10-Q
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the quarterly period ended March 31, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the transition period from to
Commission file number 1-10435
STURM,
RUGER & COMPANY, INC.
(Exact name of registrant as specified in its charter)
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| Delaware
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06-0633559 |
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| (State or other jurisdiction of
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(I.R.S. employer |
| incorporation or organization)
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identification no.) |
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| Lacey Place, Southport, Connecticut
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06890 |
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| (Address of principal executive offices)
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(Zip code) |
(203) 259-7843
(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the issuer’s common stock as of March 31, 2007: Common
Stock, $1 par value – 22,638,720.
INDEX
STURM, RUGER & COMPANY, INC.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
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March 31, |
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December 31, |
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2007 |
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2006 |
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(Note) |
Assets |
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|
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|
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Current Assets |
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|
|
|
|
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Cash and cash equivalents |
|
$ |
5,139 |
|
|
$ |
7,316 |
|
Short-term investments |
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|
48,925 |
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|
|
22,026 |
|
Trade receivables, net |
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|
17,171 |
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|
18,007 |
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|
|
|
|
|
|
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Gross inventories |
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|
70,932 |
|
|
|
87,477 |
|
Less LIFO reserve |
|
|
(51,821 |
) |
|
|
(57,555 |
) |
Less excess and obsolescence reserve |
|
|
(4,447 |
) |
|
|
(5,516 |
) |
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Net inventories |
|
|
14,664 |
|
|
|
24,406 |
|
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|
|
|
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Deferred income taxes |
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|
7,534 |
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|
8,347 |
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Prepaid expenses and other current assets |
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|
1,412 |
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|
1,683 |
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Total current assets |
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94,845 |
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|
81,785 |
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Property, plant and equipment |
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127,926 |
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|
128,042 |
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Less allowances for depreciation |
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(105,316 |
) |
|
|
(105,081 |
) |
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Net property, plant and equipment |
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|
22,610 |
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|
|
22,961 |
|
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|
|
|
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Deferred income taxes |
|
|
3,535 |
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|
|
3,630 |
|
Other assets |
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|
6,530 |
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|
8,690 |
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Total Assets |
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$ |
127,520 |
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|
$ |
117,066 |
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See notes to condensed financial statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
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March 31, |
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December 31, |
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2007 |
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2006 |
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(Note) |
Liabilities and Stockholders’ Equity |
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Current Liabilities |
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|
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|
|
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Trade accounts payable and accrued expenses |
|
$ |
4,341 |
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$ |
6,342 |
|
Product liability |
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|
776 |
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|
904 |
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Employee compensation and benefits |
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|
7,064 |
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|
6,416 |
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Workers’ compensation |
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6,519 |
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6,547 |
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Income taxes payable |
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4,912 |
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|
1,054 |
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Total current liabilities |
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23,612 |
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|
21,263 |
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Accrued pension liability |
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7,632 |
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7,640 |
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Product liability accrual |
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|
814 |
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|
837 |
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Contingent liabilities – Note 7 |
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— |
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— |
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Stockholders’ Equity |
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Common Stock, non-voting, par value $1: |
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Authorized shares 50,000; none issued |
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— |
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— |
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Common Stock, par value $1: Authorized shares -
40,000,000; issued and outstanding 22,638,700
and 22,638,700 |
|
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22,639 |
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22,639 |
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Additional paid-in capital |
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2,691 |
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2,615 |
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Retained earnings |
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82,565 |
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74,505 |
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Accumulated other comprehensive income (loss) |
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(12,433 |
) |
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|
(12,433 |
) |
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Total Stockholders’ Equity |
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|
95,462 |
|
|
|
87,326 |
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Total Liabilities and Stockholders’ Equity |
|
$ |
127,520 |
|
|
$ |
117,066 |
|
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Note:
The balance sheet at December 31, 2006 has been derived from the audited financial statements at
that date but does not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements.
See notes to condensed financial statements.
4
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
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Three Months Ended March 31, |
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2007 |
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2006 |
Net firearms sales |
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$ |
43,669 |
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$ |
40,825 |
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Net castings sales |
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4,787 |
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6,602 |
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Total net sales |
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48,456 |
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|
47,427 |
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Cost of products sold |
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32,893 |
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37,404 |
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Gross profit |
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|
15,563 |
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|
10,023 |
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Expenses: |
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Selling |
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|
3,336 |
|
|
|
4,020 |
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General and administrative |
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4,312 |
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|
3,708 |
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7,648 |
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7,728 |
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Operating profit |
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7,915 |
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|
2,295 |
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|
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|
|
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Gain on sale of non-manufacturing assets (Note 8) |
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|
5,202 |
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|
— |
|
Other income-net |
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|
339 |
|
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|
73 |
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Total other income |
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|
5,541 |
|
|
|
73 |
|
| |
|
|
|
|
|
|
|
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Income before income taxes |
|
|
13,456 |
|
|
|
2,368 |
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|
|
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|
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|
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Income taxes |
|
|
5,396 |
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|
949 |
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Net income |
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$ |
8,060 |
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$ |
1,419 |
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Earnings per share |
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|
|
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Basic |
|
$ |
0.36 |
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$ |
0.05 |
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Diluted |
|
$ |
0.36 |
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|
$ |
0.05 |
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|
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Average shares outstanding |
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|
|
|
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Basic |
|
|
22,639 |
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|
|
26,911 |
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|
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Diluted |
|
|
22,848 |
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26,911 |
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|
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|
See notes to condensed financial statements.
5
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
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Three Months Ended March 31, |
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|
2007 |
|
2006 |
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,060 |
|
|
$ |
1,419 |
|
Adjustments to reconcile net income to cash
provided by (use in) operating activities: |
|
|
|
|
|
|
|
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Depreciation |
|
|
1,091 |
|
|
|
1,170 |
|
Gain on sale of non-manufacturing assets |
|
|
(5,201 |
) |
|
|
— |
|
Deferred income taxes |
|
|
908 |
|
|
|
(54 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade receivables |
|
|
836 |
|
|
|
(4,982 |
) |
Inventories |
|
|
9,742 |
|
|
|
3,998 |
|
Trade accounts payable and other liabilities |
|
|
(1,381 |
) |
|
|
797 |
|
Product liability |
|
|
(151 |
) |
|
|
(376 |
) |
Prepaid expenses and other assets |
|
|
321 |
|
|
|
3,178 |
|
Income taxes |
|
|
3,858 |
|
|
|
(407 |
) |
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Cash Provided by Operating Activities |
|
|
18,083 |
|
|
|
4,743 |
|
| |
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Property, plant and equipment additions |
|
|
(740 |
) |
|
|
(585 |
) |
Proceeds from the sale of non-manufacturing assets |
|
|
7,379 |
|
|
|
— |
|
Purchases of short-term investments |
|
|
(26,899 |
) |
|
|
(33,739 |
) |
Proceeds from maturities of short-term investments |
|
|
— |
|
|
|
29,815 |
|
| |
Cash used for investing activities |
|
|
(20,260 |
) |
|
|
(4,509 |
) |
| |
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(2,177 |
) |
|
|
234 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
7,316 |
|
|
|
4,057 |
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period |
|
$ |
5,139 |
|
|
$ |
4,291 |
|
| |
See notes to condensed financial statements.
6
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2007
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of management, the accompanying unaudited condensed financial statements
include all adjustments, consisting of normal recurring accruals, considered necessary for a fair
presentation of the results of the interim periods. Operating results for the three months ended
March 31, 2007 are not necessarily indicative of the results to be expected for the full year
ending December 31, 2007. These financial statements have been prepared on a basis that is
substantially consistent with the accounting principles applied in our Annual Report on Form 10-K
for the year ended December 31, 2006.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Organization: Sturm, Ruger & Company, Inc. (“Company”) is principally engaged in the design,
manufacture, and sale of firearms and investment castings. The Company’s design and manufacturing
operations are located in the United States. Sales for the three months ended March 31, 2007 were
96% domestic and 4% export. The Company’s firearms are sold through a select number of independent
wholesale distributors to the sporting and law enforcement markets. Investment castings are sold
either directly or through manufacturers’ representatives to companies in a wide variety of
industries.
Use of Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Reclassifications: Certain prior year balances may have been reclassified to conform with
current year presentation.
Stock Incentive and Bonus Plans: At March 31, 2007, the Company has two stock-based
compensation plans. Readers should refer to both Item 8, Note 5 and Item 12 of the Company’s
financial statements, which are included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006, for additional information related to these stock-based compensation
plans. There were no options granted or exercised in the periods ending March 31, 2007 and 2006.
The Company accounts for stock option grants in accordance with FASB Statement 123(R), Share-Based
Payment. Compensation costs related to share-based payments recognized in the Condensed Statements
of Income were $76,000 and $12,000 for the periods ended March 31, 2007 and 2006, respectively.
7
Recent Accounting Pronouncements:
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This Interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 on
January 1, 2007. The potential impact of FIN 48 on the Company’s financial position is discussed in
Note 4 to the condensed financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements, (“FAS 157”) and No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, (“FAS 159”). These Standards define fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and expands disclosures about
fair value measurements. FAS 157 and FAS 159 are effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The
adoption of FAS 157 and FAS 159 are not expected to have a material impact on the Company’s
financial position, results of operations and cash flows.
NOTE 3 — INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method. An actual valuation of
inventory under the LIFO method can be made only at the end of each year based on the inventory
levels and costs existing at that time. Accordingly, interim LIFO calculations must necessarily be
based on management’s estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management’s control, interim results are subject to the final
year-end LIFO inventory valuation.
During the first quarter of 2007, inventory quantities were reduced. This reduction in
inventory levels is expected to continue through year-end. This reduction will result in a
liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as
compared with the current cost of purchases. Although the effect of such a liquidation cannot be
precisely quantified at the present time, management believes that if a LIFO liquidation continues
to occur in 2007, the impact may be material to the Company’s results of operations for the period
but will not have a material impact on the financial position of the Company. The Company estimates
that the impact of this liquidation on the results of operations for the period ended March 31,
2007 was to reduce cost of products sold by $4.4 million.
Inventories consist of the following (in thousands):
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|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2007 |
|
|
2006 |
|
| |
Inventory at FIFO
|
|
|
|
|
|
|
|
|
Finished products |
|
$ |
8,852 |
|
|
$ |
13,117 |
|
Materials and work in process |
|
|
62,080 |
|
|
|
74,360 |
|
|
|
|
|
|
|
|
Gross inventory |
|
|
70,932 |
|
|
|
87,477 |
|
|
|
|
|
|
|
|
Less: LIFO reserve |
|
|
(51,821 |
) |
|
|
(57,555 |
) |
Less: excess and obsolescence reserve |
|
|
(4,447 |
) |
|
|
(5,516 |
) |
|
|
|
|
|
|
|
Net inventories |
|
$ |
14,664 |
|
|
$ |
24,406 |
|
|
|
|
|
|
|
|
8
In addition to the aforementioned liquidation, the LIFO reserve was further reduced by $1.3 million
as a result of the sale of excess titanium inventory in 2007. This sale did not have an
impact on the statement of income.
The excess and obsolescence reserve decreased as a result of an adjustment related to the increased
LIFO impact on the FIFO inventory.
NOTE 4 — INCOME TAXES
The Company’s 2007 and 2006 effective tax rate differs from the statutory tax rate due
principally to state income taxes. Income tax payments totaled $0.6 million for the three months
ended March 31, 2007. No income tax payments were made in the quarter ended March 31, 2006.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes,” on January 1, 2007.
The Company files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state
income tax examinations by tax authorities for years before 2003. In the first quarter of 2007, the
Internal Revenue Service (IRS) commenced an examination of the Company’s Federal income tax return
for 2005. The Company anticipates that the IRS will complete this examination by the end of 2007.
The Company does not anticipate that adjustments resulting from this examination, if any, would
result in a material change to its financial position or results of operations.
Upon the adoption of FIN 48, the Company commenced a review of all open tax years in all
jurisdictions. The Company does not believe it has included any “uncertain tax positions” in its
Federal income tax return or any of the state income tax returns it is currently filing. The
Company has made an evaluation of the potential impact of additional state taxes
being assessed by jurisdictions in which the Company does not currently consider itself liable. The
Company does not anticipate that such additional taxes, if any, would result in a material change
to its financial position. However, the Company anticipates that it is more likely than not that
additional state tax liabilities in the range of $0.5 to $1.0 million exist. The Company had
previously recorded $0.7 million relating to these additional state income taxes, including
approximately $0.2 million for the payment of interest and penalties. This amount is included in
income taxes payable at March 31, 2007. In connection with the adoption of FIN 48, the Company will
include interest and penalties related to uncertain tax positions as a component of its provision
for taxes.
NOTE 5 — PENSION PLANS
The Company sponsors two defined benefit pension plans which cover substantially all
employees. A third defined benefit plan is non-qualified and covers certain executive officers of
the Company. The estimated cost of these plans is summarized below (in thousands):
| |
|
|
|
|
|
|
|
|
| Three months ended March 31, |
|
2007 |
|
2006 |
| |
Service cost |
|
$ |
352 |
|
|
$ |
405 |
|
Interest cost |
|
|
727 |
|
|
|
821 |
|
Expected return on plan assets |
|
|
(893 |
) |
|
|
(993 |
) |
Amortization of prior service cost |
|
|
34 |
|
|
|
66 |
|
Recognized actuarial gains |
|
|
262 |
|
|
|
256 |
|
| |
Net periodic pension cost |
|
$ |
482 |
|
|
$ |
555 |
|
| |
9
The Company made contributions totaling $0.5 million related to its defined benefit pension
plans in the first quarter of 2007. The Company expects its contribution requirements for its
defined benefit pension plans for the balance of 2007 to be approximately $1.5 million.
NOTE 6 — BASIC AND DILUTED EARNINGS PER SHARE
Shares outstanding as of March 31, 2007 and 2006 were 22,638,720 and 26,910,720, respectively.
Diluted earnings per share reflect the impact of options outstanding using the treasury stock
method, when applicable. This resulted in diluted weighted-average shares outstanding for the
three months ended March 31, 2007 and 2006 of 22,847,578 shares and 26,911,000, respectively.
NOTE 7 — CONTINGENT LIABILITIES
(The following disclosures within “Note 7-Contingent Liabilities” are identical to the disclosures
within “Firearms Litigation” in Item 2-Management’s Discussion and Analysis of Financial Condition
and Results of Operations.)
As of March 31, 2007, the Company is a defendant in approximately 3 lawsuits involving its
products and is aware of certain other such claims. These lawsuits and claims fall into two
categories:
| |
(i) |
|
those that claim damages from the Company related to allegedly defective product design
which stem from a specific incident. No such lawsuits are presently pending. Pending
claims are based principally on the theory of “strict liability” but also may be based on
negligence, breach of warranty, and other legal theories; and |
| |
| |
(ii) |
|
those brought by cities, municipalities, counties, and individuals against firearms
manufacturers, distributors and dealers seeking to recover damages allegedly arising out of
the misuse of firearms by third parties in the commission of homicides, suicides and other
shootings involving juveniles and adults. There are three such lawsuits presently pending:
Gary, Indiana; Washington, D. C.; and New York City, all discussed further below. The
complaints by municipalities seek damages, among other things, for the costs of medical
care, police and emergency services, public health services, and the maintenance of courts,
prisons, and other services. In certain instances, the plaintiffs seek to recover for
decreases in property values and loss of business within the city due to criminal violence.
In addition, nuisance abatement and/or injunctive relief is sought to change the design,
manufacture, marketing and distribution practices of the various defendants. These suits
allege, among other claims, strict liability or negligence in the design of products,
public nuisance, negligent entrustment, negligent distribution, deceptive or fraudulent
advertising, violation of consumer protection statutes and conspiracy or concert of action
theories. Most of these cases do not allege a specific injury to a specific individual as
a result of the misuse or use of any of the Company’s products. |
The Company has expended significant amounts of financial resources and management time in
connection with product liability litigation. Management believes that, in every case involving
firearms, the allegations are unfounded, and that the shootings and any results therefrom were due
to negligence or misuse of the firearms by third-parties or the claimant, and that there should be
no recovery against the Company. Defenses further exist to the suits brought by cities,
municipalities, and counties based, among other reasons, on established state law precluding
recovery by municipalities for essential government services, the remoteness of the claims, the
types of damages sought to be recovered, and limitations on the extraterritorial authority which
may be exerted by a city, municipality, county or state under state and federal law, including
State and Federal Constitutions.
10
The only case against the Company alleging liability for criminal shootings by third-parties
to ever be permitted to go before a constitutional jury, Hamilton, et al. v. Accu-tek, et
al., resulted in a defense verdict in favor of the Company on February 11, 1999. In that case,
numerous firearms manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and “industry-wide” liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of the seven cases
decided by the jury. In subsequent proceedings involving other defendants, the New York Court of
Appeals as a matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a manufacturer’s lawfully made products; and 2)
liability of firearms manufacturers could not be apportioned under a market share theory. More
recently, the New York Court of Appeals on October 21, 2003 declined to hear the appeal from the
decision of the New York Supreme Court, Appellate Division, affirming the dismissal of New York
Attorney General Eliot Spitzer’s public nuisance suit against the Company and other manufacturers
and distributors of firearms. In its decision, the Appellate Division relied heavily on
Hamilton in concluding that it was “legally inappropriate,” “impractical,” “unrealistic”
and “unfair” to attempt to hold firearms manufacturers responsible under theories of public
nuisance for the criminal acts of others.
Of the lawsuits brought by municipalities or a state Attorney General, twenty have been
concluded: Atlanta – dismissal by intermediate Appellate Court, no further appeal;
Bridgeport – dismissal affirmed by Connecticut Supreme Court; County of Camden –
dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami – dismissal affirmed by
intermediate appellate court, Florida Supreme Court declined review; New Orleans –
dismissed by Louisiana Supreme Court, United States Supreme Court declined review;
Philadelphia – U.S. Third Circuit Court of Appeals affirmed dismissal, no further appeal;
Wilmington – dismissed by trial court, no appeal; Boston – voluntary dismissal with
prejudice by the City at the close of fact discovery; Cincinnati – voluntarily withdrawn
after a unanimous vote of the city council; Detroit – dismissed by Michigan Court of
Appeals, no appeal; Wayne County – dismissed by Michigan Court of Appeals, no appeal;
New York State – Court of Appeals denied plaintiff’s petition for leave to appeal the
Intermediate Appellate Court’s dismissal, no further appeal; Newark – Superior Court of New
Jersey Law Division for Essex County dismissed the case with prejudice; City of Camden –
dismissed on July 7, 2003, not reopened; Jersey City – voluntarily dismissed and not
re-filed; St. Louis – Missouri Supreme Court denied plaintiffs’ motion to appeal Missouri
Appellate Court’s affirmance of dismissal; Chicago – Illinois Supreme Court denied
plaintiffs’ petition for rehearing; and Los Angeles City, Los Angeles County,
San Francisco – Appellate Court affirmed summary judgment in favor of defendants, no
further appeal; and Cleveland – dismissed on January 24, 2006 for lack of prosecution.
The dismissal of the Washington, D.C. municipal lawsuit was sustained on appeal, but
individual plaintiffs were permitted to proceed to discovery and attempt to identify the
manufacturers of the firearms used in their shootings as “machine guns” under the city’s “strict
liability” law. On April 21, 2005, the D.C. Court of Appeals, in an en banc hearing, unanimously
dismissed all negligence and public nuisance claims, but let stand individual claims based upon a
Washington, D.C. act imposing “strict liability” for manufacturers of “machine guns.” Based on
present information, none of the Company’s products has been identified with any of the criminal
assaults which form the basis of the individual claims. The writ of certiorari to the United
States Supreme Court regarding the constitutionality of the Washington, D.C. act was denied and the
case was remanded to the trial court for further proceedings. The defendants subsequently moved to
dismiss the case based upon the Protection of Lawful Commerce in Arms Act, which motion was granted
on May 22, 2006. The individual plaintiffs and the District of Columbia, which has subrogation
claims in regard to the individual plaintiffs, have appealed.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial
court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery
proceedings on December 23, 2003. Gary is scheduled to begin trial in 2009. The
defendants filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms Act
(“PLCAA”). The state court judge held the PLCAA unconstitutional and the defendants filed a motion
with the Indiana Court of Appeals asking it to accept interlocutory appeal on the issue, which
appeal was accepted on February 5, 2007.
11
In the previously reported New York City municipal case, the defendants moved to
dismiss the suit pursuant to the Protection of Lawful Commerce in Arms Act. The trial judge found
the Act to be constitutional but denied the defendants’ motion to dismiss the case, stating that
the Act was not applicable to the suit. The defendants were given leave to appeal and in fact have
appealed the decision to the U.S. Court of Appeals for the Second Circuit. That appeal is pending.
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the
NAACP’s claims. On July 21, 2003, Judge Jack B. Weinstein entered an order dismissing the
NAACP lawsuit, but this order contained lengthy dicta which defendants believe are contrary
to law and fact. Appeals by both sides were filed, but plaintiffs withdrew their appeal. On
August 3, 2004, the United States Court of Appeals for the Second Circuit granted the NAACP’s
motion to dismiss the defendants’ appeal of Judge Weinstein’s order denying defendants’ motion to
strike his dicta made in his order dismissing the NAACP’s case, and the defendants’ motion for
summary disposition was denied as moot. The ruling of the Second Circuit effectively confirmed the
decision in favor of defendants and brought this matter to a conclusion.
Legislation has been passed in approximately 34 states precluding suits of the type brought by
the municipalities mentioned above. On the Federal level, the “Protection of Lawful Commerce in
Arms Act” was signed by President Bush on October 26, 2005. The Act requires dismissal of suits
against manufacturers arising out of the lawful sale of their products for harm resulting from the
criminal or unlawful misuse of a firearm by a third party. The Company is pursuing dismissal of
each action involving such claims, including the municipal cases described above. The Company was
voluntarily dismissed with prejudice on March 23, 2007 from the previously reported Arnold case.
The matter was thus concluded with no payment by the Company.
Punitive damages, as well as compensatory damages, are demanded in certain of the lawsuits and
claims. Aggregate claimed amounts presently exceed product liability accruals and applicable
insurance coverage. For claims made after July 10, 2000, coverage is provided on an annual basis
for losses exceeding $5 million per claim, or an aggregate maximum loss of $10 million annually,
except for certain new claims which might be brought by governments or municipalities after July
10, 2000, which are excluded from coverage.
Product liability claim payments are made when appropriate if, as, and when claimants and the
Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the
lawsuits and claims develop, the timing of which may vary greatly from case to case. A time
schedule cannot be determined in advance with any reliability concerning when payments will be made
in any given case.
Provision is made for product liability claims based upon many factors related to the severity
of the alleged injury and potential liability exposure, based upon prior claim experience. Because
our experience in defending these lawsuits and claims is that unfavorable outcomes are typically
not probable or estimable, only in rare cases is an accrual established for such costs. In most
cases, an accrual is established only for estimated legal defense costs. Product liability
accruals are periodically reviewed to reflect then-current estimates of possible liabilities and
expenses incurred to date and reasonably anticipated in the future. Threatened product liability
claims are reflected in our product liability accrual on the same basis as actual claims; i.e., an
accrual is made for reasonably anticipated possible liability and claims-handling expenses on an
ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes cannot be made.
Currently, there are no product liability cases in which a dollar amount of damages is claimed. If
there were cases with claimed damages, the amount of damages claimed would be set forth as an
indication of possible maximum liability that the Company might be required to incur in these cases
(regardless of the likelihood or reasonable probability of any or all of this amount being awarded
to claimants) as a result of adverse judgments that are sustained on appeal.
The Company management monitors the status of known claims and the product liability accrual,
which includes amounts for asserted and unasserted claims. While it is not possible to forecast
the outcome of litigation or
12
the timing of costs, in the opinion of management, after consultation with special and corporate
counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will
have a material adverse effect on the financial position of the Company, but may have a material
impact on the Company’s financial results for a particular period.
The Company has reported all cases instituted against it through December 31, 2006 and the results
of those cases, where terminated, to the S.E.C. on its previous Form 10-K and 10-Q reports, to
which reference is hereby made.
NOTE 8 – RELATED PARTY TRANSACTIONS
On March 8, 2007 the Company sold 42 parcels of non-manufacturing real property for $7.3
million to William B. Ruger, the Company’s former Chief Executive Officer and Chairman of the
Board. The sales price was based upon an independent appraisal. The sale included substantially all
of the Company’s non-manufacturing real property assets in New Hampshire. The Company recognized a
gain of $5.2 million on the sale. Also in March 2007, the Company sold several pieces of artwork
to members of the Ruger family for $0.1 million and recognized insignificant gains from these
sales.
NOTE 9 — OPERATING SEGMENT INFORMATION
The Company has two reportable segments: firearms and investment castings. The firearms
segment manufactures and sells rifles, pistols, revolvers, and shotguns principally to a select
number of independent wholesale distributors primarily located in the United States. The
investment castings segment consists of two operating divisions that manufacture and sell titanium
and steel investment castings. In July 2006, the Company announced the cessation of titanium
castings operations. Production of these items was completed in the first quarter of 2007 and no
new orders will be accepted. The Company expects to ship approximately $0.5 million of orders open
as of March 31, 2007 for titanium castings from inventory during the remainder of 2007. The
Company continues to manufacture and sell steel investment castings for a wide variety of customers
and end uses. Selected operating segment financial information follows (in thousands):
| |
|
|
|
|
|
|
|
|
| Three months ended March 31, |
|
2007 |
|
2006 |
| |
Net Sales |
|
|
|
|
|
|
|
|
Firearms |
|
$ |
43,669 |
|
|
$ |
40,825 |
|
Castings |
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
4,787 |
|
|
|
6,602 |
|
Intersegment |
|
|
2,028 |
|
|
|
4,650 |
|
| |
|
|
|
6,815 |
|
|
|
11,252 |
|
Eliminations |
|
|
(2,028 |
) |
|
|
(4,650 |
) |
| |
|
|
$ |
48,456 |
|
|
$ |
47,427 |
|
| |
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
|
|
|
|
|
|
|
Firearms |
|
$ |
10,375 |
|
|
$ |
3,416 |
|
Castings |
|
|
(1,088 |
) |
|
|
(1,239 |
) |
Corporate |
|
|
4,169 |
|
|
|
192 |
|
| |
|
|
$ |
13,456 |
|
|
$ |
2,369 |
|
| |
| |
|
|
|
|
|
|
|
|
| March 31, |
|
2007 |
|
2006 |
| |
Identifiable Assets |
|
|
|
|
|
|
|
|
Firearms |
|
$ |
46,110 |
|
|
$ |
53,525 |
|
Castings |
|
|
11,691 |
|
|
|
17,154 |
|
Corporate |
|
|
69,719 |
|
|
|
46,387 |
|
| |
|
|
$ |
127,520 |
|
|
$ |
117,066 |
|
| |
13
NOTE 10 – SUBSEQUENT EVENT
On April 16, 2007, the Company sold a non-manufacturing facility in Arizona for $5 million.
This facility had not been used in the Company’s operations for several years. The Company expects
to realize a gain of approximately $1.5 million from this sale in the second quarter of 2007.
|
|
|
| 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 and precision investment castings. The Company’s design and
manufacturing operations are located in the United States. Sales for the three months ended March
31, 2007 were 96% domestic and 4% export. The Company’s firearms are sold through a select number
of independent wholesale distributors principally to the commercial sporting market.
Investment castings are manufactured from titanium and steel alloys. Investment castings are
sold either directly to or through manufacturers’ representatives to companies in a wide variety of
industries. In July 2006, the Company announced the cessation of titanium castings operations.
Production of these items was completed in the first quarter of 2007 and no new orders will be
accepted. The Company expects to ship approximately $0.5 million of open orders as of March 31,
2007 for titanium castings from inventory during the remainder of 2007. The Company will
consolidate its casting operations in its New Hampshire foundry in 2007. The Company does not
anticipate that there will be any significant costs associated with this consolidation. The Company
continues to manufacture and sell steel investment castings for a wide variety of customers and end
uses.
Because many 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 certain models of firearms are usually lower in the third quarter of the year.
Results of Operations
Backlog
In prior years, the Company received one cancelable annual firearms order in December from
each of its distributors. Effective December 1, 2006 the Company changed the manner in which
distributors order firearms, and began receiving firm, non-cancelable purchase orders on a frequent
basis, with most orders for immediate delivery. During the three months ended March 31, 2007,
firearms orders received totaled $58.9 million, and order backlog increased $11.6 million from
$16.2 million on December 31, 2006 to $27.8 million on March 31, 2007. Because of the
aforementioned change in the manner in which distributors now order firearms, comparable data for
the first quarter of 2006 is not meaningful.
Sales
Consolidated net sales were $48.4 million for the three months ended March 31, 2007. This
represents an increase of $1.0 million or 2.2% from consolidated net sales of $47.4 million in the
comparable prior year period.
14
Firearms segment net sales were $43.6 million for the three months ended March 31, 2007. This
represents an increase of $2.8 million or 6.9% from firearm net sales of $40.8 million in the
comparable prior year period.
Firearms unit shipments increased 2.2% for the three months ended March 31, 2007. Rifle
shipments increased 9.5% as demand remained strong for the Ruger 10/22 rimfire rifles and Mini-14
centerfire rifles. Revolver shipments decreased 6.6%, from the first quarter of 2006, due almost
entirely to the discounted 2006 sale of 5,000 units of a discontinued single-action revolver.
Eliminating the effect of this 2006 shipment, revolver sales would have increased 10.0% from the
comparable 2006 quarter. This comparison better reflects the greater availability and continued
strong demand of revolver models, particularly the Ruger New Vaquero. Shotgun shipments increased
9.4% and pistol shipments remained consistent with the prior year period.
Casting segment net sales were $4.8 million for the three months ended March 31, 2007. This
represents a decrease of $1.8 million or 27.3% from casting sales of $6.6 million in the comparable
prior year period.
The casting sales decrease reflects the cessation of titanium casting operations, as
previously announced by the Company in July 2006. Titanium casting sales accounted for $2.4
million or 50.0% of casting sales for the three months ended March 31, 2007 and $3.1 million or
47.0% of casting sales in the comparable prior year period. The Company continues to manufacture
and sell steel investment castings for a wide variety of customers and end uses.
Cost of Products Sold and Gross Margin
Consolidated cost of products sold was $32.9 million for the three months ended March 31,
2007. This represents a decrease of $4.5 million or 12.0% from consolidated cost of products sold
of $37.4 million in the comparable prior year period.
The gross margin as a percent of sales was 32.1% for the three months ended March 31, 2007.
This represents an increase from the gross margin of 21.1% in the comparable prior year period as
illustrated below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31 |
|
2007 |
|
2006 |
| |
Net sales |
|
$ |
48,456 |
|
|
|
100.0 |
% |
|
$ |
47,427 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products
sold, before LIFO and
overhead rate inventory
adjustments and product
liability (Note A) |
|
|
(35,549 |
) |
|
|
(73.4 |
)% |
|
|
(35,478 |
) |
|
|
(74.8 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin before LIFO
and overhead rate
inventory adjustments and
product liability |
|
|
12,907 |
|
|
|
26.6 |
% |
|
|
11,949 |
|
|
|
25.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFO and overhead rate
inventory adjustments and
product liability (Note
B) |
|
|
2,656 |
|
|
|
5.5 |
% |
|
|
(1,926 |
) |
|
|
(4.1 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
15,563 |
|
|
|
32.1 |
% |
|
$ |
10,023 |
|
|
|
21.1 |
% |
| |
Note A: Gross margin before inventory adjustments and product liability was favorably
impacted by stronger firearm sales and a favorable adjustment to the excess and obsolescence
reserve related to the increased LIFO impact, and was adversely impacted by reduced castings
production and sales for both outside customers and internal firearm segment consumption.
15
Note B: Gross margin was favorably impacted by a LIFO liquidation of $4.4 million and a
reduction in product liability of $0.4 million, and was adversely impacted by a reduction in
inventory value of $1.2 million related to reduced overhead rates .
LIFO—During the three months ended March 31, 2007 gross inventories were reduced by $16.5 million, compared to a decrease in gross inventories of $3.0 million in the comparable prior
year period. Inventories are not expected to increase above the March 31 levels during the
remainder of 2007. The 2007 reduction resulted in a liquidation of LIFO inventory quantities
carried at lower costs that prevailed in prior years as compared with the current cost of
purchases, the effect of which decreased costs of products sold by approximately $4.4 million
and increased gross margin by 9.2% of sales in the three month period ended March 31, 2007.
LIFO adjustments of $1.0 million resulted in an increase in cost of products sold in the
comparable prior year period. The LIFO reserve was further reduced in 2007 by $1.3 million as
a result of the sale of excess titanium inventory. This sale did not have an impact on
the statement of income.
Product Liability—During the three months ended March 31, 2007 and 2006, the Company
incurred product liability expense of $0.4 million and $0.8 million, respectively, which includes
the cost of outside legal fees, insurance, and other expenses incurred in the management and
defense of product liability matters.
Overhead Rate Change—The change in inventory value in the three months ended March 31, 2007
was a reduction of $1.4 million, which recognized the continued progress made in lowering overhead
rates the first quarter of 2007. The change in inventory value in the three months ended March 31,
2006 was a decrease of $0.2 million. The impact of the change in inventory value on gross margin
was 2.9% of sales in 2007 as compared to 0.4% of sales in 2006.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $7.6 million for the three months ended
March 31, 2007. This represents a decrease of $0.1 million or 1.0% from selling, general and
administrative expenses of $7.7 million in the comparable prior year period. The decrease reflects
$1.1 million severance costs related to the previously announced reduction-in-force program, offset
by a reduction in advertising and sales promotion expenses and a non-recurring charge of $0.7
million incurred in the first quarter of 2006 related to the retirement of the Company’s former
Chairman and Chief Executive Officer.
Other Income
Other income-net was $5.5 million for the three months ended March 31, 2007. This represents
an increase of $4.8 million from other income-net of $0.7 million in the comparable prior year
period. The increase is primarily attributable to the $5.2 million gain on the sale of
non-manufacturing real property in March of 2007.
Income Taxes and Net Income
The effective income tax rate of 40.1% in the three months ended March 31, 2007 remained
consistent with the income tax rate in 2006.
As a result of the foregoing factors, net income was $8.1 million for the three months ended
March 31, 2007. This represents an increase of $6.6 million or 468.0% from consolidated net income
of $1.4 million in the comparable prior year period.
16
Financial Condition
Operations
At March 31, 2007, the Company had cash, cash equivalents and short-term investments of $54.1
million. The Company’s pre-LIFO working capital of $122.7 million, less the LIFO reserve of $51.8
million, results in working capital of $70.9 million and a current ratio of 4.0 to 1.
Cash provided by operating activities was $18.1 million and $4.7 million for the three months
ended March 31, 2007 and 2006, respectively. The increase in cash provided is principally a result
of a decrease in inventory, improved net income and various fluctuations in operating asset and
liability accounts during the first three months of 2007 compared to the first three months of
2006.
Third parties supply the Company with various raw materials for its firearms and castings,
such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle and
shotgun stocks, wax, ceramic material, metal alloys, various synthetic products and other component
parts. There is a limited supply of these materials in the marketplace at any given time that can
cause the purchase prices to vary based upon numerous market factors. The Company believes that it
has adequate quantities of raw materials in inventory to provide ample time to locate and obtain
additional items at then-current market cost without interruption of its manufacturing operations.
However, if market conditions result in a significant prolonged inflation of certain prices or if
adequate quantities of raw materials can not be obtained, the Company’s manufacturing processes
could be interrupted and the Company’s financial condition or results of operations could be
materially adversely affected.
Investing and Financing
Capital expenditures for the three months ended March 31, 2007 totaled $0.7 million. For the
past two years capital expenditures averaged approximately $0.8 million per quarter. The Company
expects to spend approximately $3.3 million on capital expenditures during the remainder of 2007 to
purchase tooling for new product introductions and to upgrade and modernize manufacturing
equipment, primarily at the Newport Firearms and Pine Tree Castings Divisions. The Company
finances, and intends to continue to finance, these activities with funds provided by operations
and current cash and short-term investments.
On January 26, 2007, the Company announced that its Board of Directors authorized a stock
repurchase program. The program allows the Company to repurchase up to $20 million of its common
stock from time to time in the open market or through privately negotiated transactions. No shares
were repurchased during the quarter ended March 31, 2007.
On March 8, 2007 the Company sold 42 parcels of non-manufacturing real property for $7.3
million to William B. Ruger, the Company’s former Chief Executive Officer and Chairman of the
Board. The sale included substantially all of the Company’s non-manufacturing real property assets
in New Hampshire. The Company recognized a gain of $5.2 million on the sale.
On April 16, 2007, the Company sold a non-manufacturing facility in Arizona for $5
million. This facility had not been used in the Company’s operations for several years. The
Company expects to realize a gain of approximately $1.5 million and net cash of $4.6 million from
this sale in the second quarter of 2007.
There were no dividends paid for the three months ended March 31, 2007. The payment of future
dividends depends on many factors, including consistent quarterly operating earnings, internal
estimates of future performance, then-current cash and short-term investments and the Company’s
need for funds. The Company does not expect to pay dividends in the near term, but will reconsider
a dividend from time to time.
17
Historically, the Company has not required external financing. Based on its unencumbered
assets, the Company believes it has the ability to raise substantial amounts of cash through the
issuance of short-term or long-term debt.
Firearms 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 7-Contingent Liabilities.)
As of March 31, 2007, the Company is a defendant in approximately 3 lawsuits involving its
products and is aware of certain other such claims. These lawsuits and claims fall into two
categories:
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those that claim damages from the Company related to allegedly defective product
design which stem from a specific incident. No such lawsuits are presently pending.
Pending claims are based principally on the theory of “strict liability” but also may be
based on negligence, breach of warranty, and other legal theories; and |
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those brought by cities, municipalities, counties, and individuals against firearms
manufacturers, distributors and dealers seeking to recover damages allegedly arising out of
the misuse of firearms by third parties in the commission of homicides, suicides and other
shootings involving juveniles and adults. There are three such lawsuits presently pending:
Gary, Indiana; Washington, D. C.; and New York City, all discussed further below. The
complaints by municipalities seek damages, among other things, for the costs of medical
care, police and emergency services, public health services, and the maintenance of courts,
prisons, and other services. In certain instances, the plaintiffs seek to recover for
decreases in property values and loss of business within the city due to criminal violence.
In addition, nuisance abatement and/or injunctive relief is sought to change |
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the design, manufacture, marketing and distribution practices of the various defendants.
These suits allege, among other claims, strict liability or negligence in the design of
products, public nuisance, negligent entrustment, negligent distribution, deceptive or
fraudulent advertising, violation of consumer protection statutes and conspiracy or
concert of action theories. Most of these cases do not allege a specific injury to a
specific individual as a result of the misuse or use of any of the Company’s products. |
The Company has expended significant amounts of financial resources and management time in
connection with product liability litigation. Management believes that, in every case involving
firearms, the allegations are unfounded, and that the shootings and any results therefrom were due
to negligence or misuse of the firearms by third-parties or the claimant, and that there should be
no recovery against the Company. Defenses further exist to the suits brought by cities,
municipalities, and counties based, among other reasons, on established state law precluding
recovery by municipalities for essential government services, the remoteness of the claims, the
types of damages sought to be recovered, and limitations on the extraterritorial authority which
may be exerted by a city, municipality, county or state under state and federal law, including
State and Federal Constitutions.
The only case against the Company alleging liability for criminal shootings by third-parties
to ever be permitted to go before a constitutional jury, Hamilton, et al. v. Accu-tek, et
al., resulted in a defense verdict in favor of the Company on February 11, 1999. In that case,
numerous firearms manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and “industry-wide” liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of the seven cases
decided by the jury. In subsequent proceedings involving other defendants, the New York Court of
Appeals as a matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a manufacturer’s lawfully made products; and 2)
liability of firearms manufacturers could not be apportioned under a market share theory. More
recently, the New York Court of Appeals on October 21, 2003 declined to hear the appeal from the
decision of the New York Supreme Court, Appellate Division, affirming the dismissal of New York
Attorney General Eliot Spitzer’s public nuisance suit against the Company and other manufacturers
and distributors of firearms. In its decision, the Appellate Division relied heavily on
Hamilton in concluding that it was “legally inappropriate,” “impractical,” “unrealistic”
and “unfair” to attempt to hold firearms manufacturers responsible under theories of public
nuisance for the criminal acts of others.
Of the lawsuits brought by municipalities or a state Attorney General, twenty have been
concluded: Atlanta – dismissal by intermediate Appellate Court, no further appeal;
Bridgeport – dismissal affirmed by Connecticut Supreme Court; County of Camden –
dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami – dismissal affirmed by
intermediate appellate court, Florida Supreme Court declined review; New Orleans –
dismissed by Louisiana Supreme Court, United States Supreme Court declined review;
Philadelphia – U.S. Third Circuit Court of Appeals affirmed dismissal, no further appeal;
Wilmington – dismissed by trial court, no appeal; Boston – voluntary dismissal with
prejudice by the City at the close of fact discovery; Cincinnati – voluntarily withdrawn
after a unanimous vote of the city council; Detroit – dismissed by Michigan Court of
Appeals, no appeal; Wayne County – dismissed by Michigan Court of Appeals, no appeal;
New York State – Court of Appeals denied plaintiff’s petition for leave to appeal the
Intermediate Appellate Court’s dismissal, no further appeal; Newark – Superior Court of New
Jersey Law Division for Essex County dismissed the case with prejudice; City of Camden –
dismissed on July 7, 2003, not reopened; Jersey City – voluntarily dismissed and not
re-filed; St. Louis – Missouri Supreme Court denied plaintiffs’ motion to appeal Missouri
Appellate Court’s affirmance of dismissal; Chicago – Illinois Supreme Court denied
plaintiffs’ petition for rehearing; and Los Angeles City, Los Angeles County,
San Francisco – Appellate Court affirmed summary judgment in favor of defendants, no
further appeal; and Cleveland – dismissed on January 24, 2006 for lack of prosecution.
The dismissal of the Washington, D.C. municipal lawsuit was sustained on appeal, but
individual plaintiffs were permitted to proceed to discovery and attempt to identify the
manufacturers of the firearms used in their shootings as “machine guns” under the city’s “strict liability” law. On April 21, 2005, the D.C. Court of
Appeals, in an en banc hearing, unanimously dismissed all negligence and public nuisance claims,
but let stand individual
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claims based upon a Washington, D.C. act imposing “strict liability” for manufacturers of “machine
guns.” Based on present information, none of the Company’s products has been identified with any
of the criminal assaults which form the basis of the individual claims. The writ of certiorari to
the United States Supreme Court regarding the constitutionality of the Washington, D.C. act was
denied and the case was remanded to the trial court for further proceedings. The defendants
subsequently moved to dismiss the case based upon the Protection of Lawful Commerce in Arms Act,
which motion was granted on May 22, 2006. The individual plaintiffs and the District of Columbia,
which has subrogation claims in regard to the individual plaintiffs, have appealed.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial
court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery
proceedings on December 23, 2003. Gary is scheduled to begin trial in 2009. The
defendants filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms Act
(“PLCAA”). The state court judge held the PLCAA unconstitutional and the defendants filed a motion
with the Indiana Court of Appeals asking it to accept interlocutory appeal on the issue, which
appeal was accepted on February 5, 2007.
In the previously reported New York City municipal case, the defendants moved to
dismiss the suit pursuant to the Protection of Lawful Commerce in Arms Act. The trial judge found
the Act to be constitutional but denied the defendants’ motion to dismiss the case, stating that
the Act was not applicable to the suit. The defendants were given leave to appeal and in fact have
appealed the decision to the U.S. Court of Appeals for the Second Circuit. That appeal is pending.
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the
NAACP’s claims. On July 21, 2003, Judge Jack B. Weinstein entered an order dismissing the
NAACP lawsuit, but this order contained lengthy dicta which defendants believe are contrary
to law and fact. Appeals by both sides were filed, but plaintiffs withdrew their appeal. On
August 3, 2004, the United States Court of Appeals for the Second Circuit granted the NAACP’s
motion to dismiss the defendants’ appeal of Judge Weinstein’s order denying defendants’ motion to
strike his dicta made in his order dismissing the NAACP’s case, and the defendants’ motion for
summary disposition was denied as moot. The ruling of the Second Circuit effectively confirmed the
decision in favor of defendants and brought this matter to a conclusion.
Legislation has been passed in approximately 34 states precluding suits of the type brought by
the municipalities mentioned above. On the Federal level, the “Protection of Lawful Commerce in
Arms Act” was signed by President Bush on October 26, 2005. The Act requires dismissal of suits
against manufacturers arising out of the lawful sale of their products for harm resulting from the
criminal or unlawful misuse of a firearm by a third party. The Company is pursuing dismissal of
each action involving such claims, including the municipal cases described above. The Company was
voluntarily dismissed with prejudice on March 23, 2007 from the previously reported Arnold case.
The matter was thus concluded with no payment by the Company.
Punitive damages, as well as compensatory damages, are demanded in certain of the lawsuits and
claims. Aggregate claimed amounts presently exceed product liability accruals and applicable
insurance coverage. For claims made after July 10, 2000, coverage is provided on an annual basis
for losses exceeding $5 million per claim, or an aggregate maximum loss of $10 million annually,
except for certain new claims which might be brought by governments or municipalities after July
10, 2000, which are excluded from coverage.
Product liability claim payments are made when appropriate if, as, and when claimants and the
Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the
lawsuits and claims develop, the timing of which may vary greatly from case to case. A time
schedule cannot be determined in advance with any reliability concerning when payments will be made
in any given case.
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
20
an accrual established for such costs. In most cases, an accrual is established only for estimated
legal defense costs. Product liability accruals are periodically reviewed to reflect then-current
estimates of possible liabilities and expenses incurred to date and reasonably anticipated in the
future. Threatened product liability claims are reflected in our product liability accrual on the
same basis as actual claims; i.e., an accrual is made for reasonably anticipated possible liability
and claims-handling expenses on an ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes cannot be made.
Currently, there are no product liability cases in which a dollar amount of damages is claimed. If
there were cases with claimed damages, the amount of damages claimed would be set forth as an
indication of possible maximum liability that the Company might be required to incur in these cases
(regardless of the likelihood or reasonable probability of any or all of this amount being awarded
to claimants) as a result of adverse judgments that are sustained on appeal.
The Company management monitors the status of known claims and the product liability accrual,
which includes amounts for asserted and unasserted claims. While it is not possible to forecast
the outcome of litigation or the timing of costs, in the opinion of management, after consultation
with special and corporate counsel, it is not probable and is unlikely that litigation, including
punitive damage claims, will have a material adverse effect on the financial position of the
Company, but may have a material impact on the Company’s financial results for a particular period.
The Company has reported all cases instituted against it through December 31, 2006 and the
results of those cases, where terminated, to the S.E.C. on its previous Form 10-K and 10-Q reports,
to which reference is hereby made.
Other Operational Matters
In the normal course of its manufacturing operations, the Company is subject to occasional
governmental proceedings and orders pertaining to waste disposal, air emissions and water
discharges into the environment. The Company believes that it is generally in compliance with
applicable environmental regulations and the outcome of such proceedings and orders will not have a
material adverse effect on the financial position or results of operations of the Company.
The Company self-insures a significant amount of its product liability, workers compensation,
medical, and other insurance. It also carries significant deductible amounts on various insurance
policies.
The valuation of the future defined benefit pension obligations at December 31, 2006 indicated
that these plans were underfunded by $7.6 million and resulted in a cumulative other comprehensive
loss of $12.4 million on the Company’s balance sheet at December 31, 2006.
The Company expects to realize its deferred tax assets through tax deductions against future
taxable income.
Inflation’s effect on the Company’s operations is most immediately felt in cost of products
sold because the Company values inventory on the LIFO basis. Generally under this method, the cost
of products sold reported in the financial statements approximates current costs and, thus, reduces
distortion in reported income that would result from the slower recognition of increased costs when
other methods are used. In the three months ended March 31, 2007, however, a significant reduction
in inventories resulted in a liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years as compared with the current cost of purchases. This resulted in a
favorable LIFO adjustment to cost of sales of $4.4 million.
21
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its critical accounting estimates and assumptions
described in the Company’s 2006 Annual Report on Form 10-K filed on March 5, 2007, or the judgments
affecting the application of those estimates and assumptions.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This Interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 on
January 1, 2007. The potential impact of FIN 48 on the Company’s financial position is discussed in
Note 4 to the condensed financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements, (“FAS 157”) and No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, (“FAS 159”). These Standards define fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and expands disclosures about
fair value measurements. FAS 157 and FAS 159 are effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The
adoption of FAS 157 and FAS 159 are not expected to have a material impact on the Company’s
financial position, results of operations and cash flows.
Forward-Looking Statements and Projections
The Company may, from time to time, make forward-looking statements and projections concerning
future expectations. Such statements are based on current expectations and are subject to certain
qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated
castings sales and earnings, the need for external financing for operations or capital
expenditures, the results of pending litigation against the Company including lawsuits filed by
mayors, state attorneys general and other governmental entities and membership organizations, and
the impact of future firearms control and environmental legislation, any one or more of which could
cause actual results to differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publish revised forward-looking statements to reflect events or
circumstances after the date such forward-looking statements are made or to reflect the occurrence
of subsequent unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates affecting the return on
its investments but does not consider this interest rate market risk exposure to be material to its
financial condition or results of operations. The Company invests primarily in a bank-managed
money market fund that invests principally in United States Treasury instruments, all maturing
within one year. The carrying amount of these investments approximates fair value due to the
short-term maturities. Under its current policies, the Company does not use derivative financial
instruments, derivative commodity instruments or other financial instruments to manage its exposure
to changes in interest rates or commodity prices.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and
Treasurer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure
controls and procedures (the “Disclosure Controls and Procedures”), as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), as of the March 31, 2007.
Based on the evaluation, the Company’s Chief Executive Officer and Treasurer and Chief
Financial Officer have concluded that, as of March 31, 2007, 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.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
our most recently completed fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at Note 7 to this Form
10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through December 31, 2006, and the
results of those cases, where terminated, to the S.E.C. on its previous Form 10-Q and 10-K reports,
to which reference is hereby made.
No cases were formally instituted against the Company during the three months ended March 31,
2007.
During the three months ending March 31, 2007, no previously reported cases were settled.
On March 23, 2007 the previously reported case of Arnold v. Company was voluntarily dismissed
with prejudice by the plaintiff, thus concluding that matter with no payment by the Company.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from the information provided in Item 1A.
Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits:
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31.1 |
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Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2007
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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STURM, RUGER & COMPANY,
INC. |
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Date: April 20, 2007
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S/THOMAS A. DINEEN
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Thomas A. Dineen |
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Principal Financial Officer, |
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Vice President, Treasurer and Chief Financial Officer |
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