10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________ |
Commission file number 1-10435
STURM, RUGER & COMPANY, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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06-0633559 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification no.) |
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Lacey Place, Southport, Connecticut
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06890 |
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(Address of principal executive offices)
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(Zip code) |
(203) 259-7843
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the issuers common stock as of October 31, 2006: Common
Stock, $1 par value 22,638,720.
Page 1 of 27
INDEX
STURM, RUGER & COMPANY, INC.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
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September 30, |
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December 31, |
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2006 |
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2005 |
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(Note) |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
6,618 |
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$ |
4,057 |
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Short-term investments |
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4,973 |
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21,926 |
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Trade receivables, net |
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21,743 |
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15,777 |
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Gross inventories |
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105,592 |
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111,462 |
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Less LIFO reserve |
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(62,119 |
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(59,599 |
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Less excess and obsolescence reserve |
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(2,893 |
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(3,137 |
) |
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Net inventories |
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40,580 |
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48,726 |
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Deferred income taxes |
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6,115 |
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6,018 |
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Prepaid expenses and other current assets |
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3,362 |
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5,442 |
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Total current assets |
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83,391 |
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101,946 |
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Property, plant and equipment |
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157,418 |
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155,174 |
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Less allowances for depreciation |
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(135,145 |
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(131,808 |
) |
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Net property, plant and equipment |
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22,273 |
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23,366 |
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Deferred income taxes |
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2,993 |
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3,200 |
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Other assets |
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10,348 |
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11,127 |
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Total Assets |
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$ |
119,005 |
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$ |
139,639 |
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3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
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September 30, |
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December 31, |
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2006 |
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2005 |
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(Note) |
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Liabilities and Stockholders Equity |
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Current Liabilities |
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Trade accounts payable and accrued expenses |
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$ |
3,770 |
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$ |
3,619 |
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Product liability |
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962 |
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1,207 |
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Employee compensation and benefits |
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8,215 |
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7,544 |
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Workers compensation |
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5,351 |
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5,119 |
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Income taxes payable |
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930 |
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935 |
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Total current liabilities |
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19,228 |
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18,424 |
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Accrued pension liability |
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8,646 |
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8,648 |
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Product liability accrual |
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895 |
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989 |
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Contingent liabilities Note 8 |
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Stockholders Equity |
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Common Stock, non-voting, par value $1: |
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Authorized shares 50,000; none issued |
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Common Stock, par value $1: Authorized shares
40,000,000; issued and outstanding 22,638,720
and 26,910,720 |
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22,639 |
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26,911 |
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Additional paid-in capital |
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2,547 |
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2,508 |
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Retained earnings |
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77,225 |
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94,334 |
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Accumulated other comprehensive income (loss) |
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(12,175 |
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(12,175 |
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Total Stockholders Equity |
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90,236 |
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111,578 |
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Total Liabilities and Stockholders Equity |
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$ |
119,005 |
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$ |
139,639 |
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Note:
The balance sheet at December 31, 2005 has been derived from the audited financial statements at
that date but does not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements.
See notes to condensed financial statements.
4
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Firearms sales |
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$ |
34,378 |
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$ |
29,006 |
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$ |
104,425 |
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$ |
96,826 |
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Castings sales |
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7,234 |
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6,084 |
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19,890 |
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16,918 |
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Net sales |
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41,612 |
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35,090 |
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124,315 |
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113,744 |
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Cost of products sold |
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36,378 |
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30,190 |
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102,485 |
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91,351 |
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Gross profit |
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5,234 |
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4,900 |
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21,830 |
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22,393 |
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Expenses: |
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Selling |
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3,367 |
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4,841 |
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11,385 |
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13,051 |
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General and administrative |
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1,530 |
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1,729 |
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6,034 |
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4,991 |
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4,897 |
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6,570 |
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17,419 |
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18,042 |
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Operating income (loss) |
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337 |
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(1,670 |
) |
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4,411 |
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4,351 |
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Other income-net |
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1,261 |
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35 |
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1,974 |
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156 |
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Income (loss) before income taxes |
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1,598 |
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(1,635 |
) |
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6,385 |
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4,507 |
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Income taxes |
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641 |
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(656 |
) |
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2,560 |
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1,807 |
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Net income (loss) |
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$ |
957 |
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$ |
(979 |
) |
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$ |
3,825 |
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$ |
2,700 |
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Earnings(loss) per share |
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Basic |
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$ |
0.04 |
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$ |
(0.04 |
) |
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$ |
0.14 |
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$ |
0.10 |
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Diluted |
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$ |
0.04 |
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$ |
(0.04 |
) |
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$ |
0.14 |
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$ |
0.10 |
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Cash dividends per share |
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$ |
0.00 |
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$ |
0.10 |
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$ |
0.00 |
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$ |
0.30 |
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Average shares outstanding (000s) |
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Basic |
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26,679 |
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26,911 |
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26,832 |
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26,911 |
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Diluted |
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26,684 |
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26,911 |
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26,835 |
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26,911 |
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Actual shares outstanding as of September 30, 2006 were 22,638,720.
See notes to condensed financial statements.
5
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
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Nine Months Ended September 30, |
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2006 |
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2005 |
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Operating Activities |
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Net income |
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$ |
3,825 |
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$ |
2,700 |
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Adjustments
to reconcile net income to cash provided by (use in) operating
activities: |
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Depreciation |
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3,515 |
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|
4,273 |
|
Gain on sale of assets |
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(998 |
) |
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Deferred income taxes |
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|
111 |
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|
611 |
|
Changes in operating assets and liabilities: |
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Trade receivables |
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(5,966 |
) |
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|
(3,518 |
) |
Inventories |
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|
8,146 |
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|
(3,230 |
) |
Trade accounts payable and other liabilities |
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|
1,089 |
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|
21 |
|
Product liability |
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(339 |
) |
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|
(456 |
) |
Prepaid expenses and other assets |
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|
2,023 |
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|
(1,223 |
) |
Income taxes |
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(5 |
) |
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|
142 |
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Cash Provided by (Used in) Operating Activities |
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$ |
11,401 |
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$ |
(680 |
) |
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Investing Activities |
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Property, plant and equipment additions |
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(2,417 |
) |
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|
(2,777 |
) |
Proceeds from the sale of assets |
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|
1,829 |
|
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|
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|
Purchases of short-term investments |
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(87,064 |
) |
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|
(91,412 |
) |
Proceeds from maturities of short-term investments |
|
|
104,017 |
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|
101,396 |
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Cash provided by investing activities |
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|
16,365 |
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|
7,207 |
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Financing Activities |
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Repurchase and retirement of common stock |
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|
(25,205 |
) |
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Dividends paid |
|
|
|
|
|
|
(8,073 |
) |
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|
Cash used in financing activities |
|
|
(25,205 |
) |
|
|
(8,073 |
) |
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|
|
|
|
|
|
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|
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|
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|
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|
Increase (decrease) in cash and cash equivalents |
|
|
2,561 |
|
|
|
(1,546 |
) |
|
|
|
|
|
|
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|
|
Cash and cash equivalents at beginning of period |
|
|
4,057 |
|
|
|
4,841 |
|
|
|
|
|
|
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|
|
|
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Cash and cash equivalents at end of period |
|
$ |
6,618 |
|
|
$ |
3,295 |
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|
|
|
|
|
|
|
See notes to condensed financial statements.
6
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2006
NOTE 1BASIS 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
September 30, 2006 are not necessarily indicative of the results to be expected for the full year
ending December 31, 2006. 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, 2005.
NOTE 2SIGNIFICANT ACCOUNTING POLICIES
Organization: Sturm, Ruger & Company, Inc. (Company) is principally engaged in the design,
manufacture, and sale of firearms and investment castings. The Companys design and manufacturing
operations are located in the United States. Sales for the three and nine months ended September
30, 2006 were 95% domestic and 5% export. The Companys firearms are sold through a select number
of independent wholesale distributors to the sporting and law enforcement markets. Investment
castings are sold either directly or through manufacturers representatives to companies in a wide
variety of industries.
Use of Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Prior Year Balances: Certain prior year balances may have been reclassified to conform with
current year presentation.
Stock Incentive and Bonus Plans: At September 30, 2006, the Company has two stock-based
compensation plans. Readers should refer to both Item 12 and Note 1 of the Companys financial
statements, which are included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2005, for additional information related to these stock-based compensation plans.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement 123(R), Share-Based Payment, utilizing the modified prospective approach. Prior to the
adoption of SFAS 123(R) the Company accounted for stock option grants in accordance with APB
Opinion 25, Accounting for Stock Issued to Employees, (the intrinsic value method), and
accordingly, recognized no compensation expense for stock option grants.
7
Under the modified prospective approach, the provisions of SFAS 123(R) apply to new awards and
to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or
cancelled. Under the modified prospective approach, compensation cost recognized in the quarter and
nine months ended September 30, 2006 includes compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS 123, and compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). Prior periods were not restated to
reflect the impact of adopting the new standard.
The following table summarizes the stock option activity for the nine months ended September
30, 2006:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted |
|
Weighted |
|
Remaining |
|
|
|
|
|
|
Average |
|
Average Grant |
|
Contractual Life |
|
|
Shares |
|
Exercise Price |
|
Date Fair Value |
|
(Years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding At December 31, 2005 |
|
|
1,020,000 |
|
|
$ |
11.50 |
|
|
$ |
1.89 |
|
|
|
3.3 |
|
Granted |
|
|
560,000 |
|
|
|
7.11 |
|
|
|
3.27 |
|
|
|
10.0 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(315,000 |
) |
|
|
11.89 |
|
|
|
2.00 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
1,265,000 |
|
|
$ |
9.46 |
|
|
$ |
2.47 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable Options Outstanding
at September 30, 2006 |
|
|
710,000 |
|
|
$ |
11.22 |
|
|
$ |
1.84 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Options at September
30, 2006 |
|
|
555,000 |
|
|
$ |
7.20 |
|
|
$ |
3.27 |
|
|
|
10.0 |
|
|
As a result of adopting Statement 123(R) on January 1, 2006, the Companys income before
income taxes and net income for the three and nine months ended September 30, 2006 were reduced by
$34,000 and $21,000, and $64,000 and $38,000, respectively, than if it had continued to account for
share-based compensation under Opinion 25 for stock option grants. Basic and diluted earnings per
share were unchanged.
If the Company would have adopted Statement 123(R) for the three and nine month period ended
September 30, 2005, the Companys income before income taxes and net income for that period would
have been reduced by $11,000 and $7,000, and $27,000 and $16,000, respectively, than the amounts
previously reported and basic and diluted earnings per share would have been unchanged.
The Company uses the Black-Sholes option pricing model to estimate the fair value of
stock-based awards with the following weighted average assumptions: dividend yield of 0.0%,
expected volatility of 44.9%, risk free rate of return of 5.0%, and expected lives of 5 years.
Non-vested stock options at September 30, 2006 total 555,000. At September 30, 2006, there was
$1,836,000 of unrecognized compensation cost related to share-based payments that is expected to be
recognized over a weighted-average period of 5 years.
8
At September 30, 2006, there were 900,000 shares available for future stock option grants to
employees under existing plans, and no shares available for future stock option grants to directors
under existing plans. At September 30, 2006 the aggregate intrinsic value of exercisable options
was zero. The Company has reserved 2.2 million of authorized and unissued shares of its common
stock for issuance of stock under its stock options plans.
Recent Accounting Pronouncements: In July 2006, the Financial Accounting Standards Board
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of SFAS
No. 109, which clarifies the accounting for uncertainty in tax positions. This Interpretation
requires that the Company recognize in its financial statements the impact of a tax position if
that position is more likely than not of being sustained on audit. The provisions of FIN 48 are
effective for the Company as of January 1, 2007. The adoption of FIN 48 is not expected to have a
material effect on the Company.
In September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans which requires an employer to recognize the over-funded or
under-funded status of defined benefit and other postretirement plans (other than a multiemployer
plan) as an asset or liability on its consolidated balance sheet. Actuarial gains and losses and
prior service costs and credits that have not yet been recognized as a component of net periodic
benefit cost as of the statement adoption date are recorded as a component of accumulated other
comprehensive income. These changes modify the required disclosures for defined benefit and other
postretirement plans. The statement is effective for fiscal years ending after December 15, 2006.
We do not expect the adoption of this statement to have a material impact on our results of
operations or cash flows.
NOTE 3INVENTORIES
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 managements estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond managements control, interim results are subject to the final
year-end LIFO inventory valuation. During 2006, inventory quantities have been reduced. This
expected reduction will result in a liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years as compared with the current cost of purchases. Although a reduction in
inventory levels is expected to remain through year-end, the effect of a liquidation cannot be
quantified at the present time. If a liquidation does occur in 2006, management believes that the
impact may be material to the financial statements.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,2006 |
|
|
December 31, 2005 |
|
Finished products |
|
$ |
7,123 |
|
|
$ |
9,997 |
|
Materials and work in process |
|
|
33,457 |
|
|
|
38,729 |
|
|
|
|
|
|
|
|
Net inventories |
|
$ |
40,580 |
|
|
$ |
48,726 |
|
|
|
|
|
|
|
|
NOTE 4INCOME TAXES
The Companys 2006 and 2005 effective tax rate differs from the statutory tax rate due
principally to state income taxes. Income tax payments totaled $14,000 for the nine months ended
September 30, 2006. Total income tax payments during the nine months ended September 30, 2005 were
$3.1 million.
9
NOTE 5 PENSION PLANS
The Company sponsors two defined benefit pension plans which cover substantially all
employees. A third defined benefit plan is non-qualified and covers certain executive officers of
the Company. The estimated cost of these plans is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Service cost |
|
$ |
406 |
|
|
$ |
332 |
|
|
$ |
1,216 |
|
|
$ |
997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
821 |
|
|
|
677 |
|
|
|
2,463 |
|
|
|
2,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
(993 |
) |
|
|
(795 |
) |
|
|
(2,980 |
) |
|
|
(2,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
66 |
|
|
|
70 |
|
|
|
198 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial gains |
|
|
256 |
|
|
|
185 |
|
|
|
768 |
|
|
|
555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
556 |
|
|
$ |
469 |
|
|
$ |
1,665 |
|
|
$ |
1,408 |
|
|
The Company made contributions totaling $0.5 million related to its defined benefit pension
plans in the third quarter of 2006. The Company expects its contribution requirements for its
defined benefit pension plans for the balance of 2006 to be approximately $0.5 million.
NOTE 6BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of common shares
outstanding during the period. On September 26, 2006, the Company repurchased 4,272,000 shares of
its common stock, representing 15.9% of the outstanding shares from entities controlled by members
of the Ruger family at a price of $5.90 per share. This transaction reduced the weighted average
number of common shares outstanding to 26,679,000 shares and 26,832,000 shares for the three and
nine months ended September 30, 2006, respectively. For both the three and nine months ended
September 30, 2005, the weighted average number of common shares outstanding was 26,911,000 shares.
Diluted earnings per share reflect the impact of options outstanding using the treasury stock
method, when applicable. This resulted in diluted weighted-average shares outstanding for the
three and nine months ended September 30, 2006 of 26,684,000 shares and 26,835,000, respectively.
For both the three and nine months ended September 30, 2005, the diluted weighted average number of
common shares outstanding was 26,911,000 shares.
Shares outstanding as of September 30, 2006 were 22,638,720.
NOTE 7 COMPREHENSIVE INCOME
As there were no non-owner changes in equity during the first nine months of 2006 and 2005,
total comprehensive income(loss) equals net income(loss) for the three and nine months ended
September 30, 2006 and 2005, or $1.0 million and $3.8 million, and $(1.0) and $2.7 million,
respectively.
10
NOTE 8 CONTINGENT LIABILITIES
As of September 30, 2006, the Company is a defendant in approximately five lawsuits allegedly
involving its products and is aware of certain other such claims. Lawsuits and claims fall into
two categories:
(i) Those that claim damages from the Company related to allegedly defective product design
which stem from a specific incident. These lawsuits and claims are based principally on
the theory of strict liability but also may be based on negligence, breach of warranty,
and other legal theories, and
(ii) those brought by cities, municipalities, counties, and individuals against firearms
manufacturers, distributors and dealers seeking to recover damages allegedly arising out of
the misuse of firearms by third parties in the commission of homicides, suicides and other
shootings involving juveniles and adults. The complaints by municipalities seek damages,
among other things, for the costs of medical care, police and emergency services, public
health services, and the maintenance of courts, prisons, and other services. In certain
instances, the plaintiffs seek to recover for decreases in property values and loss of
business within the city due to criminal violence. In addition, nuisance abatement and/or
injunctive relief is sought to change the design, manufacture, marketing and distribution
practices of the various defendants. These suits allege, among other claims, strict
liability or negligence in the design of products, public nuisance, negligent entrustment,
negligent distribution, deceptive or fraudulent advertising, violation of consumer
protection statutes and conspiracy or concert of action theories. Most of these cases do
not allege a specific injury to a specific individual as a result of the misuse or use of
any of the Companys products.
The Company has expended significant amounts of financial resources and management time in
connection with product liability litigation. Management believes that, in every case, the
allegations are unfounded, and that the shootings and any results therefrom were due to negligence
or misuse of the firearms by third-parties or the claimant, and that there should be no recovery
against the Company. Defenses further exist to the suits brought by cities, municipalities,
counties, and a state attorney general based, among other reasons, on established state law
precluding recovery by municipalities for essential government services, the remoteness of the
claims, the types of damages sought to be recovered, and limitations on the extraterritorial
authority which may be exerted by a city, municipality, county or state under state and federal
law, including State and Federal Constitutions. Also, The Protection of Lawful Commerce in Arms
Act signed into law on October 26, 2005 on its face requires dismissal of such claims.
The only case against the Company alleging liability for criminal shootings by third-parties
to ever be permitted to go before a constitutional jury, Hamilton, et al. v. Accu-tek, et
al., resulted in a defense verdict in favor of the Company on February 11, 1999. In that case,
numerous firearms manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and industry-wide liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of the seven cases
decided by the jury. In subsequent proceedings involving other defendants, the New York Court of
Appeals as a matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a manufacturers lawfully made products; and 2)
liability of firearms manufacturers could not be apportioned under a market share theory. More
recently, the New York Court of Appeals on October 21, 2003 declined to hear the appeal from the
decision of the New York Supreme Court, Appellate Division, affirming the dismissal of New York
Attorney General Eliot Spitzers public nuisance suit against the Company and other manufacturers
and distributors of firearms. In its decision, the Appellate Division relied heavily on
Hamilton in concluding that it was legally inappropriate, impractical, unrealistic
and unfair to attempt to hold firearms manufacturers responsible under theories of public
nuisance for the criminal acts of others.
Of the lawsuits brought by municipalities or a state Attorney General, twenty have been
concluded: Atlanta dismissal by intermediate Appellate Court, no further appeal;
Bridgeport dismissal affirmed by Connecticut Supreme Court; County of Camden
dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami dismissal
11
affirmed by intermediate appellate court, Florida Supreme Court declined review; New
Orleans dismissed by Louisiana Supreme Court, United States Supreme Court declined review;
Philadelphia U.S. Third Circuit Court of Appeals affirmed dismissal, no further appeal;
Wilmington dismissed by trial court, no appeal; Boston voluntary dismissal
with prejudice by the City at the close of fact discovery; Cincinnati voluntarily
withdrawn after a unanimous vote of the city council; Detroit dismissed by Michigan
Court of Appeals, no appeal; Wayne County dismissed by Michigan Court of Appeals, no
appeal; New York State Court of Appeals denied plaintiffs petition for leave to appeal
the Intermediate Appellate Courts dismissal, no further appeal; Newark Superior Court
of New Jersey Law Division for Essex County dismissed the case with prejudice; City of
Camden dismissed on July 7, 2003, not reopened; Jersey City voluntarily dismissed
and not re-filed; St. Louis Missouri Supreme Court denied plaintiffs motion to appeal
Missouri Appellate Courts affirmance of dismissal; Chicago Illinois Supreme Court
denied plaintiffs petition for rehearing; and Los Angeles City, Los Angeles
County, San Francisco Appellate Court affirmed summary judgment in favor of
defendants, no further appeal; and Cleveland dismissed on January 24, 2006 for lack of
prosecution.
The dismissal of the Washington, D.C. municipal lawsuit was sustained on appeal, but
individual plaintiffs were permitted to proceed to discovery and attempt to identify the
manufacturers of the firearms used in their shootings as machine guns under the citys strict
liability law. On April 21, 2005, the D.C. Court of Appeals, in an en banc hearing, unanimously
dismissed all negligence and public nuisance claims, but let stand individual claims based upon a
Washington, D.C. act imposing strict liability for manufacturers of machine guns. Based on
present information, none of the Companys products has been identified with any of the criminal
assaults which form the basis of the individual claims. The writ of certiorari to the United
States Supreme Court regarding the constitutionality of the Washington, D.C. act was denied and the
case was remanded to the trial court for further proceedings. The defendants subsequently moved to
dismiss the case based upon the Protection of Lawful Commerce in Arms Act, which motion was granted
on May 22, 2006. The individual plaintiffs and the District of Columbia, which has subrogation
claims in regard to the individual plaintiffs, have appealed.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial
court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery
proceedings on December 23, 2003. The defendants filed a motion to dismiss pursuant to the
Protection of Lawful Commerce in Arms Act. The motion was denied on October 23, 2006 based on the
trial courts view that the Act is unconstitutional. Interlocutory appellate remedies are being
pursued. The case is set for trial in 2009.
In the previously reported New York City municipal case, the defendants moved to
dismiss the suit pursuant to the Protection of Lawful Commerce in Arms Act. The trial judge found
the Act to be constitutional but denied the defendants motion to dismiss the case, stating that
the Act was not applicable to the suit. The defendants were given leave to appeal and in fact have
appealed the decision to the U.S. Court of Appeals for the Second Circuit. That appeal is pending.
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the
NAACPs claims. On July 21, 2003, Judge Jack B. Weinstein entered an order dismissing the
NAACP lawsuit, but this order contained lengthy dicta which defendants believe are contrary
to law and fact. Appeals by both sides were filed, but plaintiffs withdrew their appeal. On
August 3, 2004, the United States Court of Appeals for the Second Circuit granted the NAACPs
motion to dismiss the defendants appeal of Judge Weinsteins order denying defendants motion to
strike his dicta made in his order dismissing the NAACPs case, and the defendants motion for
summary disposition was denied as moot. The ruling of the Second Circuit effectively confirmed the
decision in favor of defendants and brought this matter to a conclusion.
Legislation has been passed in approximately 34 states precluding suits of the type brought by
the municipalities mentioned above. On the Federal level, the Protection of Lawful Commerce in
Arms Act was signed by President Bush on October 26, 2005. The Act requires dismissal of suits
against manufacturers arising out of the lawful sale of their products for harm resulting from the
criminal or unlawful misuse of a firearm by a third party. The Company is pursuing dismissal of
each action involving such claims, including the municipal cases
12
described above. On June 22, 2006, in the previously reported Arnold case, the motion to
dismiss based on the Act was denied. Interlocutory appellate remedies are being pursued.
Punitive damages, as well as compensatory damages, are commonly demanded in many of the
lawsuits and claims brought against the Company. Aggregate claimed amounts may exceed product
liability accruals and applicable insurance coverage. For claims made before July 10, 2000,
coverage is provided on an annual basis for losses exceeding $2 million per claim, or an aggregate
maximum loss of $5.5 million annually. For claims made after July 10, 2000, coverage is provided
on an annual basis for losses exceeding $5 million per claim, or an aggregate maximum loss of $10
million annually, except for certain new claims which might be brought by governments or
municipalities after July 10, 2000, which are excluded from coverage.
Product liability claim payments are made when appropriate if, as, and when claimants and the
Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the
lawsuits and claims develop, the timing of which may vary greatly from case to case. A time
schedule cannot be determined in advance with any reliability concerning when payments will be made
in any given case.
Provision is made for product liability claims based upon many factors related to the severity
of the alleged injury and potential liability exposure, based upon prior claim experience. Because
our experience in defending these lawsuits and claims is that unfavorable outcomes are typically
not probable or estimable, only in rare cases is an accrual established for such costs. In most
cases, an accrual is established only for estimated legal defense costs. Product liability
accruals are periodically reviewed to reflect then-current estimates of possible liabilities and
expenses incurred to date and reasonably anticipated in the future. Threatened product liability
claims are reflected in our product liability accrual on the same basis as actual claims; i.e., an
accrual is made for reasonably anticipated possible liability and claims-handling expenses on an
ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes cannot be made.
Currently, there are no product liability cases in which a dollar amount of damages is claimed. If
there were cases with claimed damages, the amount of damages claimed would be set forth as an
indication of possible maximum liability that the Company might be required to incur in these cases
(regardless of the likelihood or reasonable probability of any or all of this amount being awarded
to claimants) as a result of adverse judgments that are sustained on appeal.
The Company management monitors the status of known claims and the product liability accrual,
which includes amounts for asserted and unasserted claims. While it is not possible to forecast
the outcome of litigation or the timing of costs, in the opinion of management, after consultation
with special and corporate counsel, it is not probable and is unlikely that litigation, including
punitive damage claims, will have a material adverse effect on the financial position of the
Company, but may have a material impact on the Companys financial results for a particular period.
The Company has reported all cases instituted against it through June 30, 2006 and the results
of those cases, where terminated, to the S.E.C. on its previous Form 10-K and 10-Q reports, to
which reference is hereby made.
13
NOTE 9OPERATING SEGMENT INFORMATION
The Company has two reportable segments: firearms and investment castings. The firearms
segment manufactures and sells rifles, pistols, revolvers, and shotguns principally to a select
number of independent wholesale distributors primarily located in the United States. The
investment castings segment consists of two operating divisions which manufacture and sell titanium
and steel investment castings. In July 2006, the Company announced the cessation of titanium
castings operations, expected to be completed in the first quarter of 2007. The Company continues
to manufacture and sell steel investment castings for a wide variety of customers and end uses.
Selected operating segment financial information follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
34,378 |
|
|
$ |
29,006 |
|
|
$ |
104,425 |
|
|
$ |
96,826 |
|
Castings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
7,234 |
|
|
|
6,084 |
|
|
|
19,890 |
|
|
|
16,918 |
|
Intersegment |
|
|
2,330 |
|
|
|
5,123 |
|
|
|
10,386 |
|
|
|
13,794 |
|
|
|
|
|
9,564 |
|
|
|
11,207 |
|
|
|
30,276 |
|
|
|
30,712 |
|
Eliminations |
|
|
(2,330 |
) |
|
|
(5,123 |
) |
|
|
(10,386 |
) |
|
|
(13,794 |
) |
|
|
|
$ |
41,612 |
|
|
$ |
35,090 |
|
|
$ |
124,315 |
|
|
$ |
113,744 |
|
|
Income (Loss) Before |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
627 |
|
|
$ |
(1,510 |
) |
|
$ |
5,639 |
|
|
$ |
4,660 |
|
Castings |
|
|
540 |
|
|
|
(367 |
) |
|
|
(717 |
) |
|
|
(704 |
) |
Corporate |
|
|
431 |
|
|
|
242 |
|
|
|
1,463 |
|
|
|
551 |
|
|
|
|
$ |
1,598 |
|
|
$ |
(1,635 |
) |
|
$ |
6,385 |
|
|
$ |
4,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
Identifiable Assets |
|
|
|
|
|
|
|
|
Firearms |
|
$ |
70,014 |
|
|
$ |
73,035 |
|
Castings |
|
|
18,498 |
|
|
|
17,751 |
|
Corporate |
|
|
30,493 |
|
|
|
48,853 |
|
|
|
|
$ |
119,005 |
|
|
$ |
139,639 |
|
|
14
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Company Overview
Sturm, Ruger & Company, Inc. (the Company) is principally engaged in the design,
manufacture, and sale of firearms and precision investment castings. The Companys design and
manufacturing operations are located in the United States. Substantially all sales are domestic.
The Company is the only U.S. firearms manufacturer which offers products in all four industry
product categories rifles, shotguns, pistols, and revolvers. The Companys firearms are sold
through a select number of independent wholesale distributors principally to the commercial
sporting market.
Investment castings are manufactured from titanium and steel alloys. Investment castings are
sold either directly to or through manufacturers representatives to companies in a wide variety of
industries. In July 2006, the Company announced the cessation of titanium castings operations,
expected to be completed in the first quarter of 2007. The Company continues to manufacture and
sell steel investment castings for a wide variety of customers and end uses.
Because many of the Companys competitors are not subject to public filing requirements and
industry-wide data is generally not available in a timely manner, the Company is unable to compare
its performance to other companies or specific current industry trends. Instead, the Company
measures itself against its own historical results.
The Company does not consider its overall firearms business to be predictably seasonal;
however, sales of certain models of firearms are usually lower in the third quarter of the year.
Results of Operations
Consolidated net sales were $41.6 million for the three months ended September 30, 2006. This
represents an increase of $6.5 million or 18.6% from 2005 consolidated net sales of $35.1 million
in the comparable prior year period.
Consolidated net sales for the nine month period ended September 30, 2006 were $124.3 million,
an increase of $10.6 million or 9.3% over sales of $113.7 million in the comparable 2005 period.
Firearms segment net sales were $34.4 million for the three months ended September 30, 2006.
This represents an increase of $5.4 million or 18.5% from 2005 firearm net sales of $29.0 million
in the comparable prior year period.
Firearms segment net sales were $104.4 million for the nine months ended September 30, 2006.
This represents an increase of $7.6 million or 7.8% from 2005 firearm net sales of $96.8 million in
the comparable prior year period.
Firearms unit shipments increased 36.1% for the three months ended September 30, 2006 due to
increased shipments of revolvers and rifles. The increase in revolver shipments for the three
months ended September 30, 2006 is due to greater availability of revolver models with stronger
demand. The increase in rifle shipments for the three months ended September 30, 2006 is due to
strong shipments for the 10/22 rifles, partially offset by reduced shipments of the M77 bolt action
rifle which benefited from a dealer-driven rebate in effect in August and September of 2005. A
shift in product mix toward firearms with lower unit sales prices resulted in the lesser increase
in sales than unit shipments.
15
Firearms unit shipments increased 7.5% for the nine months ended September 30, 2006 due to
increased shipments of revolvers, partially offset by a decline in shipments of shotguns and
pistols. Rifle shipments were consistent with the prior year. The increase in revolver shipments
for the nine months ended September 30, 2006 is due to greater availability of revolver models in
stronger demand. The decrease in shotgun shipments for the nine months ended September 30, 2006 is
due to decreased availability of the side-by-side shotgun, while the decrease in pistol shipments
for the nine months ended September 30, 2006 appears to reflect a softening of demand as well as
the shipment of 5,000 KP95D pistols to the U.S. Army and Tank-automotive and Armaments Command in
January of 2005. A shift in product mix toward firearms with lower unit sales prices resulted in
the lesser increase in sales than unit shipments.
Casting segment net sales were $7.2 million for the three months ended September 30, 2006.
This represents an increase of $1.1 million or 18.9% from 2005 casting sales of $6.1 million in the
comparable 2005 period.
Casting segment net sales were $19.9 million for the nine months ended September 30, 2006.
This represents an increase of $3.0 million or 17.6% from 2005 casting sales of $16.9 million in
the comparable 2005 period.
The casting sales increases were due primarily to the acceleration of titanium shipments
related to the cessation of titanium casting operations, as previously announced by the Company in
July 2006. Shipments of titanium castings are expected to conclude in the first quarter of 2007.
Titanium casting sales accounted for $9.8 million or 49% of casting sales for the nine months ended
September 30, 2006. The Company continues to manufacture and sell steel investment castings for a
wide variety of customers and end uses.
Consolidated cost of products sold were $36.4 million for the three months ended September 30,
2006. This represents an increase of $6.2 million or 20.5% from 2005 consolidated cost of products
sold of $30.2 million in the comparable prior year period.
Consolidated cost of products sold were $102.5 million for the nine months ended September 30,
2006. This represents an increase of $11.1 million or 12.2% from 2005 consolidated cost of products
sold of $91.4 million in the comparable prior year period.
The gross margin as a percent of sales was 12.6% for the three months ended September 30,
2006. This represents a decline from the 2005 gross margin of 14.0% in the comparable prior year
period.
The gross margin as a percent of sales was 17.6% for the nine months ended September 30, 2006.
This represents a decline from the 2005 gross margin of 19.7% in the comparable prior year period.
16
Our year over year gross margins, for both the three months and nine months ended September
30, 2006, were favorably impacted by stronger sales and lower product liability expense.
Concurrently, we reduced the value of our inventory to recognize progress we have made in lowering
overhead rates over the past year, resulting in an overall gross margin decline.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
41,612 |
|
|
|
100.0 |
% |
|
$ |
35,090 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
products sold,
before inventory
adjustments and
product liability |
|
|
34,266 |
|
|
|
82.3 |
% |
|
|
29,666 |
|
|
|
84.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin before
inventory
adjustments and
product liability |
|
|
7,346 |
|
|
|
17.7 |
% |
|
|
5,424 |
|
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
adjustments and
product liability |
|
|
2,112 |
|
|
|
|
|
|
|
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
5,234 |
|
|
|
12.6 |
% |
|
$ |
4,900 |
|
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
124,315 |
|
|
|
100.0 |
% |
|
$ |
113,744 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products
sold, before inventory
adjustments and product
liability |
|
|
94,778 |
|
|
|
76.2 |
% |
|
|
89,965 |
|
|
|
79.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin before
inventory adjustments
and product liability |
|
|
29,537 |
|
|
|
23.8 |
% |
|
|
23,779 |
|
|
|
20.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory adjustments
and product liability |
|
|
7,707 |
|
|
|
|
|
|
|
1,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
21,830 |
|
|
|
17.6 |
% |
|
$ |
22,393 |
|
|
|
19.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses were $4.9 million and $17.4 million for the
three and nine months ended September 30, 2006, respectively, representing a decrease of 25.5% for
the quarter and 3.5% for the nine months. The decrease for the three months ended September 30,
2006 reflects a reduction in advertising and sales promotion expenses. The decrease for the nine
months ended September 30, 2006 reflects a reduction in advertising and sales promotion expenses,
partially offset by increased personnel-related expenses including $0.7 million related to the
retirement of the former Chairman and Chief Executive Officer.
Other income-net for the three and nine months ended September 30, 2006 was $1.3 million and
$2.0 million, respectively, compared to $35,000 for the three months and $0.2 million for the nine
months ended September 30,
17
2005. The increase in the quarter ended September 30, 2006 is attributable to the gain on the sale
of excess casting machinery and equipment in the third quarter of 2006. The increase in the nine
months ended September 30, 2006 is attributable to the aforementioned gain on the sale of excess
casting machinery and equipment and the sale of certain non-manufacturing real estate in the first
half of 2006.
The effective income tax rate of 40.1% in the three months and nine months ended September 30,
2006 remained consistent with the income tax rate in the corresponding 2005 periods.
As a result of the foregoing factors, consolidated net income for the three months ended
September 30, 2006 increased to $1.0 million from a loss of ($1.0) for the three months ended
September 30, 2005, and increased $1.1 million, or 41.7%, from $2.7 million for the nine months
ended September 30, 2005 to $3.8 million for the nine months ended September 30, 2006.
Financial Condition
Operations
At September 30, 2006, the Company had cash, cash equivalents and short-term
investments of $11.6 million. The Companys working capital of $126.3 million, less the LIFO
reserve of $62.1 million, results in adjusted working capital of $64.2 million and a current ratio
of 4.3 to 1.
Cash provided by operating activities was $11.4 million and cash used in operating activities
was ($0.7) million for the nine months ended September 30, 2006 and 2005, respectively. The
increase in cash provided is principally a result of a decrease in inventory, improved net income,
and various fluctuations in operating asset and liability accounts during the first nine months of
2006 compared to the first nine months of 2005.
Until November 30, 2004, the Company followed a common industry practice of offering a dating
plan to its firearms customers on selected products, which allowed the customer to buy the
products commencing in December, the start of the Companys marketing year, and pay for them on
extended terms. Discounts were offered for early payment. The dating plan provided a revolving
payment plan under which payments for all shipments made during the period December through
February were made by April 30. Shipments made in subsequent months were paid for within a maximum
of 120 days. On December 1, 2004, the Company modified the payment terms on these selected
products whereby payment was due 45 days after shipment. Discounts were offered for early payment.
On December 1, 2005, the Company effectively discontinued the dating plan for domestic customers.
The dating plan receivable balance was $10.4 million at September 30, 2005. Total receivables at
September 30, 2006 were $21.7 million, only $0.3 million of which were dating plan receivables.
The Company purchases its various raw materials from a number of suppliers. There
is, however, 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 Companys manufacturing processes
could be interrupted and the Companys financial condition or results of operations could be
materially adversely affected.
Investing and Financing
Capital expenditures during the nine months ended September 30, 2006 totaled $2.4 million.
For the past two years capital expenditures averaged approximately $1.0 million per quarter. In
2006, the Company expects to spend approximately $3.5 million on capital expenditures to upgrade
and modernize manufacturing equipment primarily at the Newport Firearms and Pine Tree Castings
Divisions. The Company finances, and intends to continue to finance, all of these activities with
funds provided by operations and current cash and short-term investments.
18
On September 26, 2006, the Company repurchased 4,272,000 shares of its common
stock, representing 15.9% of the outstanding shares from entities controlled by members of the
Ruger family at a price of $5.90 per share. The purchase was made with cash held by the Company so
no debt was required.
There were no dividends paid for the nine months ended September 30, 2006. 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 does
not expect to pay dividends in the near term, but will reconsider a dividend later in 2007.
Historically, the Company has not required external financing. Based on its
unencumbered assets, the Company believes it has the ability to raise substantial amounts of
short-term or long-term debt.
Firearms Legislation
The sale, purchase, ownership, and use of firearms are subject to thousands of federal, state
and local governmental regulations. The basic federal laws are the National Firearms Act, the
Federal Firearms Act, and the Gun Control Act of 1968. These laws generally prohibit the private
ownership of fully automatic weapons and place certain restrictions on the interstate sale of
firearms unless certain licenses are obtained. The Company does not manufacture fully automatic
weapons, other than for the law enforcement market, and holds all necessary licenses under these
federal laws. From time to time, congressional committees review proposed bills relating to the
regulation of firearms. These proposed bills generally seek either to restrict or ban the sale
and, in some cases, the ownership of various types of firearms. Several states currently have laws
in effect similar to the aforementioned legislation.
Until November 30, 1998, the Brady Law mandated a nationwide five-day waiting period and
background check prior to the purchase of a handgun. As of November 30, 1998, the National Instant
Check System, which applies to both handguns and long guns, replaced the five-day waiting period.
The Company believes that the Brady Law and the National Instant Check System have not had a
significant effect on the Companys sales of firearms, nor does it anticipate any impact on sales
in the future. On September 13, 1994, the Crime Bill banned so-called assault weapons. All
the Companys then-manufactured commercially-sold long guns were exempted by name as legitimate
sporting firearms. This ban expired by operation of law on September 13, 2004. The Company
remains strongly opposed to laws which would restrict the rights of law-abiding citizens to
lawfully acquire firearms. The Company believes that the lawful private ownership of firearms is
guaranteed by the Second Amendment to the United States Constitution and that the widespread
private ownership of firearms in the United States will continue. However, there can be no
assurance that the regulation of firearms will not become more restrictive in the future and that
any such restriction would not have a material adverse effect on the business of the Company.
Firearms Litigation
(The disclosures within Firearms Litigation are identical to the disclosures within Footnote
#8-Contingent Liabilities.)
As of September 30, 2006, the Company is a defendant in approximately five lawsuits
allegedly involving its products and is aware of certain other such claims. Lawsuits and claims
fall into two categories:
(i) Those that claim damages from the Company related to allegedly defective product design
which stem from a specific incident. These lawsuits and claims are based principally on
the theory of strict liability but also may be based on negligence, breach of warranty,
and other legal theories, and
19
(ii) those brought by cities, municipalities, counties, and individuals against firearms
manufacturers, distributors and dealers seeking to recover damages allegedly arising out of
the misuse of firearms by third parties in the commission of homicides, suicides and other
shootings involving juveniles and adults. The complaints by municipalities seek damages,
among other things, for the costs of medical care, police and emergency services, public
health services, and the maintenance of courts, prisons, and other services. In certain
instances, the plaintiffs seek to recover for decreases in property values and loss of
business within the city due to criminal violence. In addition, nuisance abatement and/or
injunctive relief is sought to change the design, manufacture, marketing and distribution
practices of the various defendants. These suits allege, among other claims, strict
liability or negligence in the design of products, public nuisance, negligent entrustment,
negligent distribution, deceptive or fraudulent advertising, violation of consumer
protection statutes and conspiracy or concert of action theories. Most of these cases do
not allege a specific injury to a specific individual as a result of the misuse or use of
any of the Companys products.
The Company has expended significant amounts of financial resources and management time in
connection with product liability litigation. Management believes that, in every case, the
allegations are unfounded, and that the shootings and any results therefrom were due to negligence
or misuse of the firearms by third-parties or the claimant, and that there should be no recovery
against the Company. Defenses further exist to the suits brought by cities, municipalities,
counties, and a state attorney general based, among other reasons, on established state law
precluding recovery by municipalities for essential government services, the remoteness of the
claims, the types of damages sought to be recovered, and limitations on the extraterritorial
authority which may be exerted by a city, municipality, county or state under state and federal
law, including State and Federal Constitutions. Also, The Protection of Lawful Commerce in Arms
Act signed into law on October 26, 2005 on its face requires dismissal of such claims.
The only case against the Company alleging liability for criminal shootings by third-parties
to ever be permitted to go before a constitutional jury, Hamilton, et al. v. Accu-tek, et
al., resulted in a defense verdict in favor of the Company on February 11, 1999. In that case,
numerous firearms manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and industry-wide liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of the seven cases
decided by the jury. In subsequent proceedings involving other defendants, the New York Court of
Appeals as a matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a manufacturers lawfully made products; and 2)
liability of firearms manufacturers could not be apportioned under a market share theory. More
recently, the New York Court of Appeals on October 21, 2003 declined to hear the appeal from the
decision of the New York Supreme Court, Appellate Division, affirming the dismissal of New York
Attorney General Eliot Spitzers public nuisance suit against the Company and other manufacturers
and distributors of firearms. In its decision, the Appellate Division relied heavily on
Hamilton in concluding that it was legally inappropriate, impractical, unrealistic
and unfair to attempt to hold firearms manufacturers responsible under theories of public
nuisance for the criminal acts of others.
Of the lawsuits brought by municipalities or a state Attorney General, twenty have been
concluded: Atlanta dismissal by intermediate Appellate Court, no further appeal;
Bridgeport dismissal affirmed by Connecticut Supreme Court; County of Camden
dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami dismissal affirmed by
intermediate appellate court, Florida Supreme Court declined review; New Orleans
dismissed by Louisiana Supreme Court, United States Supreme Court declined review;
Philadelphia U.S. Third Circuit Court of Appeals affirmed dismissal, no further appeal;
Wilmington dismissed by trial court, no appeal; Boston voluntary dismissal
with prejudice by the City at the close of fact discovery; Cincinnati voluntarily
withdrawn after a unanimous vote of the city council; Detroit dismissed by Michigan
Court of Appeals, no appeal; Wayne County dismissed by Michigan Court of Appeals, no
appeal; New York State Court of Appeals denied plaintiffs petition for leave to appeal
the Intermediate Appellate Courts dismissal, no further appeal; Newark Superior Court
of New Jersey Law Division for Essex County dismissed the case with prejudice; City of
Camden dismissed on July 7, 2003, not reopened; Jersey City voluntarily dismissed
and not re-filed; St. Louis Missouri Supreme Court
20
denied plaintiffs motion to appeal Missouri Appellate Courts affirmance of dismissal;
Chicago Illinois Supreme Court denied plaintiffs petition for rehearing; and Los
Angeles City, Los Angeles County, San Francisco Appellate Court affirmed
summary judgment in favor of defendants, no further appeal; and Cleveland dismissed on
January 24, 2006 for lack of prosecution.
The dismissal of the Washington, D.C. municipal lawsuit was sustained on appeal, but
individual plaintiffs were permitted to proceed to discovery and attempt to identify the
manufacturers of the firearms used in their shootings as machine guns under the citys strict
liability law. On April 21, 2005, the D.C. Court of Appeals, in an en banc hearing, unanimously
dismissed all negligence and public nuisance claims, but let stand individual claims based upon a
Washington, D.C. act imposing strict liability for manufacturers of machine guns. Based on
present information, none of the Companys products has been identified with any of the criminal
assaults which form the basis of the individual claims. The writ of certiorari to the United
States Supreme Court regarding the constitutionality of the Washington, D.C. act was denied and the
case was remanded to the trial court for further proceedings. The defendants subsequently moved to
dismiss the case based upon the Protection of Lawful Commerce in Arms Act, which motion was granted
on May 22, 2006. The individual plaintiffs and the District of Columbia, which has subrogation
claims in regard to the individual plaintiffs, have appealed.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial
court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery
proceedings on December 23, 2003. The defendants filed a motion to dismiss pursuant to the
Protection of Lawful Commerce in Arms Act. The motion was denied on October 23, 2006 based on the
trial courts view that the Act is unconstitutional. Interlocutory appellate remedies are being
pursued. The case is set for trial in 2009.
In the previously reported New York City municipal case, the defendants moved to
dismiss the suit pursuant to the Protection of Lawful Commerce in Arms Act. The trial judge found
the Act to be constitutional but denied the defendants motion to dismiss the case, stating that
the Act was not applicable to the suit. The defendants were given leave to appeal and in fact have
appealed the decision to the U.S. Court of Appeals for the Second Circuit. That appeal is pending.
In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the
NAACPs claims. On July 21, 2003, Judge Jack B. Weinstein entered an order dismissing the
NAACP lawsuit, but this order contained lengthy dicta which defendants believe are contrary
to law and fact. Appeals by both sides were filed, but plaintiffs withdrew their appeal. On
August 3, 2004, the United States Court of Appeals for the Second Circuit granted the NAACPs
motion to dismiss the defendants appeal of Judge Weinsteins order denying defendants motion to
strike his dicta made in his order dismissing the NAACPs case, and the defendants motion for
summary disposition was denied as moot. The ruling of the Second Circuit effectively confirmed the
decision in favor of defendants and brought this matter to a conclusion.
Legislation has been passed in approximately 34 states precluding suits of the type brought by
the municipalities mentioned above. On the Federal level, the Protection of Lawful Commerce in
Arms Act was signed by President Bush on October 26, 2005. The Act requires dismissal of suits
against manufacturers arising out of the lawful sale of their products for harm resulting from the
criminal or unlawful misuse of a firearm by a third party. The Company is pursuing dismissal of
each action involving such claims, including the municipal cases described above. On June 22,
2006, in the previously reported Arnold case, the motion to dismiss based on the Act was
denied. Interlocutory appellate remedies are being pursued.
Punitive damages, as well as compensatory damages, are commonly demanded in many of the
lawsuits and claims brought against the Company. Aggregate claimed amounts may exceed product
liability accruals and applicable insurance coverage. For claims made before July 10, 2000,
coverage is provided on an annual basis for losses exceeding $2 million per claim, or an aggregate
maximum loss of $5.5 million annually. For claims made after July 10, 2000, coverage is provided
on an annual basis for losses exceeding $5 million per claim, or an aggregate
21
maximum loss of $10 million annually, except for certain new claims which might be brought by
governments or municipalities after July 10, 2000, which are excluded from coverage.
Product liability claim payments are made when appropriate if, as, and when claimants and the
Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the
lawsuits and claims develop, the timing of which may vary greatly from case to case. A time
schedule cannot be determined in advance with any reliability concerning when payments will be made
in any given case.
Provision is made for product liability claims based upon many factors related to the severity
of the alleged injury and potential liability exposure, based upon prior claim experience. Because
our experience in defending these lawsuits and claims is that unfavorable outcomes are typically
not probable or estimable, only in rare cases is an accrual established for such costs. In most
cases, an accrual is established only for estimated legal defense costs. Product liability
accruals are periodically reviewed to reflect then-current estimates of possible liabilities and
expenses incurred to date and reasonably anticipated in the future. Threatened product liability
claims are reflected in our product liability accrual on the same basis as actual claims; i.e., an
accrual is made for reasonably anticipated possible liability and claims-handling expenses on an
ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes cannot be made.
Currently, there are no product liability cases in which a dollar amount of damages is claimed. If
there were cases with claimed damages, the amount of damages claimed would be set forth as an
indication of possible maximum liability that the Company might be required to incur in these cases
(regardless of the likelihood or reasonable probability of any or all of this amount being awarded
to claimants) as a result of adverse judgments that are sustained on appeal.
The Company management monitors the status of known claims and the product liability accrual,
which includes amounts for asserted and unasserted claims. While it is not possible to forecast
the outcome of litigation or the timing of costs, in the opinion of management, after consultation
with special and corporate counsel, it is not probable and is unlikely that litigation, including
punitive damage claims, will have a material adverse effect on the financial position of the
Company, but may have a material impact on the Companys financial results for a particular period.
The Company has reported all cases instituted against it through June 30, 2006 and the results
of those cases, where terminated, to the S.E.C. on its previous Form 10-K and 10-Q reports, to
which reference is hereby made.
Other Operational Matters
In the normal course of its manufacturing operations, the Company is subject to occasional
governmental proceedings and orders pertaining to waste disposal, air emissions and water
discharges into the environment. The Company believes that it is generally in compliance with
applicable environmental regulations and the outcome of such proceedings and orders will not have a
material adverse effect on the financial position or results of operations of the Company.
The Company self-insures a significant amount of its product liability, workers compensation,
medical, and other insurance. It also carries significant deductible amounts on various insurance
policies.
The valuation of the future defined benefit pension obligations at December 31, 2005 indicated
that these plans were underfunded. While this estimation has no bearing on the actual funded
status of the pension plans, it resulted in a cumulative other comprehensive loss of $12.2 million
on the Companys balance sheet at December 31, 2005.
The Company expects to realize its deferred tax assets through tax deductions against future
taxable income or carry back against taxes previously paid.
22
Inflations effect on the Companys operations is most immediately felt in cost of products
sold because the Company values inventory on the LIFO basis. Generally under this method, the cost
of products sold reported in the financial statements approximates current costs, and thus, reduces
distortion in reported income which would result from the slower recognition of increased costs
when other methods are used. The use of historical cost depreciation has a beneficial effect on
cost of products sold. The Companys results continue to be adversely affected by the significant
inflation in the cost of certain commodities, particularly titanium, steel, and utilities.
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its critical accounting estimates and assumptions
described in the Companys Annual Report on Form 10-K filed on May 1, 2006, or the judgment
affecting the application of those estimates and assumptions.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an Interpretation of SFAS No. 109, which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that the Company
recognize in its financial statements the impact of a tax position if that position is more likely
than not of being sustained on audit. The provisions of FIN 48 are effective for the Company as of
January 1, 2007. The adoption of FIN 48 is not expected to have a material effect on the Company.
Forward-Looking Statements and Projections
The Company may, from time to time, make forward-looking statements and projections concerning
future expectations. Such statements are based on current expectations and are subject to certain
qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated
castings sales and earnings, the need for external financing for operations or capital
expenditures, the results of pending litigation against the Company including lawsuits filed by
mayors, state attorneys general and other governmental entities and membership organizations, and
the impact of future firearms control and environmental legislation, any one or more of which could
cause actual results to differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publish revised forward-looking statements to reflect events or
circumstances after the date such forward-looking statements are made or to reflect the occurrence
of subsequent unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates affecting the return on
its investments but does not consider this interest rate market risk exposure to be material to its
financial condition or results of operations. The Company invests primarily in United States
Treasury instruments with short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Under its current policies,
the Company does not use derivative financial instruments, derivative commodity instruments or
other financial instruments to manage its exposure to changes in interest rates or commodity
prices.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive
Officer and Treasurer 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 the September 30, 2006.
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Based on the evaluation, the Companys Chief Executive Officer and Treasurer and Chief
Financial Officer have concluded that, as of September 30, 2006, such disclosure controls and
procedures are effective to ensure that information required to be disclosed in the Companys
periodic reported 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
Changes in Internal Controls over Financial Reporting
Mr. Michael O. Fifer, became Chief Executive Officer of the Company effective September 25,
2006. Prior to Mr. Fifers appointment, Stephen L. Sanetti was responsible for evaluating the
effectiveness of the Companys Disclosure Controls and Procedures as Interim Chief Executive
Officer of the Company.
Except as noted above, there were no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at Note 8 to this Form
10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through June 30, 2006, and the
results of those cases, where terminated, to the S.E.C. on its previous Form 10-Q and 10-K reports,
to which reference is hereby made.
One case was formally instituted against the Company during the three months ended September
30, 2006:
Kasting v. Company, et. al. (IN) in the Johnson County Circuit Court. The plaintiff
alleged that the Ruger New Model Super Blackhawk single action revolver was defective when it blew
up while firing it. Plaintiff further claimed the ammunition was defective and caused the
revolver to fail, and claimed that the store which sold him the allegedly defective ammunition was
also at fault. On October 12, 2006, the plaintiff agreed to settle the matter with all parties for
an amount that is within the Companys limits of its self-insurance coverage.
During the three months ending September 30, 2006, no previously reported cases were settled.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from the information provided in
Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December
31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
(a) Exhibits:
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31.1 |
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Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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STURM, RUGER & COMPANY, INC. |
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Date: November 6, 2006
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/s/ THOMAS A. DINEEN |
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Thomas A. Dineen |
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Principal Financial Officer, |
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Treasurer and Chief Financial Officer |
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