STURM RUGER & CO INC - Quarter Report: 2010 October (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
__________
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended October 2,
2010
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
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STURM,
RUGER & COMPANY, INC.
|
|
(Exact
name of registrant as specified in its
charter)
|
|
Delaware
|
06-0633559
|
|
|
(State
or other jurisdiction of
|
(I.R.S.
employer
|
|
|
incorporation
or organization)
|
identification
no.)
|
|
|
Lacey
Place, Southport, Connecticut
|
06890
|
|
|
(Address
of principal executive offices)
|
(Zip
code)
|
(203)
259-7843
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such requirements for the
past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
Accelerated filer x Non-accelerated
filer o
Smaller reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of shares outstanding of the issuer's common stock as of October 26,
2010: Common Stock, $1 par value –18,822,284.
1
STURM,
RUGER & COMPANY, INC.
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
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Financial
Statements (Unaudited)
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|
|
3
|
||
|
5
|
||
|
6
|
||
|
7
|
||
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8
|
||
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Item
2.
|
16
|
|
|
Item
3.
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28
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|
|
Item
4.
|
28
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
30
|
|
|
Item
1A.
|
30
|
|
|
Item
2.
|
30
|
|
|
Item
3.
|
30
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|
|
Item
4.
|
30
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|
|
Item
5.
|
30
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|
|
Item
6.
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31
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32
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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)
|
October
2,
2010
|
December
31,
2009
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 5,492 | $ | 5,008 | ||||
|
Short-term
investments
|
47,492 | 50,741 | ||||||
|
Trade
receivables, net
|
25,934 | 25,049 | ||||||
|
Gross
inventories
|
51,205 | 51,048 | ||||||
|
Less
LIFO reserve
|
(38,711 | ) | (38,663 | ) | ||||
|
Less
excess and obsolescence reserve
|
(1,979 | ) | (2,727 | ) | ||||
|
Net
inventories
|
10,515 | 9,658 | ||||||
|
Deferred
income taxes
|
4,431 | 5,893 | ||||||
|
Prepaid
expenses and other current assets
|
2,268 | 2,062 | ||||||
|
Total
Current Assets
|
96,132 | 98,411 | ||||||
|
Property,
plant and equipment
|
149,151 | 134,057 | ||||||
|
Less
allowances for depreciation
|
(106,866 | ) | (101,324 | ) | ||||
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Net
property, plant and equipment
|
42,285 | 32,733 | ||||||
|
Deferred
income taxes
|
5,636 | 6,190 | ||||||
|
Other
assets
|
3,167 | 4,345 | ||||||
|
Total
Assets
|
$ | 147,220 | $ | 141,679 | ||||
Note:
The
balance sheet at December 31, 2009 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.
STURM,
RUGER & COMPANY, INC.
CONDENSED
BALANCE SHEETS (Continued)
(Dollars in thousands, except share
data)
|
October
2,
2010
|
December
31,
2009
|
|||||||
|
(Note)
|
||||||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Trade
accounts payable and accrued expenses
|
$ | 11,127 | $ | 12,011 | ||||
|
Product
liability
|
424 | 1,147 | ||||||
|
Employee
compensation and benefits
|
8,985 | 12,890 | ||||||
|
Workers’
compensation
|
4,849 | 5,443 | ||||||
|
Income
taxes payable
|
459 | 1,543 | ||||||
|
Total
Current Liabilities
|
25,844 | 33,034 | ||||||
|
Accrued
pension liability
|
12,179 | 12,194 | ||||||
|
Product
liability accrual
|
663 | 935 | ||||||
|
Contingent
liabilities – Note 12
|
-- | -- | ||||||
|
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
|
||||||||
|
2010
– 22,988,318 issued,
18,822,284 outstanding 2009
– 22,826,601 issued,
19,072,780 outstanding |
22,988 | 22,827 | ||||||
|
Additional
paid-in capital
|
8,913 | 8,031 | ||||||
|
Retained
earnings
|
132,879 | 115,187 | ||||||
|
Less:
Treasury stock – at cost
|
||||||||
|
2010
– 4,166,034 shares
2009
– 3,753,821 shares
|
(35,884 | ) | (30,167 | ) | ||||
|
Accumulated
other comprehensive loss
|
(20,362 | ) | (20,362 | ) | ||||
|
Total
Stockholders’ Equity
|
108,534 | 95,516 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 147,220 | $ | 141,679 | ||||
Note:
The
balance sheet at December 31, 2009 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.
STURM, RUGER & COMPANY, INC.
CONDENSED
STATEMENTS OF INCOME (UNAUDITED)
(In
thousands, except per share data)
|
Three
Months
Ended
|
Nine
Months
Ended
|
|||||||||||||||
|
October
2,
2010
|
October
3,
2009
|
October
2,
2010
|
October
3,
2009
|
|||||||||||||
|
Net
firearms sales
|
$ | 57,505 | $ | 70,011 | $ | 188,396 | $ | 203,611 | ||||||||
|
Net
castings sales
|
896 | 1,175 | 2,671 | 3,495 | ||||||||||||
|
Total
net sales
|
58,401 | 71,186 | 191,067 | 207,106 | ||||||||||||
|
|
||||||||||||||||
|
Cost
of products sold
|
39,818 | 49,404 | 127,613 | 140,766 | ||||||||||||
|
Gross
profit
|
18,583 | 21,782 | 63,454 | 66,340 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling
|
5,194 | 5,145 | 16,211 | 15,909 | ||||||||||||
|
General
and administrative
|
4,080 | 5,031 | 11,999 | 14,740 | ||||||||||||
|
Other
operating expenses, net
|
- | 275 | 398 | 950 | ||||||||||||
|
Total
operating expenses
|
9,274 | 10,451 | 28,608 | 31,599 | ||||||||||||
|
Operating
income
|
9,309 | 11,331 | 34,846 | 34,741 | ||||||||||||
|
Other
income:
|
||||||||||||||||
|
Interest
(expense) income, net
|
(18 | ) | 8 | (75 | ) | (12 | ) | |||||||||
|
Other
income, net
|
148 | 125 | 449 | 101 | ||||||||||||
|
Total
other income, net
|
130 | 133 | 374 | 89 | ||||||||||||
|
Income
before income taxes
|
9,439 | 11,464 | 35,220 | 34,830 | ||||||||||||
|
Income
taxes
|
3,398 | 4,356 | 12,679 | 13,235 | ||||||||||||
|
Net
income
|
$ | 6,041 | $ | 7,108 | $ | 22,541 | $ | 21,595 | ||||||||
|
Basic
earnings per share
|
$ | 0.32 | $ | 0.37 | $ | 1.18 | $ | 1.13 | ||||||||
|
Fully
diluted earnings per share
|
$ | 0.31 | $ | 0.37 | $ | 1.17 | $ | 1.12 | ||||||||
|
Cash
dividends per share
|
$ | 0.10 | $ | 0.12 | $ | 0.25 | $ | 0.21 | ||||||||
See
notes to condensed financial statements.
STURM, RUGER & COMPANY, INC.
CONDENSED
STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars
in thousands)
|
Common
Stock
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other Comprehensive Loss
|
Total
|
|||||||||||||||||||
|
Balance
at December 31, 2009
|
$ | 22,827 | $ | 8,031 | $ | 115,187 | $ | (30,167 | ) | $ | (20,362 | ) | $ | 95,516 | ||||||||||
|
Net
income and comprehensive income
|
22,541 | 22,541 | ||||||||||||||||||||||
|
Dividends
paid
|
(4,849 | ) | (4,849 | ) | ||||||||||||||||||||
|
Recognition
of stock-based compensation expense
|
1,711 | 1,711 | ||||||||||||||||||||||
|
Exercise
of stock options and vesting of RSU’s
|
(1,366 | ) | (1,366 | ) | ||||||||||||||||||||
|
Tax
benefit realized from exercise of stock options and vesting of
RSU’s
|
698 | 698 | ||||||||||||||||||||||
|
Common
stock issued – compensation plans
|
161 | (161 | ) | - | ||||||||||||||||||||
|
Repurchase
of 412,213 shares of common stock
|
(5,717 | ) | (5,717 | ) | ||||||||||||||||||||
|
Balance
at October 2, 2010
|
$ | 22,988 | $ | 8,913 | $ | 132,879 | $ | (35,884 | ) | $ | (20,362 | ) | $ | 108,534 | ||||||||||
See
notes to condensed financial statements.
STURM, RUGER & COMPANY, INC.
CONDENSED
STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in
thousands)
|
Nine
Months Ended
|
||||||||
|
October
2,
2010
|
October
3,
2009
|
|||||||
|
Operating
Activities
|
||||||||
|
Net
income
|
$ | 22,541 | $ | 21,595 | ||||
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
||||||||
|
Depreciation
|
6,863 | 4,987 | ||||||
|
Slow
moving inventory valuation adjustment
|
(692 | ) | (256 | ) | ||||
|
Stock-based
compensation
|
1,711 | 3,505 | ||||||
|
Loss
(Gain) on sale of assets
|
5 | (39 | ) | |||||
|
Deferred
income taxes
|
649 | (868 | ) | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Trade
receivables
|
(885 | ) | (935 | ) | ||||
|
Inventories
|
(165 | ) | 5,147 | |||||
|
Trade
accounts payable and accrued expenses
|
(1,477 | ) | 823 | |||||
|
Employee
compensation and benefits
|
(3,905 | ) | 4,610 | |||||
|
Product
liability
|
(995 | ) | 483 | |||||
|
Prepaid
expenses, other assets and other liabilities
|
933 | (106 | ) | |||||
|
Income
taxes payable
|
(1,085 | ) | (229 | ) | ||||
|
Cash
provided by operating activities
|
23,498 | 38,717 | ||||||
|
Investing
Activities
|
||||||||
|
Property,
plant and equipment additions
|
(16,416 | ) | (10,301 | ) | ||||
|
Proceeds
from sale of assets
|
21 | 44 | ||||||
|
Purchases
of short-term investments
|
(112,473 | ) | (78,217 | ) | ||||
|
Proceeds
from maturities of short-term investments
|
115,722 | 49,538 | ||||||
|
Cash
used for investing activities
|
(13,146 | ) | (38,936 | ) | ||||
|
Financing
Activities
|
||||||||
|
Tax
benefit from exercise of stock options
|
698 | 1,411 | ||||||
|
Repayment
of line of credit balance
|
- | (1,000 | ) | |||||
|
Repurchase
of common stock
|
(5,717 | ) | (14 | ) | ||||
|
Dividends
paid
|
(4,849 | ) | (3,985 | ) | ||||
|
Cash
used for financing activities
|
(9,868 | ) | (3,588 | ) | ||||
|
Increase
(decrease) in cash and cash equivalents
|
484 | (3,807 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
5,008 | 9,688 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 5,492 | $ | 5,881 | ||||
See
notes to condensed financial statements.
STURM, RUGER & COMPANY, INC.
NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars
in thousands, except per share)
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 nine months ended October 2, 2010
are not indicative of the results to be expected for the full year ending
December 31, 2010. 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,
2009.
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES
Organization:
Sturm,
Ruger & Company, Inc. (the “Company”) is principally engaged in the design,
manufacture, and sale of firearms to domestic
customers. Approximately 98% of the Company’s total sales for the
three and nine months ended October 2, 2010 were firearms sales, and
approximately 2% were investment castings sales. Export sales
represent approximately 5% of total sales. The Company’s design and
manufacturing operations are located in the United States and almost all product
content is domestic.
The
Company’s firearms are sold through a select number of independent wholesale
distributors principally to the commercial sporting market. Two of
these independent wholesale distributors merged in 2009. Further
consolidation of independent wholesale distributors would result in a greater
concentration of credit risk.
The
Company manufactures investment castings made from steel alloys for internal use
in its firearms and utilizes available investment casting capacity to
manufacture and sell castings to unaffiliated, third-party
customers.
Fair Value of Financial
Instruments:
The
carrying amounts of financial instruments, including cash, short-term
investments, accounts receivable, accounts payable and accrued liabilities
approximate fair value due to the short-term maturity of these
items.
Use of
Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Reclassifications:
Certain
prior period balances have been reclassified to conform to current year
presentation.
NOTE 3 –
SHORT-TERM INVESTMENTS
Short-term
investments consist principally of United States Treasury instruments, all
maturing within one year, and are recorded at cost plus accrued interest, which
approximates market. The income from short-term investments is included in other
income, net. The Company intends to hold these investments until
maturity.
The
Company evaluates securities for other than temporary impairment at least on a
quarterly basis, and more frequently when market conditions warrant such
evaluation. The Company has determined that the carrying value of
short-term investments has not been impaired.
NOTE 4 -
INVENTORIES
Inventories
are valued using the last-in, first-out (LIFO) method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs existing at that
time. Accordingly, interim LIFO calculations must necessarily be
based on management's estimates of expected year-end inventory levels and
costs. Because these are subject to many factors beyond management's
control, interim results are subject to the final year-end LIFO inventory
valuation.
During
the nine month period ended October 2, 2010, inventory quantities were
reduced. If this reduction remains through year-end, it will result
in a liquidation of LIFO inventory quantities carried at lower costs prevailing
in 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 2010, 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.
Inventories
consist of the following:
|
October
2,
2010
|
December
31,
2009
|
|||||||
|
Inventory
at FIFO
|
||||||||
|
Finished
products
|
$ | 7,561 | $ | 4,623 | ||||
|
Materials
and work in process
|
43,644 | 46,425 | ||||||
|
Gross
inventories
|
51,205 | 51,048 | ||||||
|
Less:
LIFO reserve
|
(38,711 | ) | (38,663 | ) | ||||
|
Less:
excess and obsolescence reserve
|
(1,979 | ) | (2,727 | ) | ||||
|
Net
inventories
|
$ | 10,515 | $ | 9,658 | ||||
NOTE 5 –
LINE OF CREDIT
In
December 2009, the Company renewed a $25 million credit facility with a bank.
This facility is renewable annually and now terminates on December 12,
2010. Borrowings under this facility bear interest at LIBOR (0.84% at
October 2, 2010) plus 200 basis points. The Company is charged 50 basis points
per year on the unused portion. At October 2, 2010 and December 31,
2009, the Company was in compliance with the terms and covenants of the credit
facility, which remains unused.
NOTE 6 –
EMPLOYEE BENEFIT PLANS
The
Company has migrated its retirement benefit focus from defined benefit pension
plans to defined contribution retirement plans, utilizing its current 401(k)
plan.
In 2007,
the Company amended its hourly and salaried defined benefit pension plans to
freeze the benefits for current participants and to discontinue the plans for
all future employees. All active participants became fully vested in the amount
of benefit services accrued through December 31, 2007 and no benefits have
accrued since that date. Currently, the Company provides supplemental
discretionary contributions to substantially all employees’ individual 401(k)
accounts.
In future
years, the Company may be required to make cash contributions to the two defined
benefit pension plans. The annual contributions will be based on the
amount of the unfunded plan liabilities derived from the frozen benefits and
will not include liabilities for any future accrued benefits for any new or
existing participants. The total amount of these future cash
contributions will depend on the investment returns generated by the plans’
assets and the then applicable discount rates used to calculate the plans’
liabilities.
Minimum
cash contributions of $1.7 million are required for the defined benefit plans
for 2010. The Company voluntarily contributed $2 million to the
defined benefit plans in 2009 and plans on contributing approximately $2 million
in 2010. Contributions in the three and nine months ended October 2,
2010 totaled $0.6 million and $1.6 million, respectively.
The
estimated cost of the frozen defined benefit plans for 2010 is $0.4
million.
The
supplemental discretionary contributions to the 401(k) plan totaled $0.4 million
and $1.4 million for the three and nine months ended October 2, 2010,
respectively, and $0.5 million and $1.4 million for the three and nine months
ended October 3, 2009, respectively. The Company plans to contribute
approximately $0.5 million to the plan during the remainder of
2010.
NOTE 7 -
INCOME TAXES
The
Company's 2010 and 2009 effective tax rates differ from the statutory federal
tax rate due principally to state income taxes partially offset by tax benefits
related to the American Jobs Creation Act of 2004. The effective
income tax rates for the three and nine months ended October 2, 2010 and October
3, 2009 are 36.0% and 38.0%, respectively.
Income
tax payments in the three and nine months ended October 2, 2010 totaled $3.6
million and $11.5 million, respectively. Income tax payments in the three and
nine months ended October 3, 2009 totaled $3.3 million and $14.2 million,
respectively.
The
Company files income tax returns in the U.S. federal jurisdiction and various
state jurisdictions. With few exceptions, the Company is no longer subject to
U.S. federal and state income tax examinations by tax authorities for years
before 2006. In the first quarter of 2009, the IRS completed audits of the
Company’s 2006 and 2007 federal income tax returns. Adjustments resulting from
this examination did not result in a material change to the Company’s financial
position or results of operations.
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 $0.2 million to $0.5 million
exist. The Company has recorded $0.5 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 October 2, 2010. The Company will include any future interest
and penalties related to uncertain tax positions as a component of its provision
for taxes.
NOTE 8 -
EARNINGS PER SHARE
Set forth
below is a reconciliation of the numerator and denominator for basic and diluted
earnings per share calculations for the periods indicated:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
October
2,
2010
|
October
3,
2009
|
October
2,
2010
|
October
3,
2009
|
|||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net
income
|
$ | 6,041 | $ | 7,108 | $ | 22,541 | $ | 21,595 | ||||||||
|
Denominator:
|
||||||||||||||||
|
Weighted
average number of common shares outstanding – Basic
|
19,019,011 | 19,069,749 | 19,100,361 | 19,057,636 | ||||||||||||
|
Dilutive
effect of options and restricted stock units outstanding under the
Company’s employee compensation plans
|
248,402 | 307,251 | 211,846 | 150,364 | ||||||||||||
|
Weighted
average number of common shares outstanding – Diluted
|
19,267,413 | 19,377,000 | 19,312,207 | 19,208,000 | ||||||||||||
The
dilutive effect of outstanding options and restricted stock units is calculated
using the treasury stock method. The weighted average number of common shares
outstanding has decreased from the comparable prior year periods as a result of
the Company’s stock repurchase plans. See Note 9 for further
information.
The
following average numbers of stock options are anti-dilutive and therefore are
not included in the diluted earnings per share calculation:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
October
2,
2010
|
October
3,
2009
|
October
2,
2010
|
October
3,
2009
|
|||||||||||||
|
Average
number of stock options
|
- | 256,250 | - | 256,250 | ||||||||||||
NOTE 9 –
STOCK REPURCHASES
At
December 31, 2009, $4.7 million remained authorized for share
repurchases. In February 2010, the Company announced that the Board
of Directors expanded this repurchase program from $4.7 million to $10 million.
During the nine months ended October 2, 2010, the Company has repurchased
412,213 shares of its common stock for $5.7 million, representing 2.1% of the
then outstanding shares, in the open market at an average price of $13.83 per
share. At October 2, 2010, $4.3 million remained available for stock
repurchases.
In 2009,
the Company repurchased 2,400 shares of its common stock, representing 0.1% of
the then outstanding shares, in the open market at an average price of $6.03 per
share.
These
purchases were made with cash held by the Company and no debt was
incurred.
NOTE 10 –
EQUITY-BASED COMPENSATION PLANS
In April
2007, the Company adopted and the shareholders approved the 2007 Stock Incentive
Plan (the “2007 SIP”) under which employees, independent contractors, and
non-employee directors may be granted stock options, restricted stock, deferred
stock awards, and stock appreciation rights, any of which may or may not require
the satisfaction of performance objectives. Vesting requirements are
determined by the Compensation Committee or the Board of
Directors. The Company has reserved 2,550,000 shares for issuance
under the 2007 SIP of which 1,652,886 remain available for future grants as of
October 2, 2010.
Compensation
costs related to all share-based payments recognized in the statements of
operations aggregated $0.8 million and $1.7 million for the three months and
nine months ended October 2, 2010, respectively, and $0.9 million and $2.9
million for the three and nine months ended October 3, 2009,
respectively.
Stock
Options
A summary
of changes in options outstanding under the plans is summarized
below:
|
Shares
|
Weighted
Average Exercise Price
|
Grant
Date
Fair
Value
|
||||||||||
|
Outstanding
at December 31, 2009
|
1,498,150 | $ | 9.00 | $ | 4.13 | |||||||
|
Granted
|
40,000 | $ | 9.70 | $ | 4.80 | |||||||
|
Exercised
|
(325,750 | ) | $ | 7.89 | $ | 3.36 | ||||||
|
Expired
|
- | - | - | |||||||||
|
Outstanding
October 2, 2010
|
1,212,400 | $ | 9.32 | $ | 4.36 | |||||||
The
aggregate intrinsic value (mean market price at October 2, 2010 less the
weighted average exercise price) of options outstanding under the plans was
approximately $5.6 million.
Restricted Stock
Units
Beginning
in the second quarter of 2009, the Company began granting restricted stock units
to senior employees in lieu of incentive stock options. These awards vest
dependent on the achievement of various corporate objectives established by the
Compensation Committee of the Board of Directors.
Restricted
stock units issued during the three and nine months ended October 2, 2010 were
19,000 and 58,000, respectively. Compensation costs related to these
restricted stock units were $0.5 million and $0.5 million, respectively.
Management believes the required performance criteria will be achieved by
December 31, 2010, resulting in the shares vesting as of that date. As such, all
compensation costs related to the shares will be recognized in the current
year.
A portion
of all officers’ annual incentive compensation in 2009 and 2008 was paid in
restricted stock units. During the first quarters of 2010 and 2009,
awards totaling $0.4 million and $0.2 million, respectively, were made under
this policy.
NOTE 11 -
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 manufactures and sells steel investment
castings.
Selected
operating segment financial information follows:
|
(in
thousands)
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||||
|
October
2,
2010
|
October
3,
2009
|
October
2,
2010
|
October
3,
2009
|
|||||||||||||
|
Net
Sales
|
||||||||||||||||
|
Firearms
|
$ | 57,505 | $ | 70,011 | $ | 188,396 | $ | 203,611 | ||||||||
|
Castings
|
||||||||||||||||
|
Unaffiliated
|
896 | 1,175 | 2,671 | 3,495 | ||||||||||||
|
Intersegment
|
3,762 | 3,757 | 10,877 | 12,796 | ||||||||||||
| 4,658 | 4,932 | 13,548 | 16,291 | |||||||||||||
|
Eliminations
|
(3,762 | ) | (3,757 | ) | (10,877 | ) | (12,796 | ) | ||||||||
| $ | 58,401 | $ | 71,186 | $ | 191,067 | $ | 207,106 | |||||||||
|
Income
(Loss) Before Income Taxes
|
||||||||||||||||
|
Firearms
|
$ | 9,725 | $ | 11,702 | $ | 35,637 | $ | 35,727 | ||||||||
|
Castings
|
(728 | ) | (350 | ) | (1,079 | ) | (975 | ) | ||||||||
|
Corporate
|
442 | 112 | 662 | 78 | ||||||||||||
| $ | 9,439 | $ | 11,464 | $ | 35,220 | $ | 34,830 | |||||||||
|
October
2,
2010
|
December
31,
2009
|
|||||||||||||||
|
Identifiable
Assets
|
||||||||||||||||
|
Firearms
|
$ | 77,137 | $ | 66,011 | ||||||||||||
|
Castings
|
4,351 | 4,643 | ||||||||||||||
|
Corporate
|
65,732 | 71,025 | ||||||||||||||
| $ | 147,220 | $ | 141,679 | |||||||||||||
NOTE 12 -
CONTINGENT LIABILITIES
As of
October 2, 2010, the Company was a defendant in approximately four (4) lawsuits
and is aware of certain other such claims.
Lawsuits
involving the Company’s products generally fall into one of two
categories:
|
(i)
|
Those
that claim damages from the Company related to allegedly defective product
design and/or manufacture which stem from a specific
incident. Pending lawsuits and claims are based principally on
the theory of “strict liability” but also may be based on negligence,
breach of warranty, and other legal theories;
or
|
|
(ii)
|
Those
brought by cities or other governmental entities, and individuals against
firearms manufacturers, distributors and retailers seeking to recover
damages allegedly arising out of the misuse of firearms by third-parties
in the commission of homicides, suicides and other shootings involving
juveniles and adults.
|
As to
lawsuits of the first type, management believes that, in every case involving
firearms, the allegations are unfounded, and that the shootings and any results
therefrom were due to negligence or misuse of the firearms by third-parties or
the claimant, and that there should be no recovery against the
Company.
The only
remaining lawsuit of the second type is the lawsuit filed by the City of
Gary. The complaint in that case seeks damages, among other things,
for the costs of medical care, police and emergency services, public health
services, and other services as well as punitive damages. In
addition, nuisance abatement and/or injunctive relief is sought to change the
design, manufacture, marketing and distribution practices of the various
defendants. The suit alleges, among other claims, negligence in the
design of products, public nuisance, negligent distribution and marketing,
negligence per se and deceptive advertising. The case does not allege
a specific injury to a specific individual as a result of the misuse or use of
any of the Company’s products. Market share allegations have been held
inapplicable by the Indiana Supreme Court.
The
Indiana Court of Appeals affirmed the dismissal of the Gary case by the
trial court, but the Indiana Supreme Court reversed this dismissal and remanded
the case for discovery proceedings on December 23, 2003. On November
23, 2005, the defendants filed a motion to dismiss pursuant to the
PLCAA. The state court judge held the PLCAA unconstitutional and the
defendants filed a motion with the Indiana Court of Appeals asking it to accept
interlocutory appeal on the issue, which appeal was accepted on February 5,
2007. On October 29, 2007, the Indiana Appellate Court affirmed,
holding that the PLCAA does not apply to the City’s claims. A
petition for rehearing was filed in the Appellate Court and denied on January 9,
2008. On February 8, 2008, a Petition to Transfer the appeal to the
Supreme Court of Indiana was filed. The petition was denied on
January 13, 2009 and the case was remanded to the trial court. No
trial date has been set.
In
addition to the foregoing, on August 18, 2009, the Company was served with a
complaint captioned Steamfitters Local 449
Pension Fund, on Behalf of Itself and All Others Similarly Situated v. Sturm,
Ruger & Co. Inc., et
al.
pending in the United States District Court for the District of
Connecticut. The complaint seeks unspecified damages for alleged
violations of the Securities Exchange Act of 1934 and is a purported class
action on behalf of purchasers of the Company’s common stock between April 23,
2007 and October 29, 2007. On October 9, 2009, the Company waived
service of a complaint captioned Alan R. Herrett,
Individually and On Behalf of All Others Similarly Situated v. Sturm, Ruger
& Co. Inc., et
al.
pending in the United States District Court for the District of
Connecticut. This matter is based upon the same facts and basic
allegations set forth in the Steamfitters Local 449
Pension Fund litigation. On October 12, 2009, a motion to
consolidate the two actions was filed by counsel for the
Steamfitters. On January 11, 2010, the court entered an order
consolidating the two matters. A consolidated amended complaint was
filed on March 11, 2010. The defendants, including the Company, filed
a motion to dismiss on April 26, 2010 and plaintiffs filed a response on June
18, 2010. Defendants then filed a reply in support of the motion on
July 19, 2010. Oral argument is scheduled for November 22,
2010.
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.
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.
Product
liability claim payments are made when appropriate if, as, and when claimants
and the Company reach agreement upon an amount to finally resolve all
claims. Legal costs are paid as the lawsuits and claims develop, the
timing of which may vary greatly from case to case. A time schedule
cannot be determined in advance with any reliability concerning when payments
will be made in any given case.
Provision
is made for product liability claims based upon many factors related to the
severity of the alleged injury and potential liability exposure, based upon
prior claim experience. Because our experience in defending these
lawsuits and claims is that unfavorable outcomes are typically not probable or
estimable, only in rare cases is an accrual established for such
costs. In most cases, an accrual is established only for estimated
legal defense costs. Product liability accruals are periodically
reviewed to reflect then-current estimates of possible liabilities and expenses
incurred to date and reasonably anticipated in the future. Threatened
product liability claims are reflected in our product liability accrual on the
same basis as actual claims; i.e., an accrual is made for reasonably anticipated
possible liability and claims-handling expenses on an ongoing
basis.
A range
of reasonably possible loss relating to unfavorable outcomes cannot be
made. However, in product liability cases in which a dollar amount of
damages is claimed, the amount of damages claimed, which totaled $7.7 million
and $12.2 million at December 31, 2009 and 2008, respectively, are set forth as
an indication of possible maximum liability that the Company might be required
to incur in these cases (regardless of the likelihood or reasonable probability
of any or all of this amount being awarded to claimants) as a result of adverse
judgments that are sustained on appeal.
NOTE 13 –
SUBSEQUENT EVENTS
The
Company has evaluated events and transactions occurring subsequent to October 2,
2010 and determined that there were no such events or transactions that would
have a material impact on the Company’s results of operations or financial
position.
|
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Company
Overview
The
Company is principally engaged in the design, manufacture, and sale of firearms
to domestic customers. Approximately 98% of the Company’s total sales
for the three and nine months ended October 2, 2010 were firearms sales, and
approximately 2% were investment castings sales. Export sales
represent approximately 5% of total sales. The Company’s design and
manufacturing operations are located in the United States and almost all product
content is domestic. The Company’s firearms are sold through a select
number of independent wholesale distributors principally to the commercial
sporting market.
The
Company manufactures investment castings made from steel alloys for internal use
in its firearms and utilizes excess investment casting capacity to manufacture
and sell castings to unaffiliated, third-party customers.
Because
most of the Company’s competitors are not subject to public filing requirements
and industry-wide data is generally not available in a timely manner, the
Company is unable to compare its performance to other companies or specific
current industry trends. Instead, the Company measures itself against
its own historical results.
The
Company does not consider its overall firearms business to be predictably
seasonal; however, sales of mature products are usually lower in the second half
of the year.
Results of
Operations
Product
Demand
Estimated
unit sell-through of the Company’s products from distributors to retailers in
the third quarter of 2010 decreased by approximately 7% from both the third
quarter of 2009 and the second quarter of 2010. National Instant
Criminal Background Check System (“NICS”) background checks increased 6% from
the third quarter of 2009 and 2% from the second quarter of 2010, indicating
that the Company’s share of total firearms retail transactions (new and used
firearms) may have declined during the quarter.
The
year-over-year decrease in estimated sell-through from distributors to retailers
from the third quarter of 2009 is likely due to the following
factors:
|
|
·
|
Decreased
demand for autoloading rifles, consistent with industry-wide
trends,
|
|
|
·
|
The
Company’s new product launch in the third quarter of 2010 occurred late in
the quarter and therefore had minimal impact on estimated sell-through
from distributors to retailers for the quarter,
and
|
|
|
·
|
Retailers
being very cautious due to concerns about the economy, resulting in fewer
units shipped from distributors to retailers than sold from retailers to
consumers.
|
The
decrease in estimated sell-through from distributors to retailers from the
second quarter of 2010 is likely due to:
|
|
·
|
A
slowdown in certain of our mature handguns, including the LCP pistol, to
sell-through levels experienced in 2009,
and
|
|
|
·
|
normal
seasonal trends, whereby retailers build inventories in the first half of
the year resulting from orders placed at annual distributor shows in the
first quarter of 2010, and reduce their inventories in the second half of
the year.
|
The
estimated sell-through of the Company’s products from distributors to retailers
in the first nine months of 2010 decreased 2% from the comparable period in
2009. During this period NICS background checks increased
1%.
Estimated
sell-through from distributors and total NICS background checks for the trailing
seven quarters follows:
|
2010
|
2009
|
|||||||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||
|
Estimated
Units Sold from
Distributors
to Retailers (1)
|
198,700 | 213,400 | 254,200 | 209,400 | 214,500 | 227,500 | 236,000 | |||||||||||||||||||||
|
Total
NICS Background
Checks
(thousands) (2)
|
3,305 | 3,257 | 3,663 | 3,864 | 3,134 | 3,217 | 3,818 | |||||||||||||||||||||
|
Note
1:
|
The
estimates for each period were calculated by taking the beginning
inventory at the distributors, plus shipments from the Company to
distributors during the period, less the ending inventory at distributors.
These estimates are only a proxy for trends in consumer demand as
they:
|
|
|
·
|
Rely
on data provided by independent distributors that are not verified by the
Company,
|
|
|
·
|
Do
not consider potential timing issues within the distribution channel,
including goods-in-transit, and
|
|
|
·
|
Do
not consider fluctuations in inventory at
retail.
|
|
Note
2:
|
While
NICS background checks are not an actual measure of retail activity, the
trends in NICS background checks are commonly used as a proxy for trends
in consumer demand. NICS background checks are performed when
the ownership of most firearms, either new or used, is transferred. NICS
background checks are also performed for permit applications, permit
renewals, and other administrative
reasons.
|
The
Company launched the new SR-40 striker-fired pistol late in the third quarter of
2010. New product introductions, including the new SR-40 pistol,
remain a strong driver of demand and represented $50.0 million or 27% of sales
in the first nine months of 2010.
Orders Received and Ending
Backlog
The value
of orders received and ending backlog, net of excise tax, for the trailing seven
quarters are as follows (in millions except average sales price):
|
2010
|
2009
|
|||||||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||
|
Orders
Received (3) (5)
|
$ | 45.6 | $ | 38.7 | $ | 81.8 | $ | 42.9 | $ | 14.1 | $ | 73.6 | $ | 138.9 | ||||||||||||||
|
Average
Sales Price of
Orders
Received (3) (4) (5)
|
$ | 291 | $ | 279 | $ | 270 | $ | 275 | $ | 196 | $ | 400 | $ | 308 | ||||||||||||||
|
Ending
Backlog (5)
|
$ | 34.1 | $ | 44.9 | $ | 71.8 | $ | 59.6 | $ | 78.0 | $ | 138.0 | $ | 136.3 | ||||||||||||||
|
Average
Sales Price of Ending Backlog (5)
|
$ | 342 | $ | 304 | $ | 299 | $ | 330 | $ | 324 | $ | 335 | $ | 297 | ||||||||||||||
|
Note
3:
|
During
the third quarter of 2009, the Company unilaterally cancelled all of the
unshipped orders for Mini-14 and Mini Thirty auto-loading rifles, and
asked the distributors to submit new orders that better represented their
forecasted needs. The cancellation of these unshipped orders,
partially offset by the submission of new orders for these products,
resulted in a net reduction to the backlog of approximately $20 million
and decreased the Average Sales Price of Orders Received by $115 per
unit. Had these orders not been cancelled, the Average Sales
Price of Orders Received would have been $311 per unit. The
Average Sales Price of the Ending Backlog was also impacted for the same
reasons.
|
|
Note
4:
|
The
average sales price of orders received in the third quarter of 2009 was
lower than usual due to the net cancellation of Mini-14 and Mini Thirty
rifles in that quarter, as discussed in Note 3 above. In the
second quarter of 2009, the average sales price of orders received was
higher than usual due to the initial stocking orders received for the
SR-556 modern sporting rifle, which has a higher price relative to the
other product lines.
|
|
Note
5:
|
All
amounts shown are net of Federal Excise Tax of 10% for handguns and 11%
for long guns.
|
The
incoming order rate in the third quarter of 2010 increased significantly from
the second quarter of 2010 and the third quarter of 2009.
Production
Total
unit production in the third quarter of 2010 decreased 14% from the second
quarter of 2010, and 15% from the third quarter of 2009. Similar to
the second quarter of 2010, production of certain products in the third quarter
of 2010 was limited to rates moderately in excess of estimated retail demand for
those products, to allow for modest increased finished goods inventory levels
for those products. The Company anticipates continuing to limit
production of certain products in the fourth quarter of 2010 to avoid building
finished goods inventory levels throughout the distribution channel too
quickly.
The
Company is continuing its implementation of lean manufacturing, a process that
started in 2006. The current efforts in improving manufacturing
processes are directed at combining smaller, single-piece flow cells that are
dedicated to a product line into “super cells” that act as a focused factory for
that product line. This should allow for further reduction of
work-in-process inventories and improve efficiencies.
Summary Unit
Data
Firearms
unit data for the trailing seven quarters are as follows:
|
2010
|
2009
|
|||||||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||
|
Estimated
Units Sold from
Distributors
to Retailers
|
198,700 | 213,400 | 254,200 | 209,400 | 214,500 | 227,500 | 236,000 | |||||||||||||||||||||
|
Units
Ordered (6)
|
156,500 | 138,400 | 305,900 | 173,000 | 80,000 | 204,700 | 501,000 | |||||||||||||||||||||
|
Units
Produced
|
207,100 | 238,900 | 241,900 | 234,600 | 242,500 | 247,300 | 209,900 | |||||||||||||||||||||
|
Units
Shipped
|
204,200 | 225,500 | 237,300 | 228,500 | 237,400 | 246,200 | 213,700 | |||||||||||||||||||||
|
Average
Sales Price
|
$ | 277 | $ | 276 | $ | 279 | $ | 276 | $ | 295 | $ | 286 | $ | 283 | ||||||||||||||
|
Units
on Backorder (6)
|
99,800 | 147,900 | 239,900 | 181,000 | 240,700 | 412,300 | 458,900 | |||||||||||||||||||||
|
Note
6:
|
See
description in Note 3 above for information relating to order
cancellations in the third quarter of 2009. The cancellation of
these orders reduced Units Ordered in the third quarter of 2009 by 34,000
units. Had these orders not been cancelled, the Units Ordered
in the third quarter would have been approximately 114,000
units.
|
Inventories
The
Company’s finished goods inventory increased 2,900 units during the third
quarter of 2010, but remains below optimal levels to support rapid order
fulfillment. The Company anticipates that finished goods inventory
could increase by as much as $7 million to $10 million from the current level
upon the attainment of the desired levels of finished goods
inventory.
Distributor
inventories of the Company’s products increased 5,500 units during the third
quarter of 2010, but, in the Company’s opinion, are still below the optimal
level to support rapid fulfillment of retailer demand. As
distributors continually attempt to increase their inventory turns without
unduly hindering their ability to fulfill retail demand, distributor inventories
of the Company’s products may increase at a slower rate than desired, or not at
all. Distributor investments in other manufacturers’ products, some
of which may not be turning as fast as the Company’s products turn, may further
impede this inventory replenishment.
Inventory
data for the trailing seven quarters follows:
|
2010
|
2009
|
|||||||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||
|
Units
– Company Inventory
|
40,600 | 37,700 | 24,400 | 20,100 | 15,100 | 9,600 | 8,800 | |||||||||||||||||||||
|
Units
– Distributor Inventory (7)
|
96,700 | 91,200 | 79,100 | 96,000 | 76,800 | 53,900 | 35,200 | |||||||||||||||||||||
|
Total
inventory (8)
|
137,300 | 128,900 | 103,500 | 116,100 | 91,900 | 63,500 | 44,000 | |||||||||||||||||||||
|
Note
7:
|
Distributor
ending inventory as provided by the Company’s independent
distributors. These numbers do not include goods-in-transit
inventory that has been shipped from the Company but not yet received by
the distributors.
|
|
Note
8:
|
This
total does not include inventory at retailers. The Company does
not have access to data on retailer inventories of the Company’s
products.
|
Net
Sales
Consolidated
net sales were $58.4 million for the three months ended October 2,
2010. This represents a decrease of $12.8 million or 18.0% from
consolidated net sales of $71.2 million in the comparable prior year
period.
For the
nine months ended October 2, 2010, consolidated net sales were $191.1 million, a
decrease of $16.0 million or 7.7% from sales of $207.1 million in the comparable
2009 period.
Firearms
net sales were $57.5 million for the three months ended October 2,
2010. This represents a decrease of $12.5 million or 17.9% from
firearms net sales of $70.0 million in the comparable prior year
period.
For the
nine months ended October 2, 2010, firearms net sales were $188.4
million. This represents a decrease of $15.2 million or 7.5% from
firearms net sales of $203.6 million in the comparable 2009 period.
Firearms
unit shipments decreased 14.0% and 4.4% for the three and nine months ended
October 2, 2010 from the comparable prior year periods.
Casting
net sales were $0.9 million for the three months ended October 2,
2010. This represents a decrease of $0.3 million or 23.7% from
casting sales of $1.2 million in the comparable prior year period.
For the
nine months ended October 2, 2010, casting net sales were $2.7
million. This represents a decrease of $0.8 million or 23.6% from
casting sales of $3.5 million in the comparable prior year period.
Cost of Products Sold and
Gross Margin
Consolidated
cost of products sold was $39.8 million for the three months ended October 2,
2010. This represents a decrease of $9.6 million or 19.4% from
consolidated cost of products sold of $49.4 million in the comparable prior year
period.
For the
nine months ended October 2, 2010, consolidated cost of products sold was $127.6
million. This represents a decrease of $13.2 million or 9.3% from
consolidated cost of products sold of $140.8 million in the comparable prior
year period.
Gross
margin as a percent of sales was 31.8% and 33.2% for the three and nine months
ended October 2, 2010. This represents an increase from the gross
margin percentage of 30.6% and 32.0% in the three and nine months ended October
3, 2009 as illustrated below (in thousands):
|
Three
Months Ended
|
||||||||||||||||
|
October
2, 2010
|
October
3, 2009
|
|||||||||||||||
|
Net
sales
|
$ | 58,401 | 100.0 | % | $ | 71,186 | 100.0 | % | ||||||||
|
Cost
of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability, and product recall
|
38,881 | 66.6 | % | 48,904 | 68.8 | % | ||||||||||
|
LIFO
expense (income)
|
632 | 1.1 | % | (1,502 | ) | (2.1 | )% | |||||||||
|
Overhead
rate adjustments to inventory
|
298 | 0.5 | % | 972 | 1.3 | % | ||||||||||
|
Labor
rate adjustments to inventory
|
(132 | ) | (0.2 | )% | 302 | 0.4 | % | |||||||||
|
Product
liability
|
122 | 0.2 | % | 699 | 1.0 | % | ||||||||||
|
Product
recall
|
17 | - | 29 | - | ||||||||||||
|
Total
cost of products sold
|
39,818 | 68.2 | % | 49,404 | 69.4 | % | ||||||||||
|
Gross
margin
|
$ | 18,583 | 31.8 | % | $ | 21,782 | 30.6 | % | ||||||||
|
Nine
Months Ended
|
||||||||||||||||
|
October
2, 2010
|
October
3, 2009
|
|||||||||||||||
|
Net
sales
|
$ | 191,067 | 100.0 | % | $ | 207,106 | 100.0 | % | ||||||||
|
Cost
of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability, and product recall
|
127,767 | 66.9 | % | 137,831 | 66.6 | % | ||||||||||
|
LIFO
expense (income)
|
225 | 0.1 | % | (2,680 | ) | (1.3 | )% | |||||||||
|
Overhead
rate adjustments to inventory
|
(34 | ) | - | 2,732 | 1.3 | % | ||||||||||
|
Labor
rate adjustments to inventory
|
(266 | ) | (0.1 | )% | 759 | 0.4 | % | |||||||||
|
Product
liability
|
(141 | ) | (0.1 | )% | 1,447 | 0.7 | % | |||||||||
|
Product
recall
|
62 | - | 677 | 0.3 | % | |||||||||||
|
Total
cost of products sold
|
127,613 | 66.8 | % | 140,766 | 68.0 | % | ||||||||||
|
Gross
margin
|
$ | 63,454 | 33.2 | % | $ | 66,340 | 32.0 | % | ||||||||
Cost of products sold,
before LIFO, overhead and labor rate adjustments to inventory, product
liability, and product recall— During the three months ended October 2,
2010, cost of products sold, before LIFO, overhead and labor rate adjustments to
inventory, product liability, and product recall decreased as a percentage of
sales by 2.2% compared with the comparable 2009 period. This decrease
was caused by a favorable shift in product mix from the comparable 2009
period.
During
the nine months ended October 2, 2010, cost of products sold, before LIFO,
overhead and labor rate adjustments to inventory, product liability, and product
recall increased as a percentage of sales by 0.3% compared with the comparable
2009 period.
Recently,
suppliers of certain steel alloys have been asserting longer lead times and
pricing increases, and the Company is being pressured to accept these less
favorable terms. These potential developments did not impact the
results for the third quarter or the nine months ended October 2, 2010, but may
adversely affect results in future periods and may require the Company to carry
more raw material inventory.
LIFO— During the
three months ended October 2, 2010, gross inventories increased by $1.8 million
and during the nine months ended October 2, 2010, gross inventories increased
$0.2 million. As a result, in the three and nine months ended October
2, 2010 the Company recognized LIFO expense resulting in increased cost of
products sold of $0.6 million and $0.2 million, respectively. In the
comparable 2009 periods, gross inventories decreased $0.9 million and $8.9
million, respectively, and the Company recognized LIFO income resulting in
decreased cost of products sold of $1.5 million and $2.7 million,
respectively.
Overhead Rate
Adjustments— The Company uses actual overhead expenses incurred as a
percentage of sales-value-of-production over a trailing six month period to
absorb overhead expense into inventory. During the three months ended
October 2, 2010, the Company was slightly more efficient in overhead spending
and the overhead rates used to absorb overhead expenses into inventory
decreased, resulting in a decrease in inventory value of $0.3
million. This decrease in inventory carrying values resulted in an
increase to cost of products sold. During the nine months ended
October 2, 2010, the Company’s efficiency in overhead spending was essentially
unchanged. Therefore, only an insignificant increase in inventory
carrying values resulted with minimal impact to cost of products
sold.
During
the comparable periods in 2009, the overhead rate used to absorb overhead into
inventory decreased, resulting in a decrease in inventory value of $1.0 million
and $2.7 million, respectively, and corresponding increases to cost of products
sold.
Labor Rate
Adjustments— The Company uses actual direct labor expense incurred as a
percentage of sales-value-of-production over a trailing six month period to
absorb direct labor expense into inventory. During the three and nine
months ended October 2, 2010, the Company was slightly less efficient in direct
labor utilization and the labor rates used to absorb incurred labor expenses
into inventory increased, resulting in increases in inventory value of $0.1
million and $0.3 million. These increases in inventory carrying
values resulted in decreases to cost of products sold.
During
the comparable periods in 2009, the labor rates used to absorb incurred labor
expenses into inventory decreased, resulting in a decrease in inventory value of
$0.3 million and $0.8 million, respectively, and corresponding increases to cost
of products sold.
Product Liability—
Product liability expenses include the cost of outside legal fees, insurance,
and other expenses incurred in the management and defense of product liability
matters. These costs totaled $0.1 million for the three months ended
October 2, 2010. The $0.1 million reduction in cost of products sold
for the nine months ended October 2, 2010 was attributable to the favorable
settlement of legal matters. Product liability expenses totaled $0.7
million and $1.4 million for the three and nine months ended October 3,
2009. See Note 12 to the notes to the financial statements
“Contingent Liabilities” for further discussion of the Company’s product
liability.
Product Recalls— In
2008, the Company received a small number of reports from the field that its SR9
pistols, and later, its LCP pistols, could discharge if dropped onto a hard
surface. The Company began recalling SR9 pistols in April 2008 and
LCP pistols in October 2008 to offer free safety retrofits. The
estimated cost of these safety retrofit programs of approximately $3.5 million
was recorded in 2008. During the first quarter of 2009, it became
apparent that the recalls were more successful than originally forecast and a
greater quantity of affected pistols would be retrofitted than originally
estimated. Therefore, an additional expense of $0.6 million was
recognized in the first quarter of 2009. Only modest retrofit
expenses have been recorded since the first quarter of 2009.
Gross Margin—For the
three and nine months ended October 2, 2010, gross margin was $18.6 million and
$63.5 million or 31.8% and 33.2% of sales. This is a decrease of $3.2
million and $2.8 million, respectively, or 14.7% and 4.4% from the comparable
prior year periods’ gross margin of $21.8 million and $66.3 million or 30.6% and
32.0% of sales.
Selling, General and
Administrative
Selling,
general and administrative expenses were $9.3 million for the three months ended
October 2, 2010, a decrease of $0.9 million from the comparable prior year
period, but an increase from 14.3% of sales to 15.9% of sales.
Selling,
general and administrative expenses were $28.2 million for the nine months ended
October 2, 2010, a decrease of $2.4 million from the comparable prior year
period, and were 14.8% of sales in both periods.
The
decreases in selling, general and administrative expense are attributable to
decreased personnel-related expenses, including equity-based
compensation. The increases in the expenses as a percentage of sales
in the third quarter of 2010 is due to the de-leveraging of fixed expenses with
the decreased sales compared to the prior periods.
Other Operating
Expenses
In the
three and nine months ended October 2, 2010, the Company recognized no expense
and $0.4 million, respectively, related to its frozen defined benefit pension
plans, compared to $0.3 million and $1.0 million in the comparable prior year
periods.
Other
income
Other
income was $0.1 million and $0.4 in the three and nine months ended October 2,
2010, respectively, compared to $0.1 million in both three and nine months ended
October 3, 2009.
Income Taxes and Net
Income
The
effective income tax rate in the three and nine months ended October 2, 2010 was
36.0%, compared to 38.0% for the comparable prior year periods. The
decrease in the income tax rate results from an increased benefit from the
American Jobs Creation Act of 2004 that was effective January 1,
2010.
As a
result of the foregoing factors, consolidated net income was $6.0 million and
$22.5 million for the three and nine months ended October 2,
2010. This represents a decrease of $1.1 million and an increase of
$0.9 million from consolidated net income of $7.1 million and $21.6 in the three
and nine months ended October 3, 2009.
Financial
Condition
Liquidity
At the
end of the third quarter of 2010, the Company’s cash, cash equivalents and
short-term investments totaled $53.0 million. Our pre-LIFO working
capital of $109.0 million, less the LIFO reserve of $38.7 million, resulted in
working capital of $70.3 million and a current ratio of 3.7 to 1.
If the
current demand subsides, the Company expects to replenish its finished goods
inventory. This planned replenishment to levels that will better
serve our customers could increase the FIFO value of finished goods inventory by
as much as $7 to $10 million from current levels. The Company
anticipates that the cash required to fund this increase in finished goods
inventory would be partially offset by a reduction in accounts receivable which
would be expected during a period of reduced demand.
During
the first quarter of 2009, the Company paid down the $1 million balance on its
$25 million credit facility, in response to the relative improvement in the
global financial and credit markets. The credit facility, which
expires on December 12, 2010, has remained unused since that time and the
Company has no debt.
Operations
Cash
provided by operating activities was $23.5 million for the nine months ended
October 2, 2010 compared to $38.7 million for the comparable prior year
period. The decrease in cash provided by operations is primarily
attributable to a reduction in liabilities in the nine months ended October 2,
2010 and greater inventory reduction in the nine months ended October 3,
2009.
Third
parties supply the Company with various raw materials for its firearms and
castings, such as fabricated steel components, walnut, birch, beech, maple and
laminated lumber for rifle and shotgun stocks, wax, ceramic material, metal
alloys, various synthetic products and other component parts. There
is a limited supply of these materials in the marketplace at any given time,
which can cause the purchase prices to vary based upon numerous market
factors. The Company believes that it has adequate quantities of raw
materials in inventory to provide ample time to locate and obtain additional
items at then-current market cost without interruption of its manufacturing
operations. However, if market conditions result in a significant
prolonged inflation of certain prices or if adequate quantities of raw materials
can not be obtained, the Company’s manufacturing processes could be interrupted
and the Company’s financial condition or results of operations could be
materially adversely affected.
Investing and
Financing
Capital
expenditures for the nine months ended October 2, 2010 totaled $16.4
million. In 2010, the Company expects to spend approximately $20
million on capital expenditures to purchase tooling and manufacturing equipment
for new product introductions, to upgrade and modernize manufacturing equipment,
and to increase capacity for certain products in strong demand. The
Company has financed all of these activities with cash provided by operations
and current cash and short-term investments.
Dividends
of $4.8 million were paid during the nine months ended October 2,
2010. The amounts of these dividends were based on a percentage of
operating profit after adjustment for certain items, the same approach used by
the Company since 2009. Under this approach, the amount per share of
the quarterly dividend fluctuates directly with certain operating results of the
Company. The payment of future dividends depends on many factors,
including internal estimates of future performance, then-current cash and
short-term investments, and the Company’s need for cash. The Company
has financed its dividends with cash provided by operations and current cash and
short-term investments.
In
February, 2010, the Board of Directors expanded the Company’s authorization to
repurchase shares of its common stock from $4.7 million to $10
million. During the third quarter of 2010, the Company repurchased
412,000 shares of its common stock for $5.7 million in the open
market. The average price per share repurchased was
$13.83. These repurchased shares represented 2.1% of the outstanding
shares as of the beginning of the third quarter of 2010 and were funded with
cash on hand. As of the end of the third quarter of 2010, $4.3
million remains available for future stock repurchases.
The
Company has migrated its retirement benefits from defined benefit pension plans
to defined contribution retirement plans, utilizing its current 401(k)
plan.
In 2007,
the Company amended its hourly and salaried defined benefit pension plans so
that employees no longer accrue benefits under them effective December 31,
2007. This action “froze” the benefits for all employees and
prevented future hires from joining the plans, effective December 31,
2007. Currently, the Company provides supplemental discretionary
contributions to substantially all employees’ individual 401(k)
accounts.
The
valuation of the future defined-benefit pension obligations at December 31, 2009
and 2008 indicated that these plans were underfunded by $12.2 million and $16.9
million, respectively, and resulted in a cumulative other comprehensive loss of
$20.4 million and $23.0 million on the Company’s balance sheet at December 31,
2009 and 2008, respectively.
Minimum
cash contributions of $1.7 million are required for the defined benefit plans
for 2010. The Company voluntarily contributed $2 million to the
defined benefit plans in 2009 and plans on contributing approximately $2 million
in 2010.
In future
years, the Company may again be required to make cash contributions to the two
defined benefit pension plans. The annual contributions will be based
on the amount of the unfunded plan liabilities derived from the frozen benefits
and will not include liabilities for any future accrued benefits for any new or
existing participants. The total amount of these future cash
contributions will depend on the investment returns generated by the plans’
assets and the then-applicable discount rates used to calculate the plans’
liabilities.
In the
first quarter of 2009, the Company settled $2.1 million of pension liabilities
through the purchase of group annuities. This transaction resulted in
an insignificant actuarial gain.
Based on
its unencumbered assets, the Company believes it has the ability to raise
substantial amounts of cash through issuance of short-term or long-term
debt. During the first quarter of 2009, the Company paid down the $1
million balance on its $25 million credit facility, in response to the relative
improvement in the global financial and credit markets. The credit
facility, which expires on December 12, 2010, has remained unused since that
time and the Company has no debt.
Other Operational
Matters
In the
normal course of its manufacturing operations, the Company is subject to
occasional governmental audits, proceedings, and orders pertaining to workplace
safety, firearms serial number tracking and control, waste disposal, air
emissions and water discharges into the environment. The Company
believes that it is generally in compliance with applicable BATFE,
environmental, and safety regulations and the outcome of any audits,
proceedings, or orders may be material to the Company’s results of operations
for a particular period, but will not have a material adverse effect on its
financial position.
The
Company self-insures a significant amount of its product liability, workers’
compensation, medical, and other insurance. It also carries
significant deductible amounts on various insurance policies.
The
Company expects to realize its deferred tax assets through tax deductions
against future taxable income.
Adjustments to Critical
Accounting Policies
The
Company has not made any adjustments to its critical accounting estimates and
assumptions described in the Company’s 2009 Annual Report on Form 10-K filed on
February 24, 2010, or the judgments affecting the application of those estimates
and assumptions.
Forward-Looking Statements
and Projections
The
Company may, from time to time, make forward-looking statements and projections
concerning future expectations. Such statements are based on current
expectations and are subject to certain qualifying risks and uncertainties, such
as market demand, sales levels of firearms, anticipated castings sales and
earnings, the need for external financing for operations or capital
expenditures, the results of pending litigation against the Company 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 changing interest rates on its investments, which consist
primarily of United States Treasury instruments with short-term (less than one
year) maturities and cash. The interest rate market risk implicit in
the Company's investments at any given time is low, as the investments mature
within short periods and the Company does not have significant exposure to
changing interest rates on invested cash.
The
Company has not undertaken any actions to cover interest rate market risk and is
not a party to any interest rate market risk management activities.
A
hypothetical ten percent change in market interest rates over the next year
would not materially impact the Company’s earnings or cash flows. A
hypothetical ten percent change in market interest rates would not have a
material effect on the fair value of the Company’s investments.
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
Evaluation of Disclosure
Controls and Procedures
The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (the “Disclosure Controls and
Procedures”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of October
2, 2010.
Based on
the evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that, as of October 2, 2010, such Disclosure Controls and
Procedures are effective to ensure that information required to be disclosed in
the Company’s periodic reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the
Securities and Exchange Commission’s rules and forms and that such information
is accumulated and communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer or persons performing similar
functions, as appropriate, to allow timely decisions regarding
disclosure. Additionally, the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of the period covered
by this Quarterly Report on Form 10-Q, there have been no changes in the
Company’s internal control over financial reporting that occurred during the
quarter ended October 2, 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
The
effectiveness of any system of internal controls and procedures is subject to
certain limitations, and, as a result, there can be no assurance that the
Company’s Disclosure Controls and Procedures will detect all errors or
fraud. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the internal control system will be attained.
|
PART II.
|
OTHER
INFORMATION
|
ITEM
1. LEGAL PROCEEDINGS
The
nature of the legal proceedings against the Company is discussed at Note 12 to
this Form 10-Q report, which is incorporated herein by reference.
The
Company has reported all cases instituted against it through July 3, 2010, and
the results of those cases, where terminated, to the S.E.C. on its previous Form
10-Q and 10-K reports, to which reference is hereby made.
No cases
were formally instituted against the Company during the three months ending
October 2, 2010. However, the Company instituted litigation against
U.S. Ordnance in Federal District Court in New Hampshire seeking amounts due for
castings provided to U.S. Ordnance by Pine Tree Castings. In
response, U.S. Ordnance filed a counterclaim alleging breach of contract and
related theories seeking an amount in excess of $75,000.
During
the three months ending October 2, 2010, no previously reported cases were
settled.
On August
13, 2010, the previously reported Chan v. Company, et
al (CA) lawsuit was closed. Plaintiff dismissed the Company on
August 4, 2009 without prejudice to renaming the Company as a defendant within
one year from the date of dismissal. Plaintiff did not rename the
Company as a defendant within the deadline and, as such, the lawsuit was
closed.
|
ITEM 1A.
|
RISK
FACTORS
|
There
have been no material changes in the Company’s risk factors from the information
provided in Item 1A. Risk Factors included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009.
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
Not applicable
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
Not applicable
|
ITEM 4.
|
(Removed
and Reserved)
|
|
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
|
STURM, RUGER & COMPANY, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED OCTOBER 2, 2010
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:
October 27, 2010
|
/S/THOMAS
A. DINEEN
|
|
|
Thomas
A. Dineen
Principal
Financial Officer,
Principal
Accounting Officer,
Vice
President, Treasurer and Chief Financial
Officer
|
32