rate adjustments to inventory, and product liability decreased as a
percentage of sales by 4.0% and 1.5%, respectively, compared with the comparable 2010 periods. These decreases were caused by:
The significantly increased sales which allowed the leveraging of fixed
Improvement in variable cost productivity, and
Increased production and sales of higher margin products with strong
LIFO During the three months ended July 2, 2011, gross
inventories increased by $0.6 million and the Company recognized LIFO expense resulting in increased cost of products sold of $0.3 million. In the
comparable 2010 period, gross inventories decreased $1.9 million and the Company recognized LIFO income resulting in decreased cost of products sold of $0.3
During the six months ended July 2, 2011, gross inventories decreased
by $6.5 million and the Company recognized LIFO income resulting in decreased cost of products sold of $0.3 million. In the comparable 2010 period, gross
inventories decreased $1.6 million and the Company recognized LIFO income resulting in decreased cost of products sold of $0.4 million.
Overhead Rate Adjustments The Company uses actual
overhead expenses incurred as a percentage of sales-value-of-production over a trailing six month period to absorb overhead expense into inventory. During
the three and six months ended July 2, 2011, the Company was more efficient in overhead spending and the overhead rates used to absorb overhead expenses into
inventory decreased, resulting in decreases in inventory value of $0.3 million and $0.5 million, respectively. These decreases in inventory carrying
values resulted in increases to cost of products sold.
During the three months ended July 3, 2010, the overhead rate used to
absorb overhead into inventory decreased slightly, resulting in a decrease in inventory value of $0.1 million, and a corresponding increase to cost of products
sold. During the six months ended July 3, 2010, the overhead rate used to absorb overhead into inventory increased, resulting in an increase in inventory
value of $0.3 million, and a corresponding decrease to cost of products sold.
Labor Rate Adjustments The Company uses actual direct
labor expense incurred as a percentage of sales-value-of-production over a trailing six month period to absorb direct labor expense into inventory. During
the three and six months ended July 2, 2011, the Company was more efficient in direct labor utilization and the labor rates used to absorb incurred labor
expenses into inventory decreased, resulting in decreases in inventory value of $0.1 million and $0.3 million, respectively. These decreases in inventory
carrying values resulted in increases to cost of products sold.
During the three and six months ended July 3, 2010, the labor rates
used to absorb incurred labor expenses into inventory increased, resulting in increases in inventory value of $0.1 million and corresponding decreases to cost
of products sold in both periods.
Product Liability This expense includes the cost of
outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. These costs totaled $0.2 million
and $0.6 million for the three and six months ended July 2, 2011, respectively. The income in 2010 reflects favorable experience in product liability
matters during the first half of 2010. See Note 11 to the notes to the financial statements Contingent Liabilities for further discussion of
the Companys product liability.
Gross Profit As a
result of the foregoing factors, for the three months ended July 2, 2011, gross profit was $28.5 million, an increase of $6.8
million from $21.7 million in the comparable prior year period. Gross
profit as a percentage of sales increased to 35.8% in the three months
ended July 2, 2011 from 33.8% in the comparable prior year period.
For the six months ended July 2, 2011, gross profit was $52.5 million,
an increase of $7.6 million from $44.9 million in the comparable prior year period. Gross profit as a percentage of sales was 33.8% for both six
Selling, General and Administrative
Selling, general and administrative expenses were
$11.4 million and $22.9 for the three and six months ended July 2, 2011, an increase of $2.3 million and $3.6 from the comparable prior year periods, and an
increase from 14.1% and 14.6% of sales to 14.3% and 14.8% of sales. The increase in selling, general and administrative expense is attributable to the
increased promotional and advertising expenses, including the Million
Gun Challenge to benefit the National Rifle Association,
increased equity-based compensation, and
increased expenses related to the implementation of a new information
Other Operating Expenses
In the six months ended July 2, 2010, the Company
recognized an expense of $0.4 million related to its frozen defined benefit pension plans. No such expense was recorded in the six months ended July 2,
Other income was $0.1 million and $0.3 million in
the three and six months ended July 2, 2011 compared to $0.2 million and $0.2 million in three and six months ended July 3, 2010, respectively.
Income Taxes and Net Income
The effective income tax rate in the three and six
months ended July 2, 2011 was 37.0%, compared to 36.0% for the comparable prior year period. The increase in the income tax rate results from an increase
in the estimated effective state tax rate.
As a result of the foregoing factors, consolidated
net income was $10.8 million and $18.8 million for the three and six months ended July 2, 2011, respectively. This represents an increase of $2.6 million
and $2.3 million from consolidated net income of $8.2 million and $16.5 million in the three and six months ended July 3, 2010, respectively.
At the end of the second quarter of 2011, the
Companys cash, cash equivalents and short-term investments totaled $76.5 million. Our pre-LIFO working capital of $118.5 million, less the LIFO
reserve of $37.1 million, resulted in working capital of $81.4 million and a current ratio of 3.2 to 1.
The Company expects to replenish its finished goods
inventory to levels that will better serve our customers. This replenishment could increase the FIFO value of finished goods inventory by as much as $15
million from current depressed levels. We anticipate that the cash required to fund this increase in finished goods inventory would be partially offset by
a reduction in accounts receivable which would be expected during a period of reduced demand.
Cash provided by operating activities was $32.4
million for the six months ended July 2, 2011 compared to $19.1 million for the comparable prior year period. The increase in cash provided by operations
is primarily attributable to a greater reduction in inventory in the six months ended July 2, 2011 compared to the six months ended July 3, 2010 and increased
payables and accrued expenses at July 2, 2011 due in part to the new schedule of Federal excise tax payments that was effective in the latter half of 2010.
Third parties supply the Company with various raw
materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic
material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given
time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw
materials in inventory 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 for the six months ended July
2, 2011 totaled $7.7 million. In 2011, the Company expects to spend approximately $15 million on capital expenditures to purchase tooling and fixtures for
new product introductions, to increase production capacity, and to upgrade and modernize manufacturing equipment and its information technology infrastructure.
The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash and short-term
Dividends of $2.8 million were paid during the six
months ended July 2, 2011. The amounts of these dividends were based on a percentage of operating profit after adjustment for certain items, the same
approach used by the Company since 2009. Under this approach, the amount per share of the quarterly dividend fluctuates directly with certain operating
results of the Company. The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash and
short-term investments, and the Companys need for cash. The Company has financed its dividends with cash provided by operations and current cash and
In October, 2010, the Board of Directors expanded
the Companys authorization to repurchase shares of its common stock from $4.3 million to $10 million. During the six months ended July 2, 2011, the
Company repurchased 133,400 shares of its common stock for $2.0 million in the open market. The average price per share repurchased was $14.94.
These repurchases were funded with cash on hand. As of July 2, 2011, $8.0 million remained available for future stock repurchases.
During the second quarter of 2011, the Company made
a $969,000 minority investment in a pepper spray company in which it now has a 12% interest. This investment is included in Other Assets on the balance
The Company has migrated its retirement benefits
from defined-benefit pension plans to defined-contribution retirement plans, utilizing its current 401(k) plan.
In 2007, the Company amended its hourly and salaried
defined-benefit pension plans so that employees no longer accrue benefits under them effective December 31, 2007. This action froze the
benefits for all employees and prevented future hires from joining the plans, effective December 31, 2007. Currently, the Company provides supplemental
discretionary contributions to substantially all employees individual 401(k) accounts.
Minimum cash contributions of $1.7 million were
required for the defined-benefit plans for 2010. The Company contributed $2 million to the defined-benefit plans in 2010.
In future years, the Company may again be required
to make cash contributions to the two defined-benefit pension plans. The annual contributions will be based on the amount of the unfunded plan liabilities
derived from the frozen benefits and will not include liabilities for any future accrued benefits for any new or existing participants. The total amount
of these future cash contributions will depend on the investment returns generated by the plans assets and the then-applicable discount rates used to
calculate the plans liabilities.
The Company plans to contribute approximately $2
million in 2011, but will increase the amount of the contribution if required to do so. The intent of these contributions is to reduce the amount of time
that the Company will be required to continue to operate the frozen plans. The ongoing cost of running the plans (even if frozen) is approximately
$200,000 per year, which includes PBGC premiums, actuary and audit fees, and other expenses.
Based on its unencumbered assets, the Company
believes it has the ability to raise substantial amounts of cash through issuance of short-term or long-term debt. The Companys unsecured $25
million credit facility, which expires on December 12, 2011, remains unused and the Company has no debt.
Other Operational Matters
In the normal course of its manufacturing
operations, the Company is subject to occasional governmental proceedings and orders pertaining to workplace safety, firearms serial number tracking and
control, waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable
BATFE, environmental, and safety regulations and the outcome of any proceedings or orders will not have a material adverse effect on the financial position or
results of operations of the Company.
The Company self-insures a significant amount of its
product liability, workers compensation, medical, and other insurance. It also carries significant deductible amounts on various insurance policies.
The valuation of the future defined-benefit pension
obligations at December 31, 2010 and 2009 indicated that these plans were underfunded by $9.4 million and $12.2 million, respectively, and resulted in a
cumulative other comprehensive loss of $19.6 million and $20.4 million on the Companys balance sheet at December 31, 2010 and 2009, respectively.
The Company expects to realize its deferred tax
assets through tax deductions against future taxable income.
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its
critical accounting estimates and assumptions described in the Companys 2010 Annual Report on Form 10-K filed on February 23, 2011, or the judgments
affecting the application of those estimates and assumptions.
Forward-Looking Statements and Projections
The Company may, from time to time, make
forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain
qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing
for operations or capital expenditures, the results of pending litigation against the Company, the impact of future firearms control and environmental
legislation, and accounting estimates, any one or more of which could cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to
publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the
occurrence of subsequent unanticipated events.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changing interest rates on
its investments, which consist primarily of United States Treasury instruments with short-term (less than one year) maturities and cash. The interest rate
market risk implicit in the Company's investments at any given time is low, as the investments mature within short periods and the Company does not have
significant exposure to changing interest rates on invested cash.
The Company has not undertaken any actions to cover
interest rate market risk and is not a party to any interest rate market risk management activities.
A hypothetical ten percent change in market interest
rates over the next year would not materially impact the Companys earnings or cash flows. A hypothetical ten percent change in market interest rates
would not have a material effect on the fair value of the Companys investments.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Companys management, with the
participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure
controls and procedures (the Disclosure Controls and Procedures), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act), as of July 2, 2011.
Based on the evaluation, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that, as of July 2, 2011, such Disclosure Controls and Procedures are effective to ensure that
information required to be disclosed in the Companys periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer and Chief Financial Officer or persons performing similar functions, as appropriate, to allow
timely decisions regarding disclosure. Additionally, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the
end of the period covered by this Quarterly Report on Form 10-Q, there have been no changes in the Companys internal control over financial reporting that
occurred during the quarter ended July 2, 2011 that have materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
The effectiveness of any system of internal controls
and procedures is subject to certain limitations, and, as a result, there can be no assurance that the Companys Disclosure Controls and Procedures will
detect all errors or fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the internal control system will be attained.
The nature of the legal proceedings against the
Company is discussed at Note 11 to this Form 10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted
against it through April 2, 2011, and the results of those cases, where terminated, to the S.E.C. on its previous Form 10-Q and 10-K reports, to which reference
is hereby made.
No cases were formally instituted against the
Company during the three months ending July 2, 2011.
During the three months ending July 2, 2011, the
previously reported case of Southport Post Road Limited Partnership v. Sturm, Ruger & Co., Inc. was resolved in favor of the Company at trial.
There have been no material changes in the
Companys risk factors from the information provided in Item 1A. Risk Factors included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2010.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In the six months ended July 2, 2011 the Company
repurchased shares of its common stock. Details of these purchases are as follows:
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
These purchases were made with cash held by the Company and no debt was incurred.
DEFAULTS UPON SENIOR SECURITIES
REMOVED AND RESERVED
Certification Pursuant to Rule 13a-14(a) as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JULY 2, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STURM, RUGER & COMPANY, INC.
Date: July 27, 2011
S/THOMAS A. DINEEN
Thomas A. Dineen
Principal Financial Officer,
Principal Accounting Officer,
Vice President, Treasurer and Chief Financial Officer