FORM 10-Q
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 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 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 June 30, 2007: Common Stock, $1 par value – 22,679,585.
 
 

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INDEX
STURM, RUGER & COMPANY, INC.
             
PART I.          
   
 
       
Item 1.          
   
 
       
        3  
   
 
       
        5  
   
 
       
        6  
   
 
       
        7  
   
 
       
Item 2.       14  
   
 
       
Item 3.       24  
   
 
       
Item 4.       24  
   
 
       
PART II.          
   
 
       
Item 1.       24  
   
 
       
Item 1A.       25  
   
 
       
Item 2.       25  
   
 
       
Item 3.       25  
   
 
       
Item 4.       25  
   
 
       
Item 5.       26  
   
 
       
Item 6.       26  
   
 
       
SIGNATURES     27  
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
     STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
                 
    June 30,   December 31,
    2007   2006
            (Note)
Assets
               
 
               
Current Assets
               
Cash and cash equivalents
  $ 6,448     $ 7,316  
Short-term investments
    64,122       22,026  
Trade receivables, net
    13,459       18,007  
 
               
Gross inventories
    60,861       87,477  
Less LIFO reserve
    (45,287 )     (57,555 )
Less excess and obsolescence reserve
    (4,004 )     (5,516 )
 
Net inventories
    11,570       24,406  
 
 
               
Deferred income taxes
    7,331       8,347  
Prepaid expenses and other current assets
    971       1,683  
 
Total current assets
    103,901       81,785  
 
               
Property, plant and equipment
    124,124       128,042  
Less allowances for depreciation
    (101,924 )     (105,081 )
 
Net property, plant and equipment
    22,200       22,961  
 
 
               
Deferred income taxes
    2,766       3,630  
Other assets
    3,947       8,690  
 
Total Assets
  $ 132,814     $ 117,066  
 
See notes to condensed financial statements.

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
     STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
                 
    June 30,   December 31,
    2007   2006
            (Note)
Liabilities and Stockholders’ Equity
               
 
               
Current Liabilities
               
Trade accounts payable and accrued expenses
  $ 4,836     $ 6,342  
Product liability
    1,335       904  
Employee compensation and benefits
    6,227       6,416  
Workers’ compensation
    6,500       6,547  
Income taxes payable
    4,270       1,054  
 
Total current liabilities
    23,168       21,263  
 
               
Accrued pension liability
    7,618       7,640  
Product liability accrual
    778       837  
Contingent liabilities – Note 8
           
 
               
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; issued and outstanding 22,679,585 and 22,638,700
    22,680       22,639  
Additional paid-in capital
    3,307       2,615  
Retained earnings
    87,696       74,505  
Accumulated other comprehensive income (loss)
    (12,433 )     (12,433 )
 
Total Stockholders’ Equity
    101,250       87,326  
 
Total Liabilities and Stockholders’ Equity
  $ 132,814     $ 117,066  
 
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.

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STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
         
Net firearms sales
  $ 39,567     $ 29,222     $ 83,237     $ 70,047  
Net castings sales
    2,540       6,054       7,327       12,656  
 
Total net sales
    42,107       35,276       90,564       82,703  
 
                               
Cost of products sold
    28,979       26,891       61,872       64,175  
 
Gross profit
    13,128       8,385       28,692       18,528  
 
 
                               
Expenses:
                               
Selling
    3,557       3,815       6,894       7,834  
General and administrative
    3,523       2,791       7,835       6,619  
 
 
    7,080       6,606       14,729       14,453  
 
 
                               
Operating profit
    6,048       1,779       13,963       4,075  
 
                               
Gain on sale of non-manufacturing assets (Notes 9 and 11)
    1,883             7,085        
Other income-net
    635       639       975       712  
 
Total other income
    2,518       639       8,060       712  
 
 
                               
Income before income taxes
    8,566       2,418       22,023       4,787  
 
                               
Income taxes
    3,435       970       8,831       1,919  
 
 
                               
Net income
  $ 5,131     $ 1,448     $ 13,192     $ 2,868  
 
 
                               
Earnings per share
                               
Basic
  $ 0.23     $ 0.06     $ 0.58     $ 0.11  
 
                       
Diluted
  $ 0.22     $ 0.06     $ 0.57     $ 0.11  
 
                       
 
                               
Average shares outstanding
                               
Basic
    22,658       26,911       22,649       26,911  
 
                       
Diluted
    23,068       26,912       22,951       26,912  
 
                       
See notes to condensed financial statements.

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STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
                 
    Six Months Ended June 30,
    2007   2006
     
Operating Activities
               
Net income
  $ 13,192     $ 2,868  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Depreciation
    2,108       2,345  
Gain on sale of non-manufacturing assets
    (7,085 )      
Deferred income taxes
    1,880       (340 )
Changes in operating assets and liabilities:
               
Trade receivables
    4,548       (351 )
Inventories
    12,836       (1,677 )
Trade accounts payable and other liabilities
    (1,899 )     509  
Product liability
    372       (296 )
Prepaid expenses and other assets
    879       3,998  
Income taxes
    3,216       257  
 
Cash Provided by Operating Activities
    30,047       7,313  
 
 
               
Investing Activities
               
Property, plant and equipment additions
    (1,304 )     (1,648 )
Proceeds from the sale of non-manufacturing assets
    12,485        
Purchases of short-term investments
    (44,096 )     (63,465 )
Proceeds from maturities of short-term investments
    2,000       57,057  
 
Cash used for investing activities
    (30,915 )     (8,056 )
 
 
               
(Decrease) in cash and cash equivalents
    (868 )     (743 )
 
               
Cash and cash equivalents at beginning of period
    7,316       4,057  
 
               
 
Cash and cash equivalents at end of period
  $ 6,448     $ 3,314  
 
See notes to condensed financial statements.

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STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007
NOTE 1 — BASIS OF PRESENTATION
     The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
     In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results of the interim periods. Operating results for the six months ended June 30, 2007 are not indicative of the results to be expected for the full year ending December 31, 2007. These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the year ended December 31, 2006.
     NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Organization:
     Sturm, Ruger & Company, Inc. (“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 and six months ended June 30, 2007 were 95% domestic and 5% export. The Company’s firearms are sold through a select number of independent wholesale distributors principally to the commercial sporting market. Investment castings are sold either directly or through manufacturers’ representatives to companies in a wide variety of industries.
Use of Estimates:
     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications:
     Certain prior year balances may have been reclassified to conform with current year presentation.
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

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penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 on January 1, 2007. The 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 three and six month periods ended June 30, 2007, inventory quantities were reduced. This reduction in inventory levels is expected to continue through year-end. This reduction will result in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases. Although the effect of such a liquidation cannot be precisely quantified at the present time, management believes that if a LIFO liquidation continues to occur in 2007, the impact may be material to the 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 three and six month periods ended June 30, 2007 was to reduce cost of products sold by $6.5 and $16.2 million, respectively.

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Inventories consist of the following (in thousands):
                 
    June 30,     December 31,  
    2007     2006  
 
Inventory at FIFO
               
Finished products
  $ 7,670     $ 13,117  
Materials and work in process
    53,191       74,360  
 
Gross inventory
    60,861       87,477  
Less: LIFO reserve
    (45,287 )     (57,555 )
Less: excess and obsolescence reserve
    (4,004 )     (5,516 )
 
Net inventories
  $ 11,570     $ 24,406  
 
In addition to the aforementioned liquidation, the LIFO reserve was further reduced by $1.7 million as a result of the sale of excess titanium inventory in 2007. This sale did not have an impact on the statement of income.
The LIFO impact on FIFO inventory increased from 66% at December 31, 2006 to 74% at June 30, 2007. The excess and obsolescence reserve decreased as a result of this increase.
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 $3.0 million and $3.7 million for the three and six months ended June 30, 2007, respectively. No income tax payments were made in the three and six months ended June 30, 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 June 30, 2007. In connection with the adoption of FIN 48, the Company will include interest and penalties related to uncertain tax positions as a component of its provision for taxes.
NOTE 5 — PENSION PLANS
     The Company sponsors two defined benefit pension plans which cover substantially all employees. A third defined benefit plan is non-qualified and covers one current and two retired executive officers of the Company.

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The estimated cost of these plans is summarized below (in thousands):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
 
Service cost
    399     $ 406       751     $ 811  
Interest cost
    822       821       1,549       1,642  
Expected return on plan assets
    (1,011 )     (993 )     (1,904 )     (1,986 )
Amortization of prior service cost
    38       65       72       131  
Recognized actuarial gains
    297       256       559       512  
 
Net periodic pension cost
  $ 545     $ 555     $ 1,027     $ 1,110  
 
     The Company made contributions totaling $0.5 million and $1.0 million related to its defined benefit pension plans in the three and six months ended June 30, 2007. The Company expects its contributions for its defined benefit pension plans for the balance of 2007 to be approximately $1.0 million.
NOTE 6 – SHARE BASED PAYMENTS
     On February 23, 2007 the Company adopted and on April 24, 2007 shareholders approved The Sturm, Ruger & Company, Inc. 2007 Stock Incentive Plan (the “Plan”). The Plan replaces both the Company’s 1998 Stock Incentive Plan and its 2001 Stock Option Plan for Non-Employee Directors in advance of their expiration and becomes the sole plan for providing stock-based incentive compensation. All directors (including non-employee directors), officers, employees and independent contractors of the Company are eligible to participate in the Plan. The Plan provides for the issuance of up to 2,550,000 shares of the Company’s common stock over the ten-year term of the Plan.
     The Plan provides for the granting of non-qualified stock options to purchase up to 2,350,000 shares of the Company’s common stock at a price not less than 100% of the fair market value of the stock as of the date of the grant. Incentive stock options are only available to employee participants. Each non-employee director will be granted options to purchase 20,000 shares of stock upon becoming a director. Options are exercisable for a period of up to ten years. The Plan also provides for restricted stock awards available to all eligible participants. Each non-employee director will be granted an annual award of restricted stock equal to $25,000 on the date of grant. The Plan also provides for the granting of deferred stock awards and share appreciation rights to all eligible participants.
     A summary of changes in options outstanding under the 1998 Stock Incentive Plan and 2001 Stock Option Plan for Non-Employee Directors is summarized below:
         
        Weighted Average
    Shares   Exercise Price
 
Outstanding at December 31, 2006
  1,325,000   $9.46
Granted
   
Exercised
   
Expired
   
 
Outstanding June 30, 2007
  1,325,000   $9.46
 
     The aggregate intrinsic value (mean market price at June 30, 2007 less the weighted average exercise price) of options outstanding under the 1998 Stock Incentive Plan and 2001 Stock Option Plan for Non-Employee Directors was approximately $8.1 million.
     A summary of changes in options outstanding under the 2007 Stock Incentive Plan is summarized below:

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        Weighted Average
    Shares   Exercise Price
 
Outstanding at December 31, 2006
   
Granted
  286,250   $13.39
Exercised
   
Expired
   
 
Outstanding June 30, 2007
  286,250   $13.39
 
          The aggregate intrinsic value (mean market price at June 30, 2007 less the weighted average exercise price) of options outstanding under the 2007 Stock Incentive Plan was approximately $0.6 million.
     The aggregate compensation expense for options granted in April 2007, calculated using the Black-Scholes option-pricing model, was $0.7 million. This expense, which is a non-cash item, is being amortized in the Company’s Statement of Income over the vesting periods. 171,000 of the options granted to employees vest upon the Company's attainment of certain performance objectives if achieved within three years from the date of grant. 115,000 of the options granted to employees vest over five years. Compensation costs related to share-based payments granted under all three plans recognized in the Condensed Statements of Income aggregated $105,000 and $181,000 for the three and six months ended June 30, 2007, respectively. For the three and six months ended June 30, 2006, compensation costs related to share-based payments recognized in the Condensed Statements of Income were $10,000 and $18,000, respectively.
     In addition to the above options granted in the period ended June 30, 2007 under the 2007 Stock Incentive Plan, deferred stock awards totaling 29,945 shares with a fair value of $438,000 were granted to certain executives of the Company and restricted stock shares totaling 10,920 with a fair value of $150,000 were issued to non-employee directors of the Company in partial payment of directors’ fees. The deferred shares granted to employees vested thirty days from the date of grant. The restricted shares issued to non-employee directors vest on the date of the 2008 annual meeting of stockholders. As a result of granting these awards, the Company’s income before taxes and net income for both the three and six months ended June 30, 2007 were $438,000 and $262,000 lower, respectively.
     The Company has adopted a policy to pay 25% of the annual incentive compensation in deferred stock which vests over three years. This policy applies to all officers of the Company and commences with the 2007 fiscal year and any annual incentive compensation earned for that period.
NOTE 8 — BASIC AND DILUTED EARNINGS PER SHARE
     Shares outstanding as of June 30, 2007 and 2006 were 22,679,585 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 and six months ended June 30, 2007 of 23,068,100 and 22,951,100 shares, respectively. Diluted weighted average of shares outstanding for both the three and six months ended June 30, 2006 were 26,912,000.
NOTE 8 — CONTINGENT LIABILITIES
(The following disclosures within “Note 8-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 June 30, 2007, the Company is a defendant in approximately 5 lawsuits involving its products and is aware of certain other such claims. These lawsuits and claims fall into two categories:
  (i)   those that claim damages from the Company related to allegedly defective product design which stem from a specific incident. Pending lawsuits and claims are based principally on the theory of “strict liability” but also may be based on negligence, breach of warranty, and other legal theories; and

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  (ii)   those brought by cities or other governmental entities, and individuals against firearms manufacturers, distributors and dealers seeking to recover damages allegedly arising out of the misuse of firearms by third parties in the commission of homicides, suicides and other shootings involving juveniles and adults. 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 governmental entities based, among other reasons, on established state law precluding recovery for essential government services, the remoteness of the claims, the types of damages sought to be recovered, and limitations on the extraterritorial authority which may be exerted by a city, municipality, county or state under state and federal law, including State and Federal Constitutions.
     The only case against the Company alleging liability for criminal shootings by third-parties to ever be permitted to go before a constitutional jury, Hamilton, et al. v. Accu-tek, et al., resulted in a defense verdict in favor of the Company on February 11, 1999. In that case, numerous firearms manufacturers and distributors had been sued, alleging damages as a result of alleged negligent sales practices and “industry-wide” liability. The Company and its marketing and distribution practices were exonerated from any claims of negligence in each of the seven cases decided by the jury. In subsequent proceedings involving other defendants, the New York Court of Appeals as a matter of law confirmed that 1) no legal duty existed under the circumstances to prevent or investigate criminal misuses of a manufacturer’s lawfully made products; and 2) liability of firearms manufacturers could not be apportioned under a market share theory. More recently, the New York Court of Appeals on October 21, 2003 declined to hear the appeal from the decision of the New York Supreme Court, Appellate Division, affirming the dismissal of New York Attorney General Eliot Spitzer’s public nuisance suit against the Company and other manufacturers and distributors of firearms. In its decision, the Appellate Division relied heavily on Hamilton in concluding that it was “legally inappropriate,” “impractical,” “unrealistic” and “unfair” to attempt to hold firearms manufacturers responsible under theories of public nuisance for the criminal acts of others.
     Of the lawsuits brought by municipalities, counties or a state Attorney General, twenty have been concluded: Atlanta – dismissal by intermediate Appellate Court, no further appeal; Bridgeport – dismissal affirmed by Connecticut Supreme Court; County of Camden – dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami – dismissal affirmed by intermediate appellate court, Florida Supreme Court declined review; New Orleans – dismissed by Louisiana Supreme Court, United States Supreme Court declined review; Philadelphia – U.S. Third Circuit Court of Appeals affirmed dismissal, no further appeal; Wilmington – dismissed by trial court, no appeal; Boston – voluntary dismissal with prejudice by the City at the close of fact discovery; Cincinnati – voluntarily withdrawn after a unanimous vote of the city council; Detroit – dismissed by Michigan Court of Appeals, no appeal; Wayne County – dismissed by Michigan Court of Appeals, no appeal; New York State – Court of Appeals denied plaintiff’s petition for leave to appeal the Intermediate Appellate Court’s dismissal, no further appeal; Newark – Superior Court of New Jersey Law Division for Essex County dismissed the case with prejudice; City of Camden – dismissed on July 7, 2003, not reopened; Jersey City – voluntarily dismissed and not re-filed; St. Louis – Missouri Supreme Court denied plaintiffs’ motion to appeal Missouri Appellate Court’s affirmance of dismissal; Chicago

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Illinois Supreme Court affirmed trial court’s dismissal; and Los Angeles City, Los Angeles County, San Francisco – Appellate Court affirmed summary judgment in favor of defendants, no further appeal; and Cleveland – dismissed on January 24, 2006 for lack of prosecution.
     The dismissal of the Washington, D.C. municipal lawsuit was sustained on appeal, but individual plaintiffs were permitted to proceed to discovery and attempt to identify the manufacturers of the firearms used in their shootings as “machine guns” under the city’s “strict liability” law. On April 21, 2005, the D.C. Court of Appeals, in an en banc hearing, unanimously dismissed all negligence and public nuisance claims, but let stand individual claims based upon a Washington, D.C. act imposing “strict liability” for manufacturers of “machine guns.” Based on present information, none of the Company’s products has been identified with any of the criminal assaults which form the basis of the individual claims. The writ of certiorari to the United States Supreme Court regarding the constitutionality of the Washington, D.C. act was denied and the case was remanded to the trial court for further proceedings. The defendants subsequently moved to dismiss the case based upon the Protection of Lawful Commerce in Arms Act, which motion was granted on May 22, 2006. The individual plaintiffs and the District of Columbia, which has subrogation claims in regard to the individual plaintiffs, have appealed.
     The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery proceedings on December 23, 2003. Gary is scheduled to begin trial in 2009. The defendants filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms Act (“PLCAA”). The state court judge held the PLCAA unconstitutional and the defendants filed a motion with the Indiana Court of Appeals asking it to accept interlocutory appeal on the issue, which appeal was accepted on February 5, 2007.
     In the previously reported New York City municipal case, the defendants moved to dismiss the suit pursuant to the Protection of Lawful Commerce in Arms Act. The trial judge found the Act to be constitutional but denied the defendants’ motion to dismiss the case, stating that the Act was not applicable to the suit. The defendants were given leave to appeal and in fact have appealed the decision to the U.S. Court of Appeals for the Second Circuit. That appeal remains pending.
     In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the 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.

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     Product liability claim payments are made when appropriate if, as, and when claimants and the Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the lawsuits and claims develop, the timing of which may vary greatly from case to case. A time schedule cannot be determined in advance with any reliability concerning when payments will be made in any given case.
     Provision is made for product liability claims based upon many factors related to the severity of the alleged injury and potential liability exposure, based upon prior claim experience. Because our experience in defending these lawsuits and claims is that unfavorable outcomes are typically not probable or estimable, only in rare cases is an accrual established for such costs. In most cases, an accrual is established only for estimated legal defense costs. Product liability accruals are periodically reviewed to reflect then-current estimates of possible liabilities and expenses incurred to date and reasonably anticipated in the future. Threatened product liability claims are reflected in our product liability accrual on the same basis as actual claims; i.e., an accrual is made for reasonably anticipated possible liability and claims-handling expenses on an ongoing basis.
     A range of reasonably possible loss relating to unfavorable outcomes cannot be made. Currently, there are no product liability cases in which a dollar amount of damages is claimed. If there were cases with claimed damages, the amount of damages claimed would be set forth as an indication of possible maximum liability that the Company might be required to incur in these cases (regardless of the likelihood or reasonable probability of any or all of this amount being awarded to claimants) as a result of adverse judgments that are sustained on appeal.
     The Company management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company’s financial results for a particular period.
     The Company has reported all cases instituted against it through March 31, 2007 and the results of those cases, where terminated, to the S.E.C. on its previous Form 10-K and 10-Q reports, to which reference is hereby made.
NOTE 9 – RELATED PARTY TRANSACTIONS
     On March 8, 2007, the Company sold 42 parcels of non-manufacturing real property for $7.3 million to William B. Ruger, Jr., the 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 2007, the Company sold several pieces of artwork to members of the Ruger family for $0.2 million and recognized insignificant gains from these sales.
NOTE 10 — OPERATING SEGMENT INFORMATION
     The Company has two reportable segments: firearms and investment castings. The firearms segment manufactures and sells rifles, pistols, revolvers, and shotguns principally to a select number of independent wholesale distributors primarily located in the United States. The investment castings segment consists of one operating division that manufactures and sells steel investment castings. In July 2006, the Company announced the cessation of titanium castings operations. Production of titanium castings was completed in the first quarter of 2007. Sales of titanium castings for the remainder of 2007 will be insignificant. The Company continues to manufacture and sell steel investment castings. Selected operating segment financial information follows (in thousands):

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    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
 
Net Sales
                               
Firearms
  $ 39,567     $ 29,222     $ 83,237     $ 70,047  
Castings
                               
Unaffiliated
    2,540       6,054       7,327       12,656  
Intersegment
    2,051       3,406       4,080       8,056  
 
 
    4,591       9,460       11,407       20,712  
Eliminations
    (2,051 )     (3,406 )     (4,080 )     (8,056 )
 
 
  $ 42,107     $ 35,276       90,564     $ 82,703  
 
 
                               
Income (Loss) Before Income Taxes
                               
Firearms
  $ 6,348     $ 1,596     $ 16,724     $ 5,012  
Castings
    (565 )     (18 )     (1,653 )     (1,257 )
Corporate
    2,783       840       6,952       1,032  
 
 
  $ 8,566     $ 2,418     $ 22,023     $ 4,787  
 
 
                               
 
                    June 30,
2007
      December 31,
2006
 
 
Identifiable Assets
                               
Firearms
                  $ 40,712     $ 71,908  
Castings
                    10,077       18,945  
Corporate
                    82,875       52,189  
 
 
                  $ 132,664     $ 143,042  
 
NOTE 11 – NON-RECURRING EVENT
     On April 16, 2007, the Company sold a non-manufacturing facility in Arizona for $5.0 million. This facility had not been used in the Company’s operations for several years. The Company realized 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 investment castings. The Company’s design and manufacturing operations are located in the United States. Sales for the six months ended June 30, 2007 were 95% domestic and 5% 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. Sales of titanium castings for the remainder of 2007 will be insignificant. The Company consolidated its casting operations in its New Hampshire foundry during the first half of 2007. There were no significant costs associated with this consolidation. The Company continues to manufacture and sell steel investment castings.

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     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 experiences differing seasonality in various firearms product lines, typically related to their end-use applications, with the overall net effect being moderately lower firearms demand in the third quarter of the year.
Results of Operations
Orders Received and Backlog
     In prior years, the Company received one cancelable annual firearms order in December from each of its distributors. Effective December 1, 2006, the Company changed the manner in which distributors order firearms, and began receiving firm, non-cancelable purchase orders on a frequent basis, with most orders for immediate delivery. The gross value of orders received and ending backlog for the periods ending June 30, 2007 and March 31, 2007 are as follows (in millions, including Federal Excise Tax):
                 
    Three Months Ended
    June 30, 2007   March 31, 2007
Orders Received
  $ 39.1     $ 58.9  
Ending Backlog
  $ 23.3     $ 27.9  
     Because of the aforementioned change in the manner in which distributors now order firearms, comparable data for the three and six months ended June 30, 2006 is not meaningful.
Sales
     Consolidated net sales were $42.1 million for the three months ended June 30, 2007. This represents an increase of $6.8 million or 19.4% from consolidated net sales of $35.3 million in the comparable prior year period.
     For the six months ended June 30, 2007, consolidated net sales were $90.6 million, an increase of $7.9 million or 9.5% over sales of $82.7 million in the comparable 2006 period.
     Firearms segment net sales were $39.6 million for the three months ended June 30, 2007. This represents an increase of $10.3 million or 35.4% from firearm net sales of $29.2 million in the comparable prior year period.
     For the six months ended June 30, 2007, firearms segment net sales were $83.2 million. This represents an increase of $13.2 million or 18.8% from 2006 firearm net sales of $70.0 million in the comparable 2006 period.
     Firearms unit shipments increased 31.8% for the three months ended June 30, 2007 when compared to the second quarter of 2006. Rifle shipments increased 49.3% from the comparable prior year period due to strong demand and product availability. Revolver shipments increased 19.8% from the comparable prior year period. Pistol shipments increased 18.8% from the comparable prior year period. Shotgun shipments increased 35.8% from the comparable prior year period.
     For the six months ended June 30, 2007 firearms unit shipments increased 13.6% from the comparable 2006 period. Rifle shipments increased 25.7% from the comparable prior year period. Revolver shipments increased slightly from the 2006 period despite the 2006 shipment of 5,000 units of a discontinued single-action revolver. Eliminating the effect of this 2006 shipment, revolver sales would have increased 11.5% compared to the comparable

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prior year period. Shotgun shipments increased 18.5% and pistol shipments increased 9.4% from the comparable prior year period.
     Production of many models has not increased as quickly as demand and safety stock levels of finished goods inventory of those models has been depleted during the six-month period ending June 30, 2007. As a result, increased firearm shipments in future periods will be dependent on the ability to increase firearm production of those models.
     Casting segment net sales were $2.5 million for the three months ended June 30, 2007. This represents a decrease of $3.6 million or 58.0% from casting sales of $6.1 million in the comparable prior year period.
     For the six months ended June 30, 2007 casting segment net sales were $7.3 million. This represents a decrease of $5.4 million or 42.1% from casting sales of $12.7 million in the comparable prior year period.
     The casting sales decrease in both the three and six months ended June 30, 2007 reflects the cessation of titanium casting operations, as previously announced by the Company in July 2006. Titanium casting sales accounted for $0.2 million or 9.3% of casting sales for the three months ended June 30, 2007 and $2.4 million or 39.3% of total casting sales in the comparable prior year period. For the six months ended June 30, 2007 titanium casting sales were $2.7 million or 36.8% of total casting sales compared to $5.5 million or 43.4% in the comparable 2006 period. The Company continues to manufacture and sell steel investment castings.
Cost of Products Sold and Gross Margin
     Consolidated cost of products sold was $29.0 million for the three months ended June 30, 2007. This represents an increase of $2.1 million or 7.8% from consolidated cost of products sold of $26.9 million in the comparable prior year period.
     For the six months ended June 30, 2007, consolidated cost of products sold was $61.9 million. This represents a decrease of $2.3 million or 3.6% from consolidated cost of products sold of $64.2 million in the comparable prior year period.
     Gross margin as a percent of sales was 31.2% and 31.7% for the three and six months ended June 30, 2007, respectively. This represents increases from the gross margin of 23.8% and 22.4% in the comparable prior year periods as illustrated below (in thousands):
                                 
Three Months Ended June 30,   2007   2006
 
Net sales
  $ 42,107       100.0 %   $ 35,276       100.0 %
 
                               
Total cost of products sold, before LIFO and overhead rate adjustments to inventory and product liability
    (31,479 )     (74.8 )%     (23,316 )     (66.1 )%
 
 
                               
Performance gross margin *
    10,628       25.2 %     11,960       33.9 %
 
 
                               
LIFO income (expense)
    6,144       14.6 %     (1,686 )     (4.8 )%
Overhead rate adjustments to inventory
    (2,827 )     (6.7 )%     (1,066 )     (3.0 )%
Product liability
    (817 )     (1.9 )%     (823 )     (2.3 )%
 
 
Gross margin
  $ 13,128       31.2 %   $ 8,385       23.8 %
 

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Six Months Ended June 30,   2007   2006
 
Net sales
  $ 90,564       100.0 %   $ 82,703       100.0 %
 
                               
Total cost of products sold, before LIFO and overhead rate adjustments to inventory and product liability
    (67,039 )     (74.0 )%     (58,794 )     (71.1 )%
 
 
                               
Performance gross margin*
    23,525       26.0 %     23,909       28.9 %
 
 
                               
LIFO income (expense)
    10,566       11.7 %     (2,667 )     (3.2 )%
Overhead rate adjustments to inventory
    (4,226 )     (4.7 )%     (1,234 )     (1.5 )%
Product liability
    (1,173 )     (1.3 )%     (1,480 )     (1.8 )%
 
 
                               
Gross margin
  $ 28,692       31.7 %   $ 18,528       22.4 %
 
*   Performance Gross Margin is Gross Margin excluding the impact of LIFO and overhead rate adjustments to inventory and product liability
Performance Gross Margin— During the three and six months ended June 30, 2007 performance gross margin declined from the comparable prior year periods. The primary reasons were the significant inventory reduction experienced in 2007, resulting in the recognition of less efficient overhead incurred in prior periods, temporarily running certain production assets at lower rates than in prior periods to achieve the inventory reduction, and the expense associated with conversion of manufacturing processes (going “lean”). This inventory reduction effect is exacerbated in the year-over-year comparison due to the absorption of overhead during the comparable periods in 2006. The Company believes that short-term erosion in gross margin is common to companies experiencing similar significant reductions in inventory while they convert to lean manufacturing.
LIFO—During the three and six months ended June 30, 2007 gross inventories were reduced by $10.1 million and $26.6 million, respectively, compared to a increases in gross inventories of $7.2 million and $4.3 million in the comparable prior year periods. Inventories are not expected to increase above the June 30 levels during the remainder of 2007. The 2007 reduction resulted in LIFO income and decreased cost of products sold of $6.1 million and $10.6 million for the three and six months ended June 30, 2007, respectively. LIFO expense of $1.7 million and $2.7 million resulted in an increase in cost of products sold in the comparable prior year periods.
Overhead Rate Change—The change in inventory value as a result of a change in the overhead rate used to absorb overhead expenses into inventory remaining on the balance sheet for the three and six months ended June 30, 2007 were reductions of $2.8 million and $4.2, respectively, which recognized the continued progress made in lowering overhead rates. These reductions in inventory value resulted in increases to cost of products sold.
The change in inventory value as a result of a change in the overhead rate used to absorb overhead expenses into inventory remaining on the balance sheet in the three and six months ended June 30, 2006 were decreases of $1.1 million and $1.2 million, respectively. These reductions in inventory value resulted in increases to cost of products sold.
Product Liability—During the three and six months ended June 30, 2007 and 2006, the Company incurred product liability expense of $0.8 million and $1.2 million, respectively, which includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. For the comparable 2006 periods, product liability expenses totaled $0.8 million and $1.5 million, respectively.
Selling, General and Administrative Expenses

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     Selling, general and administrative expenses were $7.1 million and $14.7 million for the three and six months ended June 30, 2007, respectively. This represents increases of $0.5 million and $0.2 million from selling, general and administrative expenses of $6.6 million and $14.5 million in the comparable prior year periods. The increase for the three months ended June 30, 2007 reflects increased personnel related costs, partially offset by reductions in sales promotion expenses. The increase for the six months ended June 30, 2007 reflects increased personnel-related costs, partially offset by reductions in advertising and sales promotion expenses. The increased personnel costs for the six months ended June 30, 2007 includes $1.1 million of severance costs incurred in the first quarter of 2007 related to the previously announced reduction-in-force program, offset by the $0.7 million expense incurred in the first quarter of 2006 related to the retirement of the Company’s former Chairman and Chief Executive Officer.
Other Income
     Other income-net for the three and six months ended June 30, 2007 was $2.5 million and $8.1 million, respectively. This represents an increase from other income-net of $0.6 million and $0.7 million, respectively, in the comparable prior year periods. The increases are primarily attributable to a $5.2 million gain on the sale of non-manufacturing real property in March 2007 and a $1.5 million gain on the sale of non-manufacturing real property in April 2007 and increased income from short-term investments as a result of increased principal invested at higher interest rates.
Income Taxes and Net Income
     The effective income tax rate of 40.1% in the three and six months ended June 30, 2007 remained consistent with the income tax rate in 2006.
     As a result of the foregoing factors, net income was $5.1 million and $13.2 million for the three and six months ended June 30, 2007, respectively. This represents increases of $3.7 million and $10.3 million from net income of $1.4 million and $2.9 million in the comparable prior year periods.
Financial Condition
Operations
     At June 30, 2007, the Company had cash, cash equivalents and short-term investments of $70.6 million. The Company’s pre-LIFO working capital of $126.0 million, less the LIFO reserve of $45.3 million, results in working capital of $80.7 million and a current ratio of 4.5 to 1.
     Cash provided by operating activities was $30.0 million and $7.3 million for the six months ended June 30, 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 six months of 2007 compared to the first six 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.

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Investing and Financing
     Capital expenditures for the six months ended June 30, 2007 totaled $1.3 million. For the past two years capital expenditures averaged approximately $1.1 million per quarter. The Company expects to spend approximately $2.7 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 six months ended June 30, 2007.
     On March 8, 2007, the Company sold 42 parcels of non-manufacturing real property for $7.3 million to William B. Ruger, Jr., the 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 sales price was based upon an independent appraisal, and the Company recognized a gain of $5.2 million on the sale.
     On April 16, 2007, the Company sold a non-manufacturing facility in Arizona for $5.0 million. This facility had not been used in the Company’s operations for several years. The Company realized a gain of approximately $1.5 million and net cash of $4.6 million from this sale.
     There were no dividends paid for the six months ended June 30, 2007. The payment of future dividends depends on many factors, including consistent quarterly operating earnings, internal estimates of future performance, then-current cash and short-term investments and the 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.
     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

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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 8-Contingent Liabilities.)
     As of June 30, 2007, the Company is a defendant in approximately 5 lawsuits involving its products and is aware of certain other such claims. These lawsuits and claims fall into two categories:
  (i)   those that claim damages from the Company related to allegedly defective product design which stem from a specific incident. Pending lawsuits and claims are based principally on the theory of “strict liability” but also may be based on negligence, breach of warranty, and other legal theories; and
 
  (ii)   those brought by cities or other governmental entities, and individuals against firearms manufacturers, distributors and dealers seeking to recover damages allegedly arising out of the misuse of firearms by third parties in the commission of homicides, suicides and other shootings involving juveniles and adults. 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 governmental entities based, among other reasons, on established state law precluding recovery for essential government services, the remoteness of the claims, the types of damages sought to be recovered, and limitations on the extraterritorial authority which may be exerted by a city, municipality, county or state under state and federal law, including State and Federal Constitutions.
     The only case against the Company alleging liability for criminal shootings by third-parties to ever be permitted to go before a constitutional jury, Hamilton, et al. v. Accu-tek, et al., resulted in a defense verdict in favor of the Company on February 11, 1999. In that case, numerous firearms manufacturers and distributors had been sued, alleging damages as a result of alleged negligent sales practices and “industry-wide” liability. The Company and its marketing and distribution practices were exonerated from any claims of negligence in each of the seven cases decided by the jury. In subsequent proceedings involving other defendants, the New York Court of Appeals as a matter of law confirmed that 1) no legal duty existed under the circumstances to prevent or investigate criminal misuses of a manufacturer’s lawfully made products; and 2) liability of firearms manufacturers could not be apportioned under a market share theory. More recently, the New York Court of Appeals on October 21, 2003 declined to hear the appeal from the decision of the New York Supreme Court, Appellate Division, affirming the dismissal of New York Attorney General Eliot Spitzer’s public nuisance suit against the Company and other

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manufacturers and distributors of firearms. In its decision, the Appellate Division relied heavily on Hamilton in concluding that it was “legally inappropriate,” “impractical,” “unrealistic” and “unfair” to attempt to hold firearms manufacturers responsible under theories of public nuisance for the criminal acts of others.
     Of the lawsuits brought by municipalities, counties or a state Attorney General, twenty have been concluded: Atlanta – dismissal by intermediate Appellate Court, no further appeal; Bridgeport – dismissal affirmed by Connecticut Supreme Court; County of Camden – dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami – dismissal affirmed by intermediate appellate court, Florida Supreme Court declined review; New Orleans – dismissed by Louisiana Supreme Court, United States Supreme Court declined review; Philadelphia – U.S. Third Circuit Court of Appeals affirmed dismissal, no further appeal; Wilmington – dismissed by trial court, no appeal; Boston – voluntary dismissal with prejudice by the City at the close of fact discovery; Cincinnati – voluntarily withdrawn after a unanimous vote of the city council; Detroit – dismissed by Michigan Court of Appeals, no appeal; Wayne County – dismissed by Michigan Court of Appeals, no appeal; New York State – Court of Appeals denied plaintiff’s petition for leave to appeal the Intermediate Appellate Court’s dismissal, no further appeal; Newark – Superior Court of New Jersey Law Division for Essex County dismissed the case with prejudice; City of Camden – dismissed on July 7, 2003, not reopened; Jersey City – voluntarily dismissed and not re-filed; St. Louis – Missouri Supreme Court denied plaintiffs’ motion to appeal Missouri Appellate Court’s affirmance of dismissal; Chicago – Illinois Supreme Court affirmed trial court’s dismissal; and Los Angeles City, Los Angeles County, San Francisco – Appellate Court affirmed summary judgment in favor of defendants, no further appeal; and Cleveland – dismissed on January 24, 2006 for lack of prosecution.
     The dismissal of the Washington, D.C. municipal lawsuit was sustained on appeal, but individual plaintiffs were permitted to proceed to discovery and attempt to identify the manufacturers of the firearms used in their shootings as “machine guns” under the city’s “strict liability” law. On April 21, 2005, the D.C. Court of Appeals, in an en banc hearing, unanimously dismissed all negligence and public nuisance claims, but let stand individual claims based upon a Washington, D.C. act imposing “strict liability” for manufacturers of “machine guns.” Based on present information, none of the Company’s products has been identified with any of the criminal assaults which form the basis of the individual claims. The writ of certiorari to the United States Supreme Court regarding the constitutionality of the Washington, D.C. act was denied and the case was remanded to the trial court for further proceedings. The defendants subsequently moved to dismiss the case based upon the Protection of Lawful Commerce in Arms Act, which motion was granted on May 22, 2006. The individual plaintiffs and the District of Columbia, which has subrogation claims in regard to the individual plaintiffs, have appealed.
     The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery proceedings on December 23, 2003. Gary is scheduled to begin trial in 2009. The defendants filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms Act (“PLCAA”). The state court judge held the PLCAA unconstitutional and the defendants filed a motion with the Indiana Court of Appeals asking it to accept interlocutory appeal on the issue, which appeal was accepted on February 5, 2007.
     In the previously reported New York City municipal case, the defendants moved to dismiss the suit pursuant to the Protection of Lawful Commerce in Arms Act. The trial judge found the Act to be constitutional but denied the defendants’ motion to dismiss the case, stating that the Act was not applicable to the suit. The defendants were given leave to appeal and in fact have appealed the decision to the U.S. Court of Appeals for the Second Circuit. That appeal remains pending.
     In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the 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

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disposition was denied as moot. The ruling of the Second Circuit effectively confirmed the decision in favor of defendants and brought this matter to a conclusion.
     Legislation has been passed in approximately 34 states precluding suits of the type brought by the municipalities mentioned above. On the Federal level, the “Protection of Lawful Commerce in Arms Act” was signed by President Bush on October 26, 2005. The Act requires dismissal of suits against manufacturers arising out of the lawful sale of their products for harm resulting from the criminal or unlawful misuse of a firearm by a third party. The Company is pursuing dismissal of each action involving such claims, including the municipal cases described above. The Company was voluntarily dismissed with prejudice on March 23, 2007 from the previously reported Arnold case. The matter was thus concluded with no payment by the Company.
     Punitive damages, as well as compensatory damages, are demanded in certain of the lawsuits and claims. Aggregate claimed amounts presently exceed product liability accruals and applicable insurance coverage. For claims made after July 10, 2000, coverage is provided on an annual basis for losses exceeding $5 million per claim, or an aggregate maximum loss of $10 million annually, except for certain new claims which might be brought by governments or municipalities after July 10, 2000, which are excluded from coverage.
     Product liability claim payments are made when appropriate if, as, and when claimants and the Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the lawsuits and claims develop, the timing of which may vary greatly from case to case. A time schedule cannot be determined in advance with any reliability concerning when payments will be made in any given case.
     Provision is made for product liability claims based upon many factors related to the severity of the alleged injury and potential liability exposure, based upon prior claim experience. Because our experience in defending these lawsuits and claims is that unfavorable outcomes are typically not probable or estimable, only in rare cases is an accrual established for such costs. In most cases, an accrual is established only for estimated legal defense costs. Product liability accruals are periodically reviewed to reflect then-current estimates of possible liabilities and expenses incurred to date and reasonably anticipated in the future. Threatened product liability claims are reflected in our product liability accrual on the same basis as actual claims; i.e., an accrual is made for reasonably anticipated possible liability and claims-handling expenses on an ongoing basis.
     A range of reasonably possible loss relating to unfavorable outcomes cannot be made. Currently, there are no product liability cases in which a dollar amount of damages is claimed. If there were cases with claimed damages, the amount of damages claimed would be set forth as an indication of possible maximum liability that the Company might be required to incur in these cases (regardless of the likelihood or reasonable probability of any or all of this amount being awarded to claimants) as a result of adverse judgments that are sustained on appeal.
     The Company management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company’s financial results for a particular period.
     The Company has reported all cases instituted against it through March 31, 2007 and the results of those cases, where terminated, to the S.E.C. on its previous Form 10K and 10Q 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

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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 under funded 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 and six months ended June 30, 2007, however, a significant reduction in inventories resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases. This resulted in LIFO income and decreased cost of products sold of $6.5 million and $16.2 million for the three and six months ended June 30, 2007, respectively.
Adjustments to Critical Accounting Policies
     The Company has not made any adjustments to its critical accounting estimates and assumptions described in the 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 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

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could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     The Company is exposed to changes in prevailing market interest rates affecting the return on its investments but does not consider this interest rate market risk exposure to be material to its financial condition or results of operations. The Company invests primarily in a bank-managed money market fund that invests principally in United States Treasury instruments, all maturing within one year. The carrying amount of these investments approximates fair value due to the short-term maturities. Under its current policies, the Company does not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage its exposure to changes in interest rates or commodity prices.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
     The 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 June 30, 2007.
     Based on the evaluation, the Company’s Chief Executive Officer and Treasurer and Chief Financial Officer have concluded that, as of June 30, 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 8 to this Form 10-Q report, which is incorporated herein by reference.
     The Company has reported all cases instituted against it through March 31, 2007, and the results of those cases, where terminated, to the S.E.C. on its previous Form 10-Q and 10-K reports, to which reference is hereby made.
     Two cases were formally instituted against the Company during the three months ending June 30, 2007:
     Pearce v. Company, et al (MA) in the U.S. District Court for the District of Massachusetts. The plaintiff was allegedly injured when the fork on his bicycle failed, resulting in unspecified permanent injuries and property damage. The complaint alleges that either the Pine Tree Castings Division of the Company or Wyman-Gordon

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Investment Castings manufactured the casting from which the fork crown, the part that allegedly failed, was manufactured. Compensatory damages and costs are demanded.
     Watkins v. Company, et al (PA) in the Court of Common Pleas, Philadelphia County. The Writ alleges that a minor pointed “a handgun” at the minor decedent. The minor pulled the trigger and shot the decedent, resulting in his death. A Form Writ of Summons has been filed, but other details and the damages demanded are not set out.
     During the three months ending June 30, 2007, no previously reported cases were settled.
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
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
               Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2007 Annual Meeting of Stockholders of the Company was held on April 24, 2007. The table below sets forth the results of the votes taken on the 2007 Annual Meeting:
  1.  
                 
Election of Directors   Votes For     Votes Withheld  
Michael O. Fifer
    20,139,485       446,008  
Stephen L. Sanetti
    20,191,666       393,827  
James E. Service
    19,530,913       1,054,580  
John A. Cosentino, Jr.
    20,165,373       420,120  
C. Michael Jacobi
    20,236,993       348,500  
John M. Kingsley, Jr.
    19,192,632       1,392,861  
Stephen T. Merkel
    20,136,227       449,266  
Ronald C. Whitaker
    20,243,271       342,222  

  2.  
                 
Ratification of McGladrey & Pullen, LLP as Auditors for 2007
 
Votes For   Votes Against     Abstain  
20,417,757
    103,406       64,330  

  3.  
                         
Ruger 2007 Stock Incentive Plan
 
Votes For   Votes Against     Abstain     Non Votes  
7,619,564
    5,206,756       107,441       7,651,732  

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ITEM 5. OTHER INFORMATION
               None
ITEM 6. EXHIBITS
  (a)   Exhibits:
  31.1   Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
  31.2   Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
  32.1   Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  32.2   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 SIX MONTHS ENDED JUNE 30, 2007
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
  STURM, RUGER & COMPANY, INC.    
 
       
 
       
Date: July 23, 2007
  S/THOMAS A. DINEEN    
 
       
 
  Thomas A. Dineen    
 
  Principal Financial Officer,    
 
  Vice President, Treasurer and Chief Financial Officer    

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