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 June 28, 2014
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 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 x Accelerated filer o 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 July 30, 2014: Common Stock, $1 par value 19,416,935.
Page 1 of 30
INDEX
STURM, RUGER & COMPANY, INC.
PART I. FINANCIAL INFORMATION | ||
Item 1. | Financial Statements (Unaudited) | |
Condensed balance sheets June 28, 2014 and December 31, 2013 | 3 | |
Condensed statements of income and comprehensive income Three and six months ended June 28, 2014 and June 29, 2013 | 5 | |
Condensed statement of stockholders' equity Six months ended June 28, 2014 | 6 | |
Condensed statements of cash flows Six months ended June 28, 2014 and June 29, 2013 | 7 | |
Notes to condensed financial statements June 28, 2014 | 8 | |
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 16 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 27 |
Item 4. | Controls and Procedures | 27 |
PART II. OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 28 |
Item 1A. | Risk Factors | 28 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 28 |
Item 3. | Defaults Upon Senior Securities | 28 |
Item 4. | Mining Safety Disclosures | 28 |
Item 5. | Other Information | 28 |
Item 6. | Exhibits | 29 |
SIGNATURES | 30 |
2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
June 28, |
December 31, |
|||||||
(Note) |
||||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 47,435 | $ | 55,064 | ||||
Trade receivables, net |
51,704 | 67,384 | ||||||
Gross inventories |
83,033 | 64,199 | ||||||
Less LIFO reserve |
(39,291 | ) | (38,516 | ) | ||||
Less excess and obsolescence reserve |
(3,363 | ) | (2,422 | ) | ||||
Net inventories |
40,379 | 23,261 | ||||||
Deferred income taxes |
8,092 | 7,637 | ||||||
Prepaid expenses and other current assets |
2,802 | 4,280 | ||||||
Total Current Assets |
150,412 | 157,626 | ||||||
Property, plant and equipment |
271,882 | 250,127 | ||||||
Less allowances for depreciation |
(165,826 | ) | (149,099 | ) | ||||
Net property, plant and equipment |
106,056 | 101,028 | ||||||
Other assets |
27,222 | 18,464 | ||||||
Total Assets |
$ | 283,690 | $ | 277,118 |
Note:
See notes to condensed financial statements.
3 |
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS (Continued)
(Dollars in thousands, except share data)
June 28, |
December 31, |
|||||||
(Note) |
||||||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities |
||||||||
Trade accounts payable and accrued expenses |
$ | 36,565 | $ | 46,991 | ||||
Product liability |
941 | 971 | ||||||
Employee compensation and benefits |
22,573 | 34,626 | ||||||
Workers compensation |
5,583 | 5,339 | ||||||
Income taxes payable |
-- | 239 | ||||||
Total Current Liabilities |
65,662 | 88,166 | ||||||
Product liability |
260 | 265 | ||||||
Deferred income taxes |
10,679 | 9,601 | ||||||
Contingent liabilities Note 10 |
-- | -- | ||||||
Stockholders Equity |
||||||||
Common Stock, non-voting, par value $1: |
||||||||
Authorized shares 50,000; none issued |
-- | -- | ||||||
Common Stock, par value $1: |
||||||||
Authorized shares 40,000,000 |
||||||||
2014 23,716,369 issued, |
||||||||
19,416,935 outstanding |
||||||||
2013 23,647,350 issued, |
||||||||
19,347,916 outstanding | 23,716 | 23,647 | ||||||
Additional paid-in capital |
22,629 | 20,614 | ||||||
Retained earnings |
218,007 | 192,088 | ||||||
Less: Treasury stock at cost |
||||||||
2014 and 2013 4,299,434 shares | (37,884 | ) | (37,884 | ) | ||||
Accumulated other comprehensive loss |
(19,379 | ) | (19,379 | ) | ||||
Total Stockholders Equity |
207,089 | 179,086 | ||||||
Total Liabilities and Stockholders Equity |
$ | 283,690 | $ | 277,118 |
Note:
The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
See notes to condensed financial statements.
4 |
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 28, |
June 29, |
June 28, |
June 29, |
|||||||||||||
Net firearms sales |
$ | 153,016 | $ | 176,787 | $ | 322,179 | $ | 330,227 | ||||||||
Net castings sales |
641 | 2,741 | 1,363 | 5,207 | ||||||||||||
Total net sales |
153,657 | 179,528 | 323,542 | 335,434 | ||||||||||||
Cost of products sold |
103,304 | 108,804 | 212,066 | 203,401 | ||||||||||||
Gross profit |
50,353 | 70,724 | 111,476 | 132,033 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling |
10,062 | 11,823 | 24,483 | 27,588 | ||||||||||||
General and administrative |
7,244 | 8,317 | 15,976 | 16,760 | ||||||||||||
Other operating expenses (income), net |
-- | (168 | ) | -- | (238 | ) | ||||||||||
Total operating expenses |
17,306 | 19,972 | 40,459 | 44,110 | ||||||||||||
Operating income |
33,047 | 50,752 | 71,017 | 87,923 | ||||||||||||
Other income: |
||||||||||||||||
Interest expense, net |
(36 | ) | (39 | ) | (73 | ) | (55 | ) | ||||||||
Other income, net |
130 | 166 | 495 | 361 | ||||||||||||
Total other income, net |
94 | 127 | 422 | 306 | ||||||||||||
Income before income taxes |
33,141 | 50,879 | 71,439 | 88,229 | ||||||||||||
Income taxes |
10,855 | 18,571 | 24,834 | 32,203 | ||||||||||||
Net income and comprehensive income |
$ | 22,286 | $ | 32,308 | $ | 46,605 | $ | 56,026 | ||||||||
Basic earnings per share |
$ | 1.15 | $ | 1.67 | $ | 2.40 | $ | 2.90 | ||||||||
Fully diluted earnings per share |
$ | 1.12 | $ | 1.63 | $ | 2.34 | $ | 2.83 | ||||||||
Cash dividends per share |
$ | 0.490 | $ | 0.490 | $ | 1.030 | $ | 0.894 |
See notes to condensed financial statements.
5 |
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)
(Dollars in thousands)
|
|
|
|
Accumulated |
|
||||||||||||||
Balance at December 31, 2013 |
$23,647 | $20,614 | $192,088 | $(37,884) | $(19,379) | $179,086 | |||||||||||||
Net income and comprehensive income |
46,605 | 46,605 | |||||||||||||||||
Dividends paid |
(19,989) | (19,989) | |||||||||||||||||
Unpaid dividends accrued |
(697) | (697) | |||||||||||||||||
Recognition of stock-based compensation expense | 2,758 | 2,758 | |||||||||||||||||
Exercise of stock options and vesting of RSUs |
(2,294) | (2,294) | |||||||||||||||||
Tax benefit realized from exercise of stock options and vesting of RSUs |
1,620 | 1,620 | |||||||||||||||||
Common stock issued compensation plans |
69 | (69) | - | ||||||||||||||||
Balance at June 28, 2014 |
$23,716 | $22,629 | $218,007 | $(37,884) | $(19,379) | $207,089 |
See notes to condensed financial statements.
6 |
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended |
||||||||
June 28, |
June 29, |
|||||||
Operating Activities |
||||||||
Net income |
$ | 46,605 | $ | 56,026 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
Depreciation and amortization |
17,880 | 9,434 | ||||||
Slow moving inventory valuation adjustment |
960 | (261 | ) | |||||
Stock-based compensation |
2,758 | 2,659 | ||||||
Gain on sale of assets |
(7 | ) | (70 | ) | ||||
Deferred income taxes |
623 | (2,691 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Trade receivables |
15,680 | (14,326 | ) | |||||
Inventories |
(18,078 | ) | 216 | |||||
Trade accounts payable and accrued expenses |
(10,181 | ) | 5,483 | |||||
Employee compensation and benefits |
(12,751 | ) | 10,861 | |||||
Product liability |
(35 | ) | 170 | |||||
Prepaid expenses, other assets and other liabilities |
(7,639 | ) | (3,296 | ) | ||||
Income taxes payable |
(239 | ) | 5,634 | |||||
Cash provided by operating activities |
35,576 | 69,839 | ||||||
Investing Activities |
||||||||
Property, plant and equipment additions |
(22,817 | ) | (18,820 | ) | ||||
Proceeds from sale of assets |
275 | 70 | ||||||
Cash used for investing activities |
(22,542 | ) | (18,750 | ) | ||||
Financing Activities |
||||||||
Tax benefit from exercise of stock options and vesting of RSUs |
1,620 | 2,078 | ||||||
Remittance of taxes withheld from employees related to share-based compensation |
(2,317 | ) | (2,082 | ) | ||||
Proceeds from exercise of stock options |
23 | - | ||||||
Dividends paid |
(19,989 | ) | (17,282 | ) | ||||
Cash used for financing activities |
(20,663 | ) | (17,286 | ) | ||||
Increase (decrease) in cash and cash equivalents |
(7,629 | ) | 33,803 | |||||
Cash and cash equivalents at beginning of period |
55,064 | 30,978 | ||||||
Cash and cash equivalents at end of period |
$ | 47,435 | $ | 64,781 |
See notes to condensed financial statements.
7 |
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 six months ended June 28, 2014 may not be indicative of the results to be expected for the full year ending December 31, 2014. 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, 2013.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Organization:
Sturm, Ruger & Company, Inc. (the Company) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99.6% of the Companys total sales for the three and six months ended June 28, 2014 were firearms sales, and approximately 0.4% were investment castings sales. Export sales represent approximately 5% of total sales. The Companys design and manufacturing operations are located in the United States and almost all product content is domestic.
The Companys 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 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, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short-term maturity of these items.
8 |
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.
NOTE 3 - INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs existing at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation.
Inventories consist of the following:
June 28, |
December 31, |
|||||||
Inventory at FIFO |
||||||||
Finished products |
$ | 16,796 | $ | 6,552 | ||||
Materials and work in process |
66,237 | 57,647 | ||||||
Gross inventories |
83,033 | 64,199 | ||||||
Less: LIFO reserve |
(39,291 | ) | (38,516 | ) | ||||
Less: excess and obsolescence reserve |
(3,363 | ) | (2,422 | ) | ||||
Net inventories |
$ | 40,379 | $ | 23,261 |
NOTE 4 - LINE OF CREDIT
The Company has a $40 million revolving line of credit with a bank. This facility is renewable annually and terminates on June 15, 2015. Borrowings under this facility bear interest at LIBOR (0.555% at June 28, 2014) plus 200 basis points. The Company is charged three-eighths of a percent (0.375%) per year on the unused portion. At June 28, 2014 and December 31, 2013, the Company was in compliance with the terms and covenants of the credit facility, which remains unused.
NOTE 5 - EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
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.
The Company expects to satisfy all of its obligations under the frozen pension plans and to terminate the plans when market conditions are favorable. Late in the fourth quarter of 2013, 94% of the pension plans assets were allocated to money market funds to capture the investment returns in 2013. This was an initial step to prepare to fully fund and terminate the plans in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, which, if successful, will occur in late 2014 or early 2015. Plan participants will not be adversely affected by the plan terminations, but rather will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier.
9 |
It is expected that the settlement and termination of the frozen pension plans would have a material impact on the financial results of the period in which it occurs, and may have a material financial impact on the financial position of the Company.
If the settlement and termination of the frozen pension plans does not occur in 2014, the estimated cost of the frozen defined benefit plans for 2014 is not expected to be significant.
Defined Contribution Plan
Effective January 1, 2007, the Company modified the terms of its 401(k) plan and now matches a certain portion of employee contributions. Expenses related to these matching contributions totaled $0.7 million and $1.9 million for the three and six months ended June 28, 2014, respectively, and $0.9 million and $1.6 million for the three and six months ended June 29, 2013, respectively. The Company plans to contribute approximately $1.5 million to the plan in matching employee contributions during the remainder of 2014.
In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $1.3 million and $3.7 million for the three and six months ended June 28, 2014, respectively, and $1.5 million and $2.5 million for the three and six months ended June 29, 2013, respectively. The Company plans to contribute approximately $3.5 million in supplemental contributions to the plan during the remainder of 2014.
NOTE 6 - INCOME TAXES
The Company's 2014 and 2013 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 Companys effective income tax rate in the three and six months ended June 28, 2014 was 32.8% and 34.8%, respectively. The Companys effective income tax rate in the three and six months ended June 29, 2013 was 36.5%. The decrease in the effective income tax rate in 2014 is due to the recognition of an increase in the 2013 domestic production activities deduction.
Income tax payments in the three and six months ended June 28, 2014 totaled $22.4 million and $22.5 million, respectively. Income tax payments in the three and six months ended June 29, 2013 totaled $26.7 million and $27.1 million, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2011.
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.
10 |
NOTE 7 - EARNINGS PER SHARE
Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 28, |
June 29, |
June 28, |
June 29, |
|||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 22,286 | $ | 32,308 | $ | 46,605 | $ | 56,026 | ||||||||
Denominator: |
||||||||||||||||
Weighted average number of common shares outstanding Basic |
19,410,102 | 19,333,589 | 19,388,396 | 19,308,066 | ||||||||||||
Dilutive effect of options and restricted stock units outstanding under the Companys employee compensation plans |
533,411 | 514,841 | 511,610 | 506,494 | ||||||||||||
Weighted average number of common shares outstanding Diluted |
19,943,513 | 19,848,430 | 19,900,006 | 19,814,560 |
The dilutive effect of outstanding options and restricted stock units is calculated using the treasury stock method. There were no stock options that were anti-dilutive and therefore not included in the diluted earnings per share calculation.
NOTE 8 - COMPENSATION PLANS
In April 2007, the Company adopted and the shareholders approved the 2007 Stock Incentive Plan (the 2007 SIP) under which employees, independent contractors, and non-employee directors may be granted stock options, restricted stock, deferred stock awards, and stock appreciation rights, any of which may or may not require the satisfaction of performance objectives. Vesting requirements are determined by the Compensation Committee of the Board of Directors. The Company has reserved 2,550,000 shares for issuance under the 2007 SIP, of which 698,000 shares remain available for future grants as of June 28, 2014.
Compensation costs related to all share-based payments recognized in the statements of operations aggregated $1.5 million and $2.8 million for the three and six months ended June 28, 2014, respectively, and $1.3 million and $2.7 million for the three and six months ended June 29, 2013, respectively.
11 |
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, 2013 | 57,221 | $ | 8.66 | $ | 6.65 | |||||||
Granted | - | - | - | |||||||||
Exercised | (16,244 | ) | $ | 8.25 | $ | 7.54 | ||||||
Expired | - | - | - | |||||||||
Outstanding at June 28, 2014 | 40,977 | $ | 8.82 | $ | 6.29 |
The aggregate intrinsic value (mean market price at June 28, 2014 less the weighted average exercise price) of options outstanding under the plans was approximately $2.0 million.
Restricted Stock Units
Beginning in the second quarter of 2009, the Company began granting restricted stock units to senior employees in lieu of incentive stock options. The vesting of these awards is dependent on the achievement of corporate objectives established by the Compensation Committee of the Board of Directors. Beginning in 2011, a three year vesting period was added to the performance criteria, which had the effect of requiring both the achievement of the corporate performance objectives and the satisfaction of the vesting period.
There were 6,568 and 65,908 restricted stock units issued during the three and six months ended June 28, 2014. Total compensation costs related to these restricted stock units are $4.2 million. These costs are being recognized ratably over the vesting period of three years. Total compensation cost related to restricted stock units was $1.5 million and $2.8 million for the three and six months ended June 28, 2014, respectively, and $1.3 million and $2.5 million for the three and six months ended June 29, 2013, respectively.
12 |
NOTE 9 - OPERATING SEGMENT INFORMATION
The Company has two reportable segments: firearms and investment castings. The firearms segment manufactures and sells rifles, pistols, and revolvers principally to a select number of independent wholesale distributors primarily located in the United States. The investment castings segment manufactures and sells steel investment castings.
Selected operating segment financial information follows:
(in thousands) |
Three Months Ended |
Six Months Ended |
||||||||||||||
June 28, |
June 29, |
June 28, |
June 29, |
|||||||||||||
Net Sales |
||||||||||||||||
Firearms |
$ | 153,016 | $ | 176,787 | $ | 322,179 | $ | 330,227 | ||||||||
Castings |
||||||||||||||||
Unaffiliated |
641 | 2,741 | 1,363 | 5,207 | ||||||||||||
Intersegment |
9,452 | 8,027 | 18,906 | 15,755 | ||||||||||||
10,093 | 10,768 | 20,269 | 20,962 | |||||||||||||
Eliminations |
(9,452 | ) | (8,027 | ) | (18,906 | ) | (15,755 | ) | ||||||||
$ | 153,657 | $ | 179,528 | $ | 323,542 | $ | 335,434 | |||||||||
Income (Loss) Before Income Taxes |
||||||||||||||||
Firearms |
$ | 33,547 | $ | 52,019 | $ | 72,238 | $ | 89,323 | ||||||||
Castings |
(542 | ) | (1,041 | ) | (1,071 | ) | (946 | ) | ||||||||
Corporate |
136 | (99 | ) | 272 | (148 | ) | ||||||||||
$ | 33,141 | $ | 50,879 | $ | 71,439 | $ | 88,229 | |||||||||
|
December 31, |
|||||||||||||||
Identifiable Assets |
||||||||||||||||
Firearms |
$ | 218,096 | $ | 201,660 | ||||||||||||
Castings |
13,284 | 11,402 | ||||||||||||||
Corporate |
52,310 | 64,056 | ||||||||||||||
$ | 283,690 | $ | 277,118 |
NOTE 10 - CONTINGENT LIABILITIES
As of June 28, 2014, the Company was a defendant in approximately four (4) lawsuits and is aware of certain other such claims. The lawsuits fall into three general categories, traditional products liability, municipal litigation, and commercial litigation, discussed in turn below.
Product Liability Litigation
Two of the four lawsuits mentioned above involve claims for damages related to allegedly defective product design and/or manufacture. These lawsuits stem from a specific incident of personal injury and are based on traditional product liability theories such as strict liability, negligence and/or breach of warranty.
13 |
The Company management believes that the allegations in these cases are unfounded, and that the incidents were caused by the negligence and/or misuse of the firearms by third-parties or the claimant, and that there should be no recovery against the Company.
Municipal Litigation
Municipal litigation generally includes those cases brought by cities or other governmental entities against firearms manufacturers, distributors and retailers seeking to recover damages allegedly arising out of the misuse of firearms by third-parties.
There is only one remaining lawsuit of this type, filed by the City of Gary in Indiana State Court, over ten years ago. The complaint in that case seeks damages, among other things, for the costs of medical care, police and emergency services, public health services, and other services as well as punitive damages. In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacture, marketing and distribution practices of the various defendants. The suit alleges, among other claims, negligence in the design of products, public nuisance, negligent distribution and marketing, negligence per se and deceptive advertising. The case does not allege a specific injury to a specific individual as a result of the misuse or use of any of the Companys products.
After a long procedural history, the case was scheduled for trial on June 15, 2009. The case was not tried on that date and no subsequent scheduling order has been entered. There has been no activity since that time.
Commercial Litigation
From time to time, the Company may be involved in commercial disputes that result in litigation. These disputes run the gamut and may involve intellectual property, real property, supply or distribution agreements, contract disputes, or other, general commercial matters. As of June 28, 2014, the Company was involved in one such lawsuit and is aware of certain other such claims.
Summary of Claimed Damages and Explanation of Product Liability Accruals
Punitive damages, as well as compensatory damages, are demanded in certain of the lawsuits and claims. Aggregate claimed amounts presently exceed product liability accruals and applicable insurance coverage. For 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 Companys 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.
14 |
Provision is made for product liability claims based upon many factors related to the severity of the alleged injury and potential liability exposure, based upon prior claim experience. Because the Companys experience in defending these lawsuits and claims is that unfavorable outcomes are typically not probable or estimable, only in rare cases is an accrual established for such costs. In most cases, an accrual is established only for estimated legal defense costs. Product liability accruals are periodically reviewed to reflect then-current estimates of possible liabilities and expenses incurred to date and reasonably anticipated in the future. Threatened product liability claims are reflected in the Companys 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 $1.3 million and $0.2 million at December 31, 2013 and 2012, respectively, are set forth as an indication of possible maximum liability that the Company might be required to incur in these cases (regardless of the likelihood or reasonable probability of any or all of this amount being awarded to claimants) as a result of adverse judgments that are sustained on appeal.
NOTE 11 - SUBSEQUENT EVENTS
On July 29, 2014, Board of Directors authorized a dividend of 45¢ per share, for shareholders of record as of August 15, 2014, payable on August 29, 2014.
On July 29, 2014, the Board of Directors expanded the Companys authorization to repurchase shares of its common stock from $25 million to $100 million.
The Company has evaluated events and transactions occurring subsequent to June 28, 2014 and determined that there were no other unreported events or transactions that would have a material impact on the Companys results of operations or financial position.
15 |
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sturm, Ruger & Company, Inc. (the Company) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99.6% of the Companys total sales for the three and six months ended June 28, 2014 were firearms sales, and 0.4% were investment castings sales. Export sales represent approximately 5% of total sales. The Companys design and manufacturing operations are located in the United States and almost all product content is domestic. The Companys firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.
The Company also manufactures investment castings made from steel alloys for internal use in its firearms and for sale to unaffiliated, third-party customers.
Orders of many models of firearms from the independent distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.
Results of Operations
Demand
During the first half of 2014, there was a significant industry-wide reduction in firearms demand. National Instant Criminal Background Check System (NICS) background checks (as adjusted by the National Shooting Sports Foundation (NSSF)) during the second quarter and first half of 2014 decreased 12% and 18%, respectively, from the comparable prior year periods.
During the second quarter and first half of 2014, the estimated unit sell-through of our products from the independent distributors to retailers decreased 31% and 11%, respectively, from the comparable prior year periods. The estimated sell-through of our products from distributors to retailers in the second quarter was adversely impacted by the following:
Nonetheless, the estimated sell-through of our products from the independent distributors to retailers for the six months ended June 28, 2014 was the second highest in the Companys history, exceeding the estimated sell-through from the first half of 2012 by 83,100 units or 10%.
New products represented $57.1 million or 18% of firearm sales in the first half of 2014.
16 |
Estimated sell-through from the independent distributors to retailers and total NICS background checks for the trailing six quarters follows:
2014 |
2013 |
|||||||
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
|||
Estimated Units Sold from Distributors to Retailers (1) |
|
|
495,300 |
521,700 |
560,200 |
514,200 |
||
Total adjusted NICS Background Checks (thousands) (2) |
2,672 |
3,830 |
3,932 |
2,907 |
3,032 |
4,926 |
(1) The estimates for each period were calculated by taking the beginning inventory at the distributors, plus shipments from the Company to distributors during the period, less the ending inventory at distributors. These estimates are only a proxy for actual market demand as they:
(2) While NICS background checks are not a precise measure of retail activity, they are commonly used as a proxy for retail demand. NICS background checks are performed when the ownership of most firearms, either new or used, is transferred by a Federal Firearms Licensee. NICS background checks are also performed for permit applications, permit renewals, and other administrative reasons.
The adjusted NICS data presented above was derived by the NSSF by subtracting out NICS checks that are not directly related to the sale of a firearm, including checks used for concealed carry (CCW) permit application checks as well as checks on active CCW permit databases. While not a direct correlation to firearms sales, the NSSF-adjusted NICS data provides a more accurate picture of current market conditions than raw NICS data.
Orders Received and Ending Backlog
Net orders received in the first half of 2014 decreased 66% from the comparable prior year period and our ending order backlog of 1.0 million units at June 28, 2014 decreased 1.0 million units from backlog of 2.0 million units at June 29, 2013. This decrease is due to the reduction in demand discussed above and the unprecedented level of orders received in the first quarter of 2013.
17 |
The units ordered, value of orders received and ending backlog, net of excise tax, for the trailing six quarters are as follows (dollars in millions, except average sales price):
(All amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns.)
2014 |
2013 |
||||||||||||||||||||||||
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
||||||||||||||||||||
Units Ordered |
145,200 | 395,000 | 249,700 | 390,400 | 525,600 | 1,085,300 | |||||||||||||||||||
Orders Received |
$ | 42.2 | $ | 119.8 | $ | 79.5 | $ | 94.9 | $ | 150.9 | $ | 310.7 | |||||||||||||
Average Sales Price of Orders Received |
$ | 291 | $ | 303 | $ | 318 | $ | 243 | $ | 286 | $ | 291 | |||||||||||||
Ending Backlog |
$ | 289.1 | $ | 396.5 | $ | 440.6 | $ | 534.1 | $ | 590.3 | $ | 602.3 | |||||||||||||
Average Sales Price of Ending Backlog |
$ | 293 | $ | 293 | $ | 290 | $ | 285 | $ | 290 | $ | 288 |
Production
Total unit production in the first half of 2014 increased 7% from the first half of 2013. During the three months ended June 28, 2014, production rates were reduced in response to the decline in estimated sell-through of our products from the independent distributors to retailers.
The Company reviews the estimated sell-through from the independent distributors to retailers semi-monthly in an effort to regulate production and mitigate increases in inventory. As estimated sell-through began to slow, the Company managed its labor force by limiting the hiring of new employees, reducing overtime hours, and allowing attrition to reduce its total employee base. The Companys compensation structure, under which at least 25% of individual employee compensation was variable in 2013, allows for a more rapid reduction in labor cost.
Capital expenditures have been curtailed by the cancellation or delay of purchase orders and the redeployment of manufacturing equipment from mature production lines to new production lines for products in development.
In 2013, the Company revised its estimate of the useful life of machinery and equipment from 10 to 7 years. This change, which became effective December 31, 2013, resulted in increased depreciation expense of $2 million and $4 million for the three and six months ended June 28, 2014, respectively. The Company estimates that this change will increase depreciation expense for the machinery and equipment on hand at December 31, 2013 by approximately $8 million in 2014.
18 |
Summary Unit Data
Firearms unit data for the trailing six quarters are as follows:
2014 |
2013 |
||||||||||||||||||||||||
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
||||||||||||||||||||
Units Ordered |
145,200 | 395,000 | 249,700 | 390,400 | 525,600 | 1,085,300 | |||||||||||||||||||
Units Produced |
552,200 | 598,300 | 615,800 | 554,700 | 575,400 | 503,600 | |||||||||||||||||||
Units Shipped |
513,700 | 561,400 | 604,900 | 553,000 | 577,200 | 502,300 | |||||||||||||||||||
Average Sales Price (3) |
$ | 298 | $ | 301 | $ | 299 | $ | 309 | $ | 306 | $ | 305 | |||||||||||||
Units on Backlog |
985,900 | 1,354,400 | 1,520,800 | 1,876,000 | 2,038,600 | 2,090,200 |
(3) Net of Federal Excise Tax of 10% for handguns and 11% for long guns.
Inventories
The Companys finished goods inventory increased by 75,400 units during the first half of 2014. This is the first significant replenishment of finished goods inventory in several years. Additional replenishment of finished goods inventory could increase the FIFO value of finished goods inventory by as much as $10 million.
Distributor inventories of the Companys products increased by 120,800 units during the first half of 2014 and approximate a reasonable level to support rapid fulfillment of retailer demand. The Company reviews the estimated sell-through from the independent distributors to retailers semi-monthly in an effort to regulate production and mitigate further increases in distributor inventory.
Inventory data for the trailing six quarters follows:
2014 |
2013 |
||||||
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
||
Units Company Inventory |
103,100 |
64,600 |
27,700 |
16,800 |
15,100 |
16,900 |
|
Units Distributor Inventory (4) |
325,900 |
201,100 |
205,100 |
95,500 |
64,200 |
47,300 |
|
Total inventory (5) |
429,000 |
265,700 |
232,800 |
112,300 |
79,300 |
64,200 |
(4) Distributor ending inventory is provided by the Companys 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.
(5) This total does not include inventory at retailers. The Company does not have access to data on retailer inventories of the Companys products.
19 |
Net Sales
Consolidated net sales were $153.7 million for the three months ended June 28, 2014, a decrease of 14.4% from $179.5 million in the comparable prior year period.
For the six months ended June 28, 2014, consolidated net sales were $323.5 million, a decrease of 3.5% from $335.4 million in the comparable prior year period.
Firearms net sales were $153.0 million for the three months ended June 28, 2014, a decrease of 13.4% from $176.8 million in the comparable prior year period.
For the six months ended June 28, 2014, firearms net sales were $322.2 million, a decrease of 2.4% from $330.2 million in the comparable prior year period.
Firearms unit shipments decreased 11.0% for the three months ended June 28, 2014 but remained virtually unchanged for the six months ended June 28, 2014 from the comparable prior year periods. The greater percentage decrease in firearms net sales compared to firearms unit shipments is attributable to decreased accessory sales in the three and six months ended June 28, 2014.
Casting net sales were $0.6 million for the three months ended June 28, 2014, a decrease of 76.6% from $2.7 million in the comparable prior year period.
For the six months ended June 28, 2014, castings net sales were $1.4 million, a decrease of 73.8% from $5.2 million in the comparable prior year period.
During 2013, the Company prioritized its internal casting needs and terminated many of its outside casting customers. As a result net casting sales decreased.
Cost of Products Sold and Gross Profit
Consolidated cost of products sold was $103.3 million for the three months ended June 28, 2014, a decrease of 5.1% from $108.8 million in the comparable prior year period.
For the six months ended June 28, 2014, consolidated cost of products sold was $212.1 million, an increase of 4.3% from $203.4 million in the comparable prior year period.
20 |
Gross margin was 32.8% and 34.5% for the three and six months ended June 28, 2014, respectively, compared to 39.4% in the comparable prior year periods as illustrated below (in thousands):
Three Months Ended |
|||||||||||||||||||||
June 28, 2014 |
June 29, 2013 |
||||||||||||||||||||
Net sales |
$ | 153,657 | 100.0 | % | $ | 179,528 | 100.0 | % | |||||||||||||
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory and product liability |
103,123 | 67.1 | % | 107,628 | 59.9 | % | |||||||||||||||
LIFO expense |
387 | 0.3 | % | 410 | 0.2 | % | |||||||||||||||
Overhead rate adjustments to inventory |
(477 | ) | (0.3 | )% | 500 | 0.3 | % | ||||||||||||||
Labor rate adjustments to inventory |
4 | - | 2 | - | |||||||||||||||||
Product liability |
267 | 0.1 | % | 264 | 0.2 | % | |||||||||||||||
Total cost of products sold |
103,304 | 67.2 | % | 108,804 | 60.6 | % | |||||||||||||||
Gross profit |
$ | 50,353 | 32.8 | % | $ | 70,724 | 39.4 | % |
Six Months Ended |
|||||||||||||||||||||
June 28, 2014 |
June 29, 2013 |
||||||||||||||||||||
Net sales |
$ | 323,542 | 100.0 | % | $ | 335,434 | 100.0 | % | |||||||||||||
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory and product liability |
211,243 | 65.3 | % | 201,207 | 60.0 | % | |||||||||||||||
LIFO expense |
775 | 0.2 | % | 542 | 0.1 | % | |||||||||||||||
Overhead rate adjustments to inventory |
(622 | ) | (0.2 | )% | 886 | 0.3 | % | ||||||||||||||
Labor rate adjustments to inventory |
(3 | ) | - | 37 | - | ||||||||||||||||
Product liability |
673 | 0.2 | % | 729 | 0.2 | % | |||||||||||||||
Total cost of products sold |
212,066 | 65.5 | % | 203,401 | 60.6 | % | |||||||||||||||
Gross profit |
$ | 111,476 | 34.5 | % | $ | 132,033 | 39.4 | % |
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability During the three and six months ended June 28, 2014, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability increased as a percentage of sales by 7.2% and 5.3% compared with the comparable 2013 periods due principally to reduced sales volume, a product mix shift away from higher-margin firearms accessories, and increased depreciation expense due to the reduction in the estimated useful lives of the Companys capital assets.
21 |
LIFO For the three months ended June 28, 2014, gross inventories increased by $12.4 million and the Company recognized LIFO expense resulting in increased cost of products sold of $0.4 million. In the comparable 2013 period, gross inventories increased by $1.9 million and the Company recognized LIFO expense resulting in increased cost of products sold of $0.4 million.
For the six months ended June 28, 2014, gross inventories increased by $18.8 million and the Company recognized LIFO expense resulting in increased cost of products sold of $0.8 million. In the comparable 2013 period, gross inventories increased by $0.3 million and the Company recognized LIFO expense resulting in increased cost of products sold of $0.5 million.
Overhead Rate Adjustments The Company uses actual overhead expenses incurred as a percentage of sales-value-of-production over a trailing six month period to absorb overhead expense into inventory.
During the three and six months ended June 28, 2014, the Company was less efficient in overhead spending and the overhead rates used to absorb overhead expenses into inventory increased, resulting in increases in inventory value of $0.5 million and $0.6 million, respectively, and corresponding decreases to cost of products sold.
During the three and six months ended June 29, 2013, the Company was more efficient in overhead spending and the overhead rates used to absorb overhead expenses into inventory decreased, resulting in decreases in inventory value of $0.5 million and $0.9 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 six months ended June 28, 2014 and June 29, 2013, the impact of the labor rate adjustment was de minimis.
Product Liability This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters.
For the three and six months ended June 28, 2014 product liability costs totaled $0.3 million and $0.7 million, respectively. For the three and six months ended June 29, 2013, product liability costs totaled $0.3 million and $0.7 million, respectively. See Note 10 to the notes to the condensed financial statements Contingent Liabilities for further discussion of the Companys product liability.
Gross Profit As a result of the foregoing factors, for the three and six months ended June 28, 2014, gross profit was $50.4 million and $111.5 million, respectively, a decrease of $20.3 million and $20.5 from $70.7 million and $132.0 million in the comparable prior year periods. Gross profit as a percentage of sales decreased to 32.8% and 34.5% in the three and six months ended June 28, 2014 from 39.4% in the comparable prior year periods.
22 |
Selling, General and Administrative, and Other Operating Expenses
Selling, general and administrative, and other operating expenses were $17.3 million and $40.5 million for the three and six months ended June 28, 2014, respectively, a decrease of $2.7 million and $3.6 million from the comparable prior year periods. This decrease is attributable to decreased volume-driven promotional selling expenses.
Other income, net
Other income, net was $0.1 million and $0.4 million in the three and six months ended June 28, 2014, compared to $0.1 million and $0.3 million in the three and six months ended June 29, 2013, respectively.
Income Taxes and Net Income
The Companys effective income tax rate in the three and six months ended June 28, 2014 was 32.8% and 34.8%, respectively. The Companys effective income tax rate in the three and six months ended June 29, 2013 was 36.5%. The decrease in the effective income tax rate in 2014 is due to the recognition of an increase in the 2013 domestic production activities deduction.
As a result of the foregoing factors, consolidated net income was $22.3 million and $46.6 million for the three and six months ended June 28, 2014. This represents a decrease of 31.0% and 16.8% from $32.3 million and $56.0 million in the comparable prior year periods.
Non-GAAP Financial Measure
In an effort to provide investors with additional information regarding its financial results, the Company refers to various United States generally accepted accounting principles (GAAP) financial measures and EBITDA, a non-GAAP financial measure which management believes provides useful information to investors. This non-GAAP financial measure may not be comparable to similarly titled financial measures being disclosed by other companies. In addition, the Company believes that the non-GAAP financial measure should be considered in addition to, and not in lieu of, GAAP financial measures. The Company believes that this non-GAAP financial measure is useful to understanding its operating results and the ongoing performance of its underlying business, as EBITDA provides information on the Companys ability to meet its capital expenditure and working capital requirements, and is also an indicator of profitability. The Company uses both GAAP and non-GAAP financial measures to evaluate the Companys financial performance.
EBITDA is defined as earnings before interest, taxes, and depreciation and amortization. The Company calculates its EBITDA by adding the amount of interest expense, income tax expense, and depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest income that was included in net income from net income.
23 |
EBITDA decreased 25% and 9% for the three and six months ended June 28, 2014 compared to the prior year periods.
Non-GAAP Reconciliation EBITDA
EBITDA
(Unaudited, dollars in thousands)
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 28, 2014 |
June 29, 2013 |
June 28, 2014 |
June 29, 2013 |
|||||||||||||
Net income |
$ | 22,286 | $ | 32,308 | $ | 46,605 | $ | 56,026 | ||||||||
Income tax expense |
10,855 | 18,571 | 24,834 | 32,203 | ||||||||||||
Depreciation and amortization expense |
8,940 | 4,933 | 17,880 | 9,434 | ||||||||||||
Interest expense, net |
36 | 39 | 73 | 55 | ||||||||||||
EBITDA |
$ | 42,117 | $ | 55,851 | $ | 89,392 | $ | 97,718 |
Financial Condition
At the end of the second quarter of 2014, the Companys cash totaled $47.4 million. Pre-LIFO working capital of $124.0 million, less the LIFO reserve of $39.3 million, resulted in working capital of $84.7 million and a current ratio of 2.3 to 1.
Cash provided by operating activities was $35.6 million for the six months ended June 28, 2014 compared to $69.8 million for the comparable prior year period. The decrease in cash provided by operations is primarily attributable to the increases in inventory and other assets during the six months ended June 28, 2014 and the decreases in accounts payable and employee compensation during such period.
Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory or on order to provide sufficient time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be obtained, the Companys manufacturing processes could be interrupted and the Companys financial condition or results of operations could be materially adversely affected.
Capital expenditures for the six months ended June 28, 2014 totaled $22.8 million. In 2014, the Company expects to spend approximately $40 million on capital expenditures to purchase tooling fixtures and equipment for new product introductions and to upgrade and modernize manufacturing equipment. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash.
24 |
Dividends of $20.0 million were paid during the six months ended June 28, 2014.
On July 29, 2014, the Board of Directors authorized a dividend of 45¢ per share, for shareholders of record as of August 15, 2014, payable on August 29, 2014. The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash and short-term investments, and the Companys need for funds. The Company has financed its dividends with cash provided by operations and current cash.
During the six months ended June 28, 2014, the Company did not repurchase any shares of its common stock. As of June 28, 2014, $25 million remained available for future stock repurchases.
On July 29, 2014, the Board of Directors expanded the Companys authorization to repurchase shares of its common stock from $25 million to $100 million.
The Company has migrated its retirement benefits from defined-benefit pension plans to defined-contribution retirement plans, utilizing its current 401(k) plan.
The Company amended its hourly and salaried defined-benefit pension plans so that employees no longer accrued benefits under them effective December 31, 2007. This action froze the benefits for all employees and prevented future hires from joining the plans. Currently, the Company provides supplemental discretionary contributions to substantially all employees individual 401(k) accounts.
The Company contributed $3 million in both 2013 and 2012. 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.
The Company expects to satisfy all of its obligations under the frozen pension plans when market conditions are favorable. Late in the fourth quarter of 2013, 94% of the pension plans assets were allocated to money market funds to capture the investment returns in 2013. This was an initial step to prepare to fully fund and terminate the plans in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, which, if successful, would not occur before late 2014 or early 2015. Plan participants will not be adversely affected by the plan terminations, but rather will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier.
It is expected that the settlement of the frozen pension plans would have a material impact on the financial results of the period in which it occurs, and may have a material impact on the financial position of the Company.
Based on its unencumbered assets, the Company believes it has the ability to raise cash through issuance of short-term or long-term debt. The Companys unsecured $40 million credit facility, which expires on June 15, 2015, remained unused at June 28, 2014 and the Company has no debt.
25 |
Other Operational Matters
In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to workplace safety, firearms serial number tracking and control, waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable Bureau of Alcohol, Tobacco, Firearms & Explosives, environmental, and safety regulations and the outcome of any related proceedings or orders will not have a material adverse effect on the financial position or results of operations of the Company.
The Company self-insures a significant amount of its product liability, workers compensation, medical, and other insurance. It also carries significant deductible amounts on various insurance policies.
The Company has transitioned to a new enterprise resource planning system and has converted all of its manufacturing facilities and its support functions during the past two years.
The valuation of the future defined-benefit pension obligations at December 31, 2013 and 2012 indicated that these plans were overfunded by $0.5 million and underfunded by $19.6 million, respectively, which resulted in a cumulative other comprehensive loss of $19.4 million and $29.6 million on the Companys balance sheet at December 31, 2013 and 2012, respectively.
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 Companys 2013 Annual Report on Form 10-K filed on February 25, 2014, or the judgments affecting the application of those estimates and assumptions.
Forward-Looking Statements and Projections
The Company may, from time to time, make forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company, the impact of future firearms control and environmental legislation, and accounting estimates, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.
26 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Historically, the Company has been exposed to changing interest rates on its investments, which consisted primarily of United States Treasury instruments with short-term (less than one year) maturities and cash. The interest rate market risk implicit in the Companys investments at any given time is typically low, as the investments mature within short periods and the Company does not have significant exposure to changing interest rates on invested cash.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys 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 June 28, 2014.
Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of June 28, 2014, such Disclosure Controls and Procedures are effective to ensure that information required to be disclosed in the Companys periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to the Companys 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 Companys 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 Companys internal control over financial reporting that occurred during the quarter ended June 28, 2014 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
The effectiveness of any system of internal controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that the Disclosure Controls and Procedures will detect all errors or fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system will be attained.
27 |
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at Note 10 to the consolidated financial statements in this Form 10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through March 29, 2014, 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.
There were no lawsuits formally instituted against the Company during the three months ending June 28, 2014.
ITEM 1A. RISK FACTORS
There have been no material changes in the Companys risk factors from the information provided in Item 1A. Risk Factors included in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINING SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
28 |
ITEM 6. EXHIBITS
(a) Exhibits:
10.1 Sixth Amendment to Credit Agreement dated June 9, 2014 between the Company and Bank of America, N.A. (1)
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
(1) Incorporated by reference to the Companys Form 8-K filed with the S.E.C. on June 16, 2014.
29 |
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 28, 2014
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 29, 2014 | S/THOMAS A. DINEEN | |
Thomas A. Dineen | ||
Principal Financial Officer, | ||
Principal Accounting Officer, | ||
Vice President, Treasurer and Chief Financial Officer |
30 |