5.3 million or 30.2% from the comparable prior year period. This increase is primarily attributable to increased participation in our firearm sales promotions, the “2 Million Gun Challenge to Benefit the NRA”, which was not in effect until April 2015, and increased distribution costs related to the increased sales volume.

 

Other income, net

 

Other income, net was $0.2 million in the three months ended April 2, 2016, compared to $0.4 million in the three months ended March 28, 2015.

 

Income Taxes and Net Income

 

The Company’s effective income tax rate in the three months ended April 2, 2016 was 36.0%. The Company’s effective income tax rate in the three months ended March 28, 2015 was 36.0%.

 

As a result of the foregoing factors, consolidated net income was $23.3 million for the three months ended April 2, 2016. This represents an increase of 50.2% from $15.5 million in the comparable prior year period.

 

Non-GAAP Financial Measure

 

In an effort to provide investors with additional information regarding its financial results, the Company refers to various United States generally accepted accounting principles (“GAAP”) financial measures and one non-GAAP financial measure, EBITDA, which management believes provides useful information to investors. This non-GAAP financial measure may not be comparable to similarly titled financial measures being disclosed by other companies. In addition, the Company believes that the non-GAAP financial measure should be considered in addition to, and not in lieu of, GAAP financial measures. The Company believes that EBITDA is useful to understanding its operating results and the ongoing performance of its underlying business, as EBITDA provides information on the Company’s ability to meet its capital expenditure and working capital requirements, and is also an indicator of profitability. The Company believes that this reporting provides better transparency and comparability

21 

Index  

to its operating results. The Company uses both GAAP and non-GAAP financial measures to evaluate the Company’s financial performance.

 

EBITDA is defined as earnings before interest, taxes, and depreciation and amortization. The Company calculates its EBITDA by adding the amount of interest expense, income tax expense, and depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest income that was included in net income from net income.

 

EBITDA was $44.8 million for the three months ended April 2, 2016, an increase of 34.7% from $33.2 million in the comparable prior year period.

 

Non-GAAP Reconciliation – EBITDA

EBITDA

(Unaudited, dollars in thousands)

 

   Three Months Ended 
   April 2, 2016   March 28, 2015 
             
Net income  $23,278   $15,503 
           
Income tax expense   13,094    8,720 
Depreciation and amortization expense   8,344    8,957 
Interest expense, net   35    40 
EBITDA  $44,751   $33,220 

 

 

Financial Condition

 

Liquidity

 

At the end of the first quarter of 2016, the Company’s cash totaled $80.5 million. Pre-LIFO working capital of $166.6 million, less the LIFO reserve of $42.7 million, resulted in working capital of $123.9 million and a current ratio of 2.6 to 1.

 

Operations

 

Cash provided by operating activities was $29.4 million for the three months ended April 2, 2016, compared to $32.8 million for the comparable prior year period. This decrease is primarily due to a greater decrease in inventories in the prior year period and an increase in variable incentive compensation paid in the current year period.

 

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory or on order to provide sufficient 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

22 

Index  

materials cannot be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

 

Investing and Financing

 

Capital expenditures for the three months ended April 2, 2016 totaled $6.3 million, an increase from $4.3 million in the comparable prior year period. In 2016, the Company expects to spend approximately $25 million on capital expenditures to purchase tooling fixtures and equipment for new product introductions and to upgrade and modernize manufacturing equipment. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash.

 

Dividends of $6.6 million were paid during the three months ended April 2, 2016.

 

On April 29, 2016, the Board of Directors authorized a dividend of 48¢ per share, for shareholders of record as of May 13, 2016, payable on May 27, 2016. 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 has financed its dividends with cash provided by operations and current cash.

 

During the three months ended March 28, 2015, the Company repurchased 82,100 shares of its common stock for $2.8 million in the open market. The average price per share purchased was $34.57. These purchases were funded with cash on hand. As of April 2, 2016, $73.2 million remained authorized for future stock repurchases. No shares were repurchased in the three months ended April 2, 2016.

 

Based on its unencumbered assets, the Company believes it has the ability to raise cash through the issuance of short-term or long-term debt. The Company’s unsecured $40 million credit facility, which expires on June 15, 2016, remained unused at April 2, 2016 and the Company has no debt.

 

Other Operational Matters

 

In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to workplace safety, firearms serial number tracking and control, waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable Bureau of Alcohol, Tobacco, Firearms & Explosives, environmental, and safety regulations and the outcome of any proceedings or orders will not have a material adverse effect on the financial position or results of operations of the Company.

 

The Company self-insures a significant amount of its product liability, workers’ compensation, medical, and other insurance. It also carries significant deductible amounts on various insurance policies.

 

The Company expects to realize its deferred tax assets through tax deductions against future taxable income.

 

 

23 

Index  

Adjustments to Critical Accounting Policies

 

The Company has not made any adjustments to its critical accounting estimates and assumptions described in the Company’s 2015 Annual Report on Form 10-K filed on February 24, 2016, or the judgments affecting the application of those estimates and assumptions.

 

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, the impact of future firearms control and environmental legislation, and accounting estimates, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Historically, the Company has been exposed to changing interest rates on its investments, which consisted 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 typically low, as the investments mature within short periods and the Company does not have significant exposure to changing interest rates on invested cash, and there has been no material change in the Company’s exposure to interest rate risks during the three months ended April 2, 2016.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (the “Disclosure Controls and Procedures”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of April 2, 2016.

 

Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of April 2, 2016, such Disclosure Controls and Procedures are effective to ensure that information required to be disclosed in the Company’s periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure.

 

24 

Index  

Additionally, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, there have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended April 2, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

The effectiveness of any system of internal controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that the Disclosure Controls and Procedures will detect all errors or fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system will be attained.

25 

Index 

 

PART II. OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

 

 

The nature of the legal proceedings against the Company is discussed at Note 10 to the financial statements, which are included in this Form 10-Q.

 

The Company has reported all cases instituted against it through December 31, 2015, 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.

 

During the three months ending April 2, 2016, one case was formally instituted against the Company, captioned Sandra Rice-Lum, Personal Representative for the Estate of Patricia McCormick v. Sturm, Ruger & Company, Inc., et al pending in Broward County Circuit Court, Florida.

 

During three months ending April 2, 2016, no cases previously reported were dismissed or settled.

 

 

 

ITEM 1A. RISK FACTORS

 

There have been no material changes in the Company’s risk factors from the information provided in Item 1A. Risk Factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Not applicable

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable

 

 

ITEM 4. MINING SAFETY DISCLOSURES

 

Not applicable

 

 

ITEM 5. OTHER INFORMATION

 

None

 

 

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Index 

ITEM 6. EXHIBITS

 

(a)Exhibits:

 

31.1Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

27 

Index 

 

 

 

STURM, RUGER & COMPANY, INC.

 

FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 2, 2016

 

SIGNATURES

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

    STURM, RUGER & COMPANY, INC.
     
     
     
     
Date:  May 2, 2016   S/THOMAS A. DINEEN
   

Thomas A. Dineen

Principal Financial Officer,

Principal Accounting Officer,

Vice President, Treasurer and Chief Financial
Officer

     
     
     
     

 

 

28