10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
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
incorporation or organization)
|
|
(I.R.S. employer
identification no.) |
|
|
|
Lacey Place, Southport, Connecticut
|
|
06890 |
|
|
|
(Address of principal executive offices)
|
|
(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.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of the issuers common stock as of July 31, 2006: Common
Stock, $1 par value - 26,910,720.
INDEX
STURM, RUGER & COMPANY, INC.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Note) |
|
Assets |
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,314 |
|
|
$ |
4,057 |
|
Short-term investments |
|
|
28,334 |
|
|
|
21,926 |
|
Trade receivables, less allowances for
doubtful accounts ($370 and $351) and
discounts ($19 and $346) |
|
|
16,128 |
|
|
|
15,777 |
|
Inventories: |
|
|
|
|
|
|
|
|
Finished products |
|
|
10,398 |
|
|
|
9,997 |
|
Materials and products in process |
|
|
40,005 |
|
|
|
38,729 |
|
|
|
|
|
|
|
|
|
|
|
50,403 |
|
|
|
48,726 |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
6,558 |
|
|
|
6,018 |
|
Prepaid expenses and other current assets |
|
|
2,273 |
|
|
|
5,442 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
107,010 |
|
|
|
101,946 |
|
|
Property, plant and equipment |
|
|
156,653 |
|
|
|
155,174 |
|
Less allowances for depreciation |
|
|
(133,979 |
) |
|
|
(131,808 |
) |
|
|
|
|
|
|
|
|
|
|
22,674 |
|
|
|
23,366 |
|
Deferred income taxes |
|
|
3,000 |
|
|
|
3,200 |
|
Other assets |
|
|
10,358 |
|
|
|
11,127 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
143,042 |
|
|
$ |
139,639 |
|
|
|
|
|
|
|
|
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(Note) |
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Trade accounts payable and accrued expenses |
|
$ |
3,056 |
|
|
$ |
3,619 |
|
Product liability |
|
|
988 |
|
|
|
1,207 |
|
Employee compensation and benefits |
|
|
8,487 |
|
|
|
7,544 |
|
Workers compensation |
|
|
5,254 |
|
|
|
5,119 |
|
Income taxes payable |
|
|
1,192 |
|
|
|
935 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
18,977 |
|
|
|
18,424 |
|
|
|
|
|
|
|
|
|
|
Accrued pension liability |
|
|
8,689 |
|
|
|
8,648 |
|
Product liability accrual |
|
|
912 |
|
|
|
989 |
|
Contingent
liabilities Note 8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Common Stock, non-voting, par value $1: Authorized shares 50,000; none issued |
|
|
|
|
|
|
|
|
Common Stock, par value $1: Authorized shares -
40,000,000; issued and outstanding 26,910,700 |
|
|
26,911 |
|
|
|
26,911 |
|
Additional paid-in capital |
|
|
2,526 |
|
|
|
2,508 |
|
Retained earnings |
|
|
97,202 |
|
|
|
94,334 |
|
Accumulated other comprehensive income (loss) |
|
|
(12,175 |
) |
|
|
(12,175 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
114,464 |
|
|
|
111,578 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
143,042 |
|
|
$ |
139,639 |
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
Firearms sales |
|
$ |
29,222 |
|
|
$ |
28,720 |
|
|
$ |
70,047 |
|
|
$ |
67,821 |
|
Castings sales |
|
|
6,054 |
|
|
|
5,675 |
|
|
|
12,656 |
|
|
|
10,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
35,276 |
|
|
|
34,395 |
|
|
|
82,703 |
|
|
|
78,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
27,819 |
|
|
|
28,750 |
|
|
|
66,107 |
|
|
|
61,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
7,457 |
|
|
|
5,645 |
|
|
|
16,596 |
|
|
|
17,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
3,898 |
|
|
|
4,149 |
|
|
|
8,017 |
|
|
|
8,210 |
|
General and administrative |
|
|
1,780 |
|
|
|
1,634 |
|
|
|
4,504 |
|
|
|
3,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,678 |
|
|
|
5,783 |
|
|
|
12,521 |
|
|
|
11,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
1,779 |
|
|
|
(138 |
) |
|
|
4,075 |
|
|
|
6,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income-net |
|
|
639 |
|
|
|
135 |
|
|
|
712 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,418 |
|
|
|
(3 |
) |
|
|
4,787 |
|
|
|
6,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
970 |
|
|
|
(1 |
) |
|
|
1,919 |
|
|
|
2,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,448 |
|
|
($ |
2 |
) |
|
$ |
2,868 |
|
|
$ |
3,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.06 |
|
|
($ |
0.00 |
) |
|
$ |
0.11 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.06 |
|
|
($ |
0.00 |
) |
|
$ |
0.11 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share |
|
$ |
0.00 |
|
|
$ |
0.10 |
|
|
$ |
0.00 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding (000s) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
26,911 |
|
|
|
26,911 |
|
|
|
26,911 |
|
|
|
26,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
26,912 |
|
|
|
26,911 |
|
|
|
26,912 |
|
|
|
26,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed financial statements.
5
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
Cash Provided by Operating Activities |
|
$ |
7,313 |
|
|
$ |
6,870 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Property, plant and equipment additions |
|
|
(1,648 |
) |
|
|
(1,694 |
) |
Purchases of short-term investments |
|
|
(63,465 |
) |
|
|
(66,608 |
) |
Proceeds from maturities of short-term investments |
|
|
57,057 |
|
|
|
66,134 |
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(8,056 |
) |
|
|
(2,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
|
|
|
|
(5,382 |
) |
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
|
|
|
|
(5,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in cash and cash equivalents |
|
|
(743 |
) |
|
|
(680 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
4,057 |
|
|
|
4,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,314 |
|
|
$ |
4,161 |
|
|
|
|
|
|
|
|
|
|
See notes to condensed financial statements. |
6
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2006
NOTE 1
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of management, the accompanying unaudited condensed financial statements
include all adjustments, consisting of normal recurring accruals, considered necessary for a fair
presentation of the results of the interim periods. Operating results for the six months ended
June 30, 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 2
SIGNIFICANT ACCOUNTING POLICIES
Organization: Sturm, Ruger & Company, Inc. (Company) is principally engaged in the design,
manufacture, and sale of firearms and investment castings. The Companys design and manufacturing
operations are located in the United States. Substantially all sales are domestic. 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.
Principles of Consolidation: The financial statements have been prepared from the Companys
books and records and include all of the Companys accounts. All significant intercompany accounts
and transactions have been eliminated. Certain prior year balances may have been reclassified to
conform with current year presentation.
Stock Incentive and Bonus Plans: At June 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
NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
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 six months ended June 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 six months ended June 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
60,000 |
|
|
|
6.15 |
|
|
|
2.83 |
|
|
|
10.0 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(315,000 |
) |
|
|
11.89 |
|
|
|
2.00 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
765,000 |
|
|
$ |
10.92 |
|
|
$ |
1.90 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable Options Outstanding at
June 30, 2006 |
|
|
705,000 |
|
|
$ |
11.23 |
|
|
$ |
1.84 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Options at June 30, 2006 |
|
|
60,000 |
|
|
$ |
7.33 |
|
|
$ |
2.68 |
|
|
|
9.8 |
|
|
As a result of adopting Statement 123(R) on January 1, 2006, the Companys income before
income taxes and net income for the six months ended June 30, 2006 are $35,000 and $21,000 lower,
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.
There were no stock options exercised during the six months ended June 30, 2006. There were
60,000 options granted during the six months ended June 30, 2006.
If the Company would have adopted Statement 123(R) for the six month period ended June 30,
2005, the Companys income before income taxes and net income for that period would have been
$16,000 and $9,000 lower, 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 June 30, 2006 total 60,000. At June 30, 2006, there was $231,000
of unrecognized compensation cost related to share-based payments that is expected to be recognized
over a weighted-average period of 2.75 years.
8
NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
At June 30, 2006, there were 1.1 million 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 June 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.
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.
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 $12,000 for the six months ended
June 30, 2006. Total income tax payments during the three months ended June 30, 2005 were $3.0
million.
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 June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Service cost |
|
$ |
406 |
|
|
$ |
319 |
|
|
$ |
811 |
|
|
$ |
665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
821 |
|
|
|
650 |
|
|
|
1,642 |
|
|
|
1,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
(993 |
) |
|
|
(763 |
) |
|
|
(1,986 |
) |
|
|
(1,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
65 |
|
|
|
67 |
|
|
|
131 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial gains |
|
|
256 |
|
|
|
177 |
|
|
|
512 |
|
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
555 |
|
|
$ |
450 |
|
|
$ |
1,110 |
|
|
$ |
939 |
|
|
9
NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The Company made contributions totaling $0.5 million related to its defined benefit pension
plans in the second 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. Diluted earnings per share reflect the impact of options
outstanding using the treasury stock method, when applicable. For the three months ended June 30,
2005, the treasury stock method would have been antidilutive, therefore the weighted average number
of common shares were used for this periods diluted earnings per share calculation. This resulted
in diluted weighted-average shares outstanding for the three and six months ended June 30, 2006 of
26,912,000, and diluted weighted-average shares outstanding for the three and six months ended June
30, 2005 of 26,911,000.
NOTE 7 COMPREHENSIVE INCOME
As there were no non-owner changes in equity during the first six months of 2006 and 2005,
total comprehensive income(loss) equals net income(loss) for the three and six months ended June
30, 2006 and 2005, or $1.4 million and $2.9 million, and $0 and $3.7 million, respectively.
NOTE 8 CONTINGENT LIABILITIES
As of June 30, 2006, the Company is a defendant in approximately 4 lawsuits allegedly
involving its products and is aware of certain other such claims. These lawsuits and claims fall
into two categories:
|
(i) |
|
those that claim damages from the Company related to allegedly defective product design
which stem from a specific incident. No such lawsuits are presently pending; 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. |
10
NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
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, and counties based, among other reasons, recently enacted
Federal legislation established state law precluding recovery by municipalities for essential
government services, the remoteness of the claims, the types of damages sought to be recovered, and
limitations on the extraterritorial authority which may be exerted by a city, municipality, county
or state under state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal shootings by third-parties
to ever be permitted to go before a constitutional jury, Hamilton, et al. v. Accu-tek, et
al., resulted in a defense verdict in favor of the Company on February 11, 1999. In that case,
numerous firearms manufacturers and distributors had been sued, alleging damages as a result of
alleged negligent sales practices and industry-wide liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of the seven cases
decided by the jury. In subsequent proceedings involving other defendants, the New York Court of
Appeals as a matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a 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 denied plaintiffs motion to appeal Missouri
Appellate Courts affirmance of dismissal; Chicago Illinois Supreme Court denied
plaintiffs petition for rehearing; 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
11
NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
proceedings. The defendants subsequently moved to dismiss the case based upon the Protection of
Lawful Commerce in Arms Act, which motion was granted on May 22, 2006. The individual
plaintiffs and the District of Columbia, which has subrogation claims in regard to the individual
plaintiffs, have appealed.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial
court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery
proceedings on December 23, 2003. Gary is scheduled to begin trial in 2009. The
defendants have filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms
Act. The motion is pending.
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 demanded in many 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.
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.
12
NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
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.
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 March 31, 2006 and the
results of those cases, where terminated, to the S.E.C. on its previous Form 10-K and 10-Q reports,
to which reference is hereby made.
NOTE 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. Selected operating segment financial information follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
29,222 |
|
|
$ |
28,720 |
|
|
$ |
70,047 |
|
|
$ |
67,821 |
|
Castings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
6,054 |
|
|
|
5,675 |
|
|
|
12,656 |
|
|
|
10,835 |
|
Intersegment |
|
|
3,406 |
|
|
|
3,007 |
|
|
|
8,056 |
|
|
|
8,671 |
|
|
|
|
|
9,460 |
|
|
|
8,682 |
|
|
|
20,712 |
|
|
|
19,506 |
|
Eliminations |
|
|
(3,406 |
) |
|
|
(3,007 |
) |
|
|
(8,056 |
) |
|
|
(8,671 |
) |
|
|
|
$ |
35,276 |
|
|
$ |
34,395 |
|
|
$ |
82,703 |
|
|
$ |
78,656 |
|
|
Income (Loss) Before |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
1,596 |
|
|
($ |
209 |
) |
|
$ |
5,012 |
|
|
$ |
6,170 |
|
Castings |
|
|
(18 |
) |
|
|
(4 |
) |
|
|
(1,257 |
) |
|
|
(337 |
) |
Corporate |
|
|
840 |
|
|
|
210 |
|
|
|
1,032 |
|
|
|
309 |
|
|
|
|
$ |
2,418 |
|
|
($ |
3 |
) |
|
$ |
4,787 |
|
|
$ |
6,142 |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
|
|
|
|
|
|
|
|
$ |
71,908 |
|
|
$ |
73,035 |
|
Castings |
|
|
|
|
|
|
|
|
|
|
18,945 |
|
|
|
17,751 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
52,189 |
|
|
|
48,853 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
143,042 |
|
|
$ |
139,639 |
|
|
13
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 manufactured are of titanium and steel alloys. Investment castings are
sold either directly to or through manufacturers representatives to companies in a wide variety of
industries.
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 of $35.3 million were achieved by the Company for the three months
ended June 30, 2006. This represents an increase of 2.6% from 2005 consolidated net sales of $34.4
million in the comparable prior year period. Sales for the six month period ended June 30, 2006
were $82.7 million, an increase of $4.0 million over sales of $78.7 million in the comparable 2005
period.
Firearms segment net sales increased by $0.5 million, or 1.7%, in the second quarter of 2006
to $29.2 million from $28.7 million in the second quarter of the prior year. For the six months
ended June 30, 2006 firearms segment net sales increased by $2.2 million, to $70.0 million from
$67.8 million in the corresponding 2005 period. Firearms unit shipments decreased 8.0% for the
three month period ended June 30, 2006 and 3.0% for the six month period ended June 30, 2006 from
the comparable 2005 periods. For the quarter ended June 30, 2006, shipments of revolvers and
pistols exceeded the second quarter of 2005, while rifle and shotgun shipments were below the
second quarter of 2005.
The increase in pistol shipments is attributable to a dealer-driven rebate program announced
in June of 2006, and the increase in revolvers is due to greater availability of revolver models in
greater demand. The decrease in rifle shipments for the three months ended June 30, 2006 is due to
the popularity of a dealer-driven rebate program for 10/22 rifles in effect in May and June of
2005. A favorable shift in product mix, coupled with modest price increases and the modification
of our sales discount programs resulted in the 2% increase in sales, despite the reduction in
shipments.
For the six months ended June 30, 2006, the increased shipments of revolvers was offset by a
decline in shipments of rifles, pistols and shotguns. The decrease in rifle shipments for the six
months ended June 30, 2006 is due to the popularity of the aforementioned dealer-driven rebate
program for 10/22 rifles in effect in May and June of 2005. The decrease in pistol shipments for
the six months ended June 30, 2006 is primarily attributable to the
14
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCONTINUED
shipment of 5,000 KP95D pistols to the U.S. Army and Tank-automotive and Armaments Command in
January of 2005. A favorable shift in product mix, coupled with modest price increases and the
modification of our sales discount programs resulted in the 2% increase in sales, despite the
reduction in shipments.
Casting segment net sales increased by $0.4 million or 6.7% to $6.1 million for the three
month period ended June 30, 2006 from the three month period ended June 30, 2005. For the six
month period ended June 30, 2006 casting segment net sales increased 16.8% or $1.9 million to $12.7
million. Increased sales were primarily generated from existing customers in a variety of
industries.
Despite the favorable trend in sales, the Companys inability to develop a realistic and
achievable strategic plan for titanium castings has resulted in the decision to cease titanium
castings operations. The cessation of titanium casting operations is targeted for the first
quarter of 2007. Titanium casting sales accounted for $5.6 million or 44% of casting sales for the
six months ended June 30, 2006.
Consolidated cost of products sold for the three and the six months ended June 30, 2006 were
$27.8 million and $66.1 million compared to $28.8 million and $61.2 million for the three and six
months ended June 30, 2005, representing a decrease of 3.2% and an increase of 8.1%. The decrease
for the three months ended June 30, 2006 reflects a favorable book-to-physical inventory adjustment
recorded in the second quarter of 2006, decreased firearm unit shipments, partially offset by
increased firearm and casting production expenses and increased casting sales. The increase for
the six months is attributable to increased firearm and casting production expenses and increased
casting sales, partially offset by the aforementioned favorable book-to-physical inventory
adjustment recorded in the second quarter of 2006.
For the second quarter of 2006, gross profit as a percent of sales increased to 21.1% from
16.4% in the second quarter of 2005. Gross profit as a percentage of net sales was 20.1% for the
six month period ended June 30, 2006 as compared to 22.2% in the comparable 2005 period. Margin
improvement during the three month period ended June 30, 2006 resulted from the favorable inventory
adjustment, partially offset by less efficient firearms and castings production. Gross margin
deterioration for the six month period ended June 30, 2006 resulted from less efficient firearms
and castings production, partially offset by the aforementioned favorable book-to-physical
inventory adjustment recorded in the second quarter of 2006.
Selling, general and administrative expenses were $5.7 million and $12.5 million for the three
and six months ended June 30, 2006, respectively, representing a decrease of 1.8% for the quarter
and an increase of 9.1% for the six months. The slight decrease for the three months ended June
30, 2006 reflects a decline in several marketing initiatives. The increases for the six months
ended June 30, 2006 were primarily attributable to increased personnel-related expenses including
$0.7 million related to the retirement of the former Chairman and Chief Executive Officer, and
additional firearm promotional expenses.
Other income-net for the three and six months ended June 30, 2006 was $0.6 million and $0.7
million, respectively, compared to $0.1 million for both of the comparable periods ended June 30,
2005. The increase in the quarter and six months is attributable to increased interest rates on
the Companys short-term investments and the sale of non-manufacturing real estate in the second
quarter of 2006.
The effective income tax rate of 40.1% in the three months and six months ended June 30, 2006
remained consistent with the income tax rate in the corresponding 2005 periods.
15
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCONTINUED
As a result of the foregoing factors, consolidated net income for the three months ended June
30, 2006 increased $1.4 million from a breakeven for the three months ended June 30, 2005, and
decreased $0.8 million, or 22.1%, from $3.7 million for the six months ended June 30, 2005 to $2.9
million for the six months ended June 30, 2006.
Financial Condition
Operations
At June 30, 2006, the Company had cash, cash equivalents and short-term investments of $31.6
million, working capital of $88.0 million and a current ratio of 5.6 to 1.
Cash provided by operating activities was $7.3 million and $6.9 million for the six months
ended June 30, 2006 and 2005, respectively. The slight increase in cash provided is principally a
result of various fluctuations in operating asset and liability accounts during the first six
months of 2006 compared to the first six 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. The dating plan
receivable balance was $5.9 million at June 30, 2005.
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 six months ended June 30, 2006 totaled $1.6 million. For the
past two years capital expenditures averaged approximately $1.4 million per quarter. In 2006, the
Company expects to spend approximately $4 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.
There were no dividends paid for the six months ended June 30, 2006. On October 20, 2005, the
Companys Board of Directors voted to forgo the quarterly dividend. 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.
16
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
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. The Company does not anticipate a need for significant external financing for the
next twelve months.
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 has not had a significant effect on the Companys sales
of firearms, nor does it anticipate any impact on sales in the future. The Crime Bill took
effect on September 13, 1994, but none of the Companys products were banned as so-called assault
weapons. To the contrary, 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 Company is a defendant in approximately four lawsuits allegedly involving its products and
is aware of certain other such claims. 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.
17
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
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 denied plaintiffs motion to appeal Missouri
Appellate Courts affirmance of dismissal; Chicago Illinois Supreme Court denied
plaintiffs petition for rehearing; 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. Gary
is scheduled to begin trial in 2009. The defendants have filed a motion to dismiss pursuant
to the Protection of Lawful Commerce in Arms Act. The motion is pending.
18
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
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.
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.
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.
19
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
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
The Companys management, with the participation of the Companys Interim Chief Executive
Officer and Treasurer and Chief Financial Officer, has evaluated the effectiveness of the Companys
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 end of the period
covered by this report.
20
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
A material weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
As of December 31, 2005, the Company did not maintain sufficient controls over the
calculation of the LIFO index. This control deficiency resulted in an audit adjustment to the LIFO
reserve and cost of sales as of and for the year ended December 31, 2005. Additionally, this
control deficiency resulted in the restatement of the financial statements as of and for the year
ended December 31, 2004. Also, this control deficiency could result in a misstatement of the
aforementioned account balances or disclosures which could cause a material misstatement of annual
or interim financial statements that would not be prevented or detected. Accordingly, management
has determined that this control deficiency constituted a material weakness.
Conclusions
Because of this material weakness, management concluded that the Company did not maintain
effective internal control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control Integrated Framework issued by the COSO. However, in the first
quarter of 2006, the Company remediated the aforementioned material weakness in the Companys
internal control over financial reporting. Specifically, the Company has implemented additional
procedures related to the review of data used in the LIFO index calculation.
Based on their evaluation, the Companys Interim Chief Executive Officer and Treasurer and
Chief Financial Officer have concluded that, as of June 30, 2006, the Companys disclosure controls
and procedures are effective.
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.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at Note 8 to this Form
10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through March 31, 2006, and the
results of those cases, where terminated, to the S.E.C. on its previous Form 10-Q and 10-K reports,
to which reference is hereby made.
No cases were formally instituted against the Company during the three months ended June 30, 2006.
During the three months ending June 30, 2006, no previously reported cases were settled.
On April 20, 2006, in the previously reported Fore case, the claims against the
Company were dismissed by stipulation of both parties. The product in question was not
manufactured by the Company.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from the information provided in
Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December
31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2006 Annual Meeting of the Stockholders of the Company was held on May 24, 2006. The
table below sets forth the results of the votes taken at the 2006 Annual Meeting:
|
|
|
|
|
|
|
|
|
|
|
1. |
|
Election of Directors |
|
Votes For |
|
Votes Withheld |
|
|
James E. Service |
|
|
18,808,661 |
|
|
|
6,084,246 |
|
|
|
Stephen L. Sanetti |
|
|
19,077,057 |
|
|
|
5,815,850 |
|
|
|
John M. Kingsley, Jr. |
|
|
17,656,515 |
|
|
|
7,236,392 |
|
|
|
Richard T. Cunniff |
|
|
18,806,452 |
|
|
|
6,086,455 |
|
|
|
John A. Cosentino, Jr. |
|
|
18,823,970 |
|
|
|
6,068,937 |
|
|
|
|
|
|
|
|
|
|
|
|
2. |
|
Ratification of McGladrey & Pullen, LLP as Auditors for 2006 |
|
|
Votes For |
|
|
Votes Against |
|
|
|
Abstain |
|
|
|
19,554,122 |
|
|
182,891 |
|
|
|
5,155,894 |
|
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
|
31.1 |
|
Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31.2 |
|
Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
32.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
23
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 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.
|
|
|
|
|
|
|
STURM, RUGER & COMPANY, INC. |
|
|
|
|
|
|
|
Date: August 4, 2006
|
|
S/THOMAS A. DINEEN
Thomas A. Dineen
|
|
|
|
|
Principal Financial Officer, |
|
|
|
|
Treasurer and Chief Financial Officer |
|
|
24