10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the fiscal year ended December 31, 2006
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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 0-4776
STURM, RUGER & COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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06-0633559 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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Lacey Place, Southport, Connecticut
(Address of Principal Executive Offices)
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06890
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(203) 259-7843
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Common Stock, $1 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES
o NO þ
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES
o NO þ
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 filing requirements for the past
90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K þ
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
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Accelerated filer
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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 aggregate market value of the voting and non-voting common equity held by non-affiliates of
the registrant computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of June 30, 2006:
Common Stock, $1 par value $175,877,600
The number of shares outstanding of the registrants common stock as of February 15, 2007:
Common Stock, $1 par value 22,638,720 shares
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrants Proxy Statement relating to its 2007 Annual Stockholders meeting, to
be filed subsequently are incorporated by reference into Part III of this Report.
Portions of the registrants Proxy Statement relating to the Annual Meeting of Stockholders to be
held April 24, 2007 are incorporated by reference into Part III (Items 10 through 14) of this
Report.
In this Annual Report on Form 10-K, Sturm, Ruger & Company, Inc. (the Company) makes
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, 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.
PART I
ITEM 1BUSINESS
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 has been in the business since 1949 and was incorporated in its present form under
the laws of Delaware in 1969. The Company 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 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, which is
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.
For the years ended December 31, 2006, 2005, and 2004, net sales attributable to the Companys
firearms operations were approximately, $139.1 million, $132.8 million and $124.9 million or 83%,
86%, and 86%, respectively, of total net sales. The balance of the Companys net sales for the
aforementioned periods was attributable to its investment castings operations.
Firearms Products
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The Company presently manufactures firearm products, under the Ruger name and trademark, in the
following industry categories: |
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Rifles
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Shotguns
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Single-shot
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Over and Under |
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Autoloading
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Side by Side |
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Bolt-action |
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Lever action |
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Pistols |
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Revolvers |
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Rimfire autoloading
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Single action |
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Centerfire autoloading
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Double action |
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Muzzleloading |
Most firearms are available in several models based upon caliber, finish, barrel length, and other
features. Many of the firearms introduced by the Company over the years have become classics
which have retained their popularity for decades and are sought by collectors.
The Company manufactures a wide range of high quality products and does not manufacture inexpensive
concealable firearms, sometimes known as Saturday Night Specials, nor does it sell commercially
any firearm included on the list of assault weapons which was part of anti-crime legislation
enacted by Congress in 1994 and since expired.
Rifles
A rifle is a long gun with spiral grooves cut into the interior of the barrel to give the bullet a
stabilizing spin after it leaves the barrel. The Company presently manufactures twelve different
types of rifles: the M77 Mark II, the M77 Hawkeye, the M77 Mark II Magnum, the 77/17, the 77/22,
the 10/22, the Model 96/22, the Model 96/44, the Model 96/17, the Mini-14 Ranch Rifle, the Mini
Thirty Ranch Rifle, and the No. 1 Single-Shot. Sales of rifles by the Company accounted for
approximately $58.4 million, $58.0 million, and $61.1 million, of revenues for the years 2006, 2005
and 2004, respectively.
Shotguns
A shotgun is a long gun with a smooth barrel interior which fires lead or steel pellets. The
Company presently manufactures two different types of shotguns: the Red Label over-and-under
shotgun available in 12, 20, and 28 gauge and the Gold Label side-by-side shotgun in 12 gauge.
Most of the Red Label models are available in special Sporting Clays, English Field, and engraved
versions. Sales of shotguns by the Company accounted for approximately $5.5 million, $9.7 million,
and $6.8 million of revenues for the years 2006, 2005 and 2004, respectively.
Pistols
A pistol is a handgun in which the ammunition chamber is an integral part of the barrel and which
is fed ammunition from a magazine contained in the grip. The Company presently manufactures three
different types of pistols: the Ruger Mark III .22 caliber in Standard, Competition, and Target
models, the Ruger 22/45, and the P-Series centerfire autoloading pistols in various calibers,
configurations, and finishes. Sales of pistols by the Company accounted for approximately $31.9
million, $32.5 million, and $24.8 million of revenues for the years 2006, 2005 and 2004,
respectively.
Revolvers
A revolver is a handgun that has a cylinder that holds the ammunition in a series of chambers which
are successively aligned with the barrel of the gun during each firing cycle. There are two
general types of revolvers, single-action and double-action. To fire a single-action revolver, the
hammer is pulled back to cock the gun and align the cylinder before the trigger is pulled. To fire
a double-action revolver, a single trigger pull advances the cylinder and cocks and releases the
hammer. The Company presently manufactures seven different types of single-action revolvers in a
variety of calibers, configurations, and finishes: the New Model Single-Six, New Model Blackhawk,
New Model Super Blackhawk, New Vaquero, Ruger Bisley Old Army Cap & Ball, New Bearcat, and Bisley
Hunter revolvers. The Company presently manufactures four different types of double-action
revolvers: the SP101, GP100,
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Redhawk, and Super Redhawk. Sales of revolvers by the Company accounted for approximately $37.6
million, $27.5 million, and $27.2 million of revenues for the years 2006, 2005, and 2004,
respectively.
The Company also manufactures and sells accessories and replacement parts for its firearms. These
sales accounted for approximately $4.4 million, $3.9 million, and $4.3 million of revenues for the
years 2006, 2005 and 2004, respectively.
Investment Casting Products
The Company is also engaged in the manufacture of titanium and ferrous investment castings for a
wide variety of markets including sporting goods and commercial and military use. The investment
castings products manufactured by the Company consist of carbon and low alloy steels, stainless
steels, air melted nickel and cobalt based alloys, and ductile iron. The Company produces various
products for a number of customers in a variety of industries.
The Ruger Investment Casting Division of the Company located in Prescott, Arizona (RIC-Prescott
Division) has engineered and produced titanium and ferrous castings. The Ruger Investment Casting
Division of the Company located in Newport, New Hampshire (RIC-Newport Division) (formerly known
as Pine Tree Castings) engineers and produces ferrous castings for a wide range of commercial
customers. In July 2006, the Company announced the cessation of titanium castings operations, which
is expected to be completed in 2007. The Company will consolidate its casting operations in its
New Hampshire foundry in 2007. The Company expects to continue to manufacture and sell steel
investment castings for a wide variety of customers and end uses.
Net sales attributable to the Companys investment casting operations (excluding intercompany
transactions) accounted for approximately $28.5 million, $21.9 million, and $20.7 million, or 17%,
14%, and 14% of the Companys total net sales for 2006, 2005, and 2004, respectively.
Manufacturing
Firearms
The Company produces its rifles, shotguns, and revolvers at the Newport, New Hampshire facility.
All pistols, and one model revolver, are produced at the Prescott, Arizona facility.
Many of the basic metal component parts of the firearms manufactured by the Company are produced by
the Companys castings facilities through a process known as precision investment casting. See
Manufacturing-Investment Castings for a description of the investment casting process. The
Company initiated the use of this process in the production of component parts for firearms in
1953. The Company believes that the investment casting process provides greater design flexibility
and results in component parts which are generally close to their ultimate shape and, therefore,
require less machining. Through the use of investment castings, the Company endeavors to produce
durable and less costly component parts for its firearms.
Third parties supply the Company with various raw materials for its firearms, such as fabricated
steel components, walnut, birch, beech, maple and laminated lumber for rifle and shotgun stocks,
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
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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.
All assembly, inspection, and testing of firearms manufactured by the Company are performed at the
Companys manufacturing facilities. Every firearm, including every chamber of every revolver
manufactured by the Company, is test-fired prior to shipment.
Investment Castings
To produce a product by the investment casting method, a wax model of the part is created and
coated (invested) with several layers of ceramic material. The shell is then heated to melt the
interior wax which is poured off, leaving a hollow mold. To cast the desired part, molten metal is
poured into the mold and allowed to cool and solidify. The mold is then broken off to reveal a
near net shape cast metal part.
All of the titanium investment castings and some of the ferrous investment castings products are
manufactured by the Companys RIC-Prescott Division. In July 2006, the Company announced the
cessation of titanium castings operations, which is expected to be completed in the first quarter
of 2007. The Company will consolidate its casting operations in its New Hampshire foundry in 2007.
The Companys RIC-Newport Division manufactures ferrous investment castings.
Raw materials including wax, ceramic material, and metal alloys necessary for the production of
investment cast products are supplied to the Company through third parties. The Company believes
that these raw materials are readily available from multiple sources at competitive prices.
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.
Marketing and Distribution
Firearms
The Companys firearms are primarily marketed through a network of selected licensed independent
wholesale distributors who purchase the products directly from the Company. They resell to
Federally-licensed retail firearms dealers who in turn resell to legally authorized end-users. All
retail purchasers are subject to a point-of-sale background check by law enforcement. These
end-users include sportsmen, hunters, law enforcement and other governmental organizations, and gun
collectors. Each distributor carries the entire line of firearms manufactured by the Company for
the commercial market. Currently, 16 distributors service the domestic commercial market, with an
additional 12 distributors servicing the domestic law enforcement market and two distributors
servicing the Canadian market. Four of the Companys distributors service both the domestic
commercial market and the domestic law enforcement market. In 2006, Lipseys, Inc. accounted for
13% and 11% of net firearms sales and consolidated sales, respectively. AcuSport Corporation
accounted for approximately 13%, 13%, and 12%, of net firearms sales and 10%, 11%, and 10% of
consolidated net sales in 2006, 2005, and 2004, respectively. Jerrys Sport Center accounted for
approximately 12%, and 13%, of the Companys net firearms sales and 10% and 11% of consolidated
net sales in 2005, and 2004, respectively. Sports
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South Corporation accounted for approximately 13%, 16%, and 13% of net firearms sales in 2006,
2005, and 2004, respectively, and 11%, 14%, and 11% of consolidated net sales in 2006, 2005, and
2004, respectively. The Company employs eight employees and one independent contractor who service
these distributors and call on dealers and law enforcement agencies. Because the ultimate demand
for the Companys firearms comes from end-users, rather than from the Companys distributors, the
Company believes that the loss of any distributor would not have a material long-term adverse
effect on the Company, but may have a material impact on the Companys financial results for a
particular period. The Company considers its relationships with its distributors to be
satisfactory.
The Company also exports its firearms through a network of selected commercial distributors and
directly to certain foreign customers, consisting primarily of law enforcement agencies and foreign
governments. Foreign sales were less than 5% of the Companys consolidated net sales for each of
the past three fiscal years. No material portion of the Companys business is subject to
renegotiation of profits or termination of contracts at the election of a government purchaser.
In prior years, the Company received one cancelable annual order in December from each of its
distributors. Effective December 1, 2006 the Company changed the manner in which distributors
order firearms, and began receiving firm, non-cancelable purchase orders on a frequent basis, with
most orders for immediate delivery. As of February 15, 2007, order backlog is approximately $24
million. The significant reduction from the $107 million of order backlog at March 1, 2006 is
directly attributable to the change in the manner in which distributors now order firearms.
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 fiscal year.
Investment Castings
The investment casting segments principal markets are commercial, sporting goods, and military.
Sales are made directly to customers or through manufacturers representatives. The Company
produces various products for a number of customers in a variety of industries, including over 20
firearms and firearms component manufacturers. The investment castings segment provides castings
for the Companys firearms segment. The Company continues to evaluate the viability and
profitability of the commercial castings market.
Competition
Firearms
Competition in the firearms industry is intense and comes from both foreign and domestic
manufacturers. While some of these competitors concentrate on a single industry product category,
such as rifles or pistols, several competitors manufacture products in all four industry categories
(rifles, shotguns, pistols, and revolvers). Some of these competitors are subsidiaries of larger
corporations than the Company with substantially greater financial resources than the Company,
which could affect the Companys ability to compete. The principal methods of competition in the
industry are product innovation, quality, and price. The Company believes that it can compete
effectively with all of its present competitors based upon innovation, high quality, reliability,
and performance of its products, and the competitiveness of its pricing.
Investment Castings
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There are a large number of investment castings manufacturers, both domestic and foreign, with
which the Company competes. Competition varies based on the type of investment castings products
and the end-use of the product (commercial, sporting goods, or military). Many of these
competitors are larger corporations than the Company with substantially greater financial resources
than the Company, which could affect the Companys ability to compete with these competitors. The
principal methods of competition in the industry are quality, price, and production lead time. The
Company believes that it can compete effectively with its present domestic competitors. However, it
is unknown at this time if the Company can compete with foreign competitors in the long-term.
Employees
As of February 1, 2007, the Company employed 1,100 full-time employees of which approximately 64%
had at least ten years of service with the Company. In January 2007, 56 of the Companys Newport,
New Hampshire employees accepted the Companys voluntary reduction-in-force program. The
associated severance expense is estimated at $1.0 million and the associated annualized savings are
estimated at $2.3 million.
None of the Companys employees are subject to a collective bargaining agreement. The Company has
never experienced a strike during its history and believes its employee relations are satisfactory.
Research and Development
In 2006, 2005, and 2004, the Company spent approximately $0.6 million, $0.8 million, and $0.9
million, respectively, on research activities relating to the development of new products and the
improvement of existing products. As of February 15, 2007, the Company had approximately 25
employees engaged in research and development activities as part of their responsibilities.
Patents and Trademarks
The Company owns various United States and foreign patents and trademarks which have been secured
over a period of years and which expire at various times. It is the policy of the Company to apply
for patents and trademarks whenever new products or processes deemed commercially valuable are
developed or marketed by the Company. However, none of these patents and trademarks are considered
to be basic to any important product or manufacturing process of the Company and, although the
Company deems its patents and trademarks to be of value, it does not consider its business
materially dependent on patent or trademark protection.
Environmental Matters
The Company is committed to achieving high standards of environmental quality and product safety,
and strives to provide a safe and healthy workplace for its employees and others in the communities
in which it operates. The Company has programs in place that monitor compliance with various
environmental regulations. However, 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. These regulations are integrated into
the Companys manufacturing, assembly, and testing processes. The Company believes that it is
generally in compliance with applicable environmental regulations and the outcome of any
environmental
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proceedings and orders will not have a material effect on the financial position of the Company,
but could have a material impact on the financial results for a particular period.
Executive Officers of the Company
Set forth below are the names, ages, and positions of the executive officers of the Company.
Officers serve at the pleasure of the Board of Directors of the Company.
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Michael O. Fifer
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Chief Executive Officer |
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Stephen L. Sanetti
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Vice Chairman of the Board of Directors, President,
and General Counsel |
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Thomas A. Dineen
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Vice President, Treasurer and Chief Financial Officer |
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Robert R. Stutler
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Vice President of Prescott Operations |
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Thomas P. Sullivan
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Vice President of Newport Operations |
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Christopher J. Killoy
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Vice President of Sales and Marketing |
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Leslie M. Gasper
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Corporate Secretary |
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Michael O. Fifer joined the Company as Chief Executive Officer on September 25, 2006, and was
named to the Board of Directors on October 19, 2006. Prior to joining the Company, Mr. Fifer was
President of the Engineered Products Division of Mueller Industries, Inc. Prior to joining Mueller
Industries, Inc., Mr. Fifer was President, North American Operations, Watts Water Technologies.
Stephen L. Sanetti became President on May 6, 2003. Mr. Sanetti has served as General Counsel
since 1980. Prior to May 6, 2003, Mr. Sanetti had been Vice Chairman and Senior Executive Vice
President since October 24, 2000. Mr. Sanetti has been a Director since March 1, 1998. Prior to
October 24, 2000, he had been Vice President, General Counsel of the Company since 1993.
Thomas A. Dineen became Vice President on May 24, 2006. Previously he served as Treasurer and
Chief Financial Officer since May 6, 2003 and had been Assistant Controller since 2001. Prior to
that, Mr. Dineen had served as Manager, Corporate Accounting since 1997.
Robert R. Stutler became Vice President of Operations for the Companys Prescott, Arizona Firearms
and Foundry Divisions on March 17, 2006. Previously he served as General Manager of Prescott
Operations since 2002 and General Manager of Prescott Firearms Division from 1990 to 2002. Mr.
Stutler joined the Company in 1987.
Thomas P. Sullivan joined the Company as Vice President of Newport Operations for the Newport, New
Hampshire Firearms and Pine Tree Castings divisions on August 14, 2006. Prior to joining the
Company, Mr. Sullivan was Vice President of Lean Enterprises at IMI Norgren Ltd.
Christopher J. Killoy rejoined the Company as Vice President of Sales and Marketing on November 27,
2006. Mr. Killoy originally joined the Company in 2003 as Executive Director of Sales and
Marketing,
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and subsequently served as Vice President of Sales and Marketing from November 1, 2004 to January
25, 2005.
Leslie M. Gasper has been Secretary of the Company since 1994. Prior to this, she was the
Administrator of the Companys pension plans, a position she held for more than five years prior
thereto.
Where You Can Find More Information
The Company is a reporting company and is therefore subject to the informational requirements of
the Securities and Exchange Act of 1934, as amended (the Exchange Act), and accordingly files its
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current
Reports on Form 8-K, and other information with the Securities and Exchange Commission (the SEC).
The public may read and copy any materials filed with the SEC at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further
information on the Public Reference Room. As an electronic filer, the Companys public filings are
maintained on the SECs Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The address of that
website is http://www.sec.gov.
The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy
Statements, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act accessible free of charge through the Companys
Internet site after the Company has electronically filed such material with, or furnished it to,
the SEC. The address of that website is http://www.ruger.com. However, such reports may not be
accessible through the Companys website as promptly as they are accessible on the SECs website.
Additionally, the Companys corporate governance materials, including its Corporate Governance
Guidelines; the charters of the Audit, Compensation, and Nominating and Corporate Governance
committees; and the Code of Business Conduct and Ethics may also be found under the Stockholder
Relations section of the Companys Internet site at www.ruger.com. A copy of the foregoing
corporate governance materials are available upon written request of the Corporate Secretary at
Sturm, Ruger & Company, Inc., Lacey Place, Southport, Connecticut 06890.
ITEM 1ARISK FACTORS
In evaluating the Companys business, the following risk factors, as well as other information in
this report, should be carefully considered.
Firearms Legislation
(The following disclosures within Firearms Legislation are identical to the disclosures within
Firearms Legislation in Item 7-Managements Discussion and Analysis of Financial Condition and
Results of Operations.)
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
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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 following disclosures within Firearms Litigation are identical to the disclosures within
Firearms Litigation in Item 7-Managements Discussion and Analysis of Financial Condition and
Results of Operations and Footnote #6-Contingent Liabilities.)
As of December 31, 2006, the Company is a defendant in approximately four lawsuits allegedly
involving its products and is aware of certain other such claims. Lawsuits and claims fall into
two categories:
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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 |
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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 |
11
|
|
|
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 denied plaintiffs motion to appeal Missouri Appellate Courts
affirmance of dismissal; Chicago Illinois Supreme Court denied plaintiffs petition for
rehearing; and Los Angeles
12
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 filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms Act
(PLCAA). The state court judge held the PLCAA unconstitutional and the defendants filed a motion
with the Indiana Court of Appeals asking it to accept interlocutory appeal on the issue, which
appeal was accepted on February 5, 2007.
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 February 1, 2007,
plaintiffs counsel in the previously reported Arnold case advised that plaintiff intends
to voluntarily dismiss the case with prejudice. This will conclude this matter with no payment by
the Company.
13
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 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.
As of December 31, 2006 and 2005, the Company was a defendant in 4 and 6 lawsuits, respectively,
involving its products and is aware of other such claims. During the year ended December 31, 2006
and 2005, respectively, 2 and 3 claims were filed against the Company, 2 and 5 claims were
dismissed, and 2 and 1 claims were settled. The average cost per settled claim was $47,000 and
$150,000 in 2006 and 2005, respectively.
During the years ended December 31, 2006 and 2005, the Company incurred product liability expense
of $2.5 million and $4.9 million, respectively, which includes the cost of outside legal fees,
insurance, and other expenses incurred in the management and defense of product liability matters.
The Company 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.
14
The Company has reported all cases instituted against it through September 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.
Balance Sheet Rollforward for Product Liability Reserve
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
Beginning of |
|
|
(Reversal) |
|
|
Legal Fees |
|
|
Settlements |
|
|
Insurance |
|
|
Admin. |
|
|
End |
|
|
|
Year (a) |
|
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
Premiums |
|
|
Expense |
|
|
of Year (a) |
|
|
|
|
2004 |
|
$ |
6,665 |
|
|
|
($1,598 |
) |
|
|
($1,935 |
) |
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
3,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
3,132 |
|
|
|
2,514 |
|
|
|
(2,935 |
) |
|
|
(515 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
2,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2,196 |
|
|
|
688 |
|
|
|
(1,000 |
) |
|
|
(143 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
1,741 |
|
Income Statement Detail for Product Liability Expense
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Insurance |
|
|
|
|
|
|
Total |
|
|
|
Legal |
|
|
Premium |
|
|
Admin. |
|
|
Product |
|
|
|
Expense |
|
|
Expense |
|
|
Expense |
|
|
Liability |
|
|
|
(b) |
|
|
(e) |
|
|
(f) |
|
|
Expense |
|
|
|
|
2004 |
|
$ |
(1,598 |
) |
|
$ |
1,524 |
|
|
$ |
878 |
|
|
$ |
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2,514 |
|
|
|
1,338 |
|
|
|
1,041 |
|
|
|
4,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
688 |
|
|
|
1,141 |
|
|
|
691 |
|
|
|
2,520 |
|
|
|
|
Notes |
|
(a) |
|
The beginning and ending liability balances represent accrued legal fees only. Settlements
and administrative costs are expensed as incurred. Only in rare instances is an accrual
established for settlements. |
|
(b) |
|
The expense accrued in the liability is for legal fees only. |
|
(c) |
|
Legal fees represent payments to outside counsel related to product liability matters. |
|
(d) |
|
Settlements represent payments made to plaintiffs or allegedly injured parties in exchange
for a full and complete release of liability. |
|
(e) |
|
Insurance expense represents the cost of insurance premiums. |
15
|
|
|
(f) |
|
Administrative expense represents personnel related and travel expenses of Company employees
and firearm experts related to the management and monitoring of product liability matters. |
There were no insurance recoveries during any of the above years.
Environmental
The Company is subject to numerous federal, state and local laws and governmental regulations and
related state laws. These laws generally relate to potential obligations to remove or mitigate the
environmental effects of the disposal or release of certain pollutants at the Companys
manufacturing facilities and at third-party or formerly owned sites at which contaminants generated
by the Company may be located. This requires the Company to make capital and other expenses.
The Company is committed to achieving high standards of environmental quality and product safety,
and strives to provide a safe and healthy workplace for its employees and others in the communities
in which it operates. In an effort to comply with federal and state laws and regulations, the
Company has programs in place that monitor compliance with various environmental regulations.
However, in the normal course of its 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.
However, the Company cannot assure that the outcome of any environmental proceedings and orders
will not have a material adverse effect on the business.
Reliance on Two Facilities
The Newport, New Hampshire and Prescott, Arizona facilities are critical to the Companys success.
These facilities house the Companys principal production, research, development, engineering,
design, and shipping. Any event that causes a disruption of the operation of these facilities for
even a relatively short period of time might have a material adverse affect on the Companys
ability to produce and ship products and to provide service to its customers.
ITEM 1BUNRESOLVED STAFF COMMENTS
None
ITEM 2PROPERTIES
The Companys manufacturing operations are carried out at two facilities. The following table sets
forth certain information regarding each of these facilities:
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
Usable |
|
|
|
|
|
|
Square Feet |
|
Status |
|
Segment |
|
|
|
Newport, New Hampshire |
|
|
350,000 |
|
|
Owned |
|
Firearms/Castings |
Prescott, Arizona |
|
|
230,000 |
|
|
Leased |
|
Firearms/Castings |
16
Each facility contains enclosed ranges for testing firearms and also contains modern tool room
facilities. The lease of the Prescott facility provides for rental payments, which are approximately equivalent
to estimated rates for real property taxes. The Company will consolidate its casting operations in
its Newport, New Hampshire foundry in 2007.
The Company has other materially important facilities that were not used in its manufacturing
operations in 2006:
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
Usable |
|
|
|
|
|
|
Square Feet |
|
Status |
|
Segment |
|
|
|
Southport, Connecticut |
|
|
25,000 |
|
|
Owned |
|
Corporate |
Newport, New Hampshire |
|
|
300,000 |
|
|
Owned |
|
Shipping |
Prescott, Arizona |
|
|
120,000 |
|
|
Owned |
|
Unused |
In 2005, the Company relocated its firearms shipping department into a portion of the 300,000
square foot facility in Newport, New Hampshire In 2006, certain of the Companys sales department
personnel were moved into a portion of the 300,000 square foot facility in Newport, New Hampshire.
The Company also has other real estate holdings that are not used in its manufacturing operations
and are not materially important to the business of the Company. There are no mortgages or any
other major encumbrance on any of the real estate owned by the Company. The Company plans to sell
non-manufacturing real property assets that appear to have market values substantially in excess of
their book values.
The Companys principal executive offices are located in Southport, Connecticut. The Company
believes that its existing facilities are suitable and adequate for its present purposes.
ITEM 3LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at Note 6 to the financial
statements included in this Form 10-K, which is incorporated herein by reference.
The Company has reported all cases instituted against it through September 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.
No cases were formally instituted against the Company during the three months ended December
31, 2006:
During the three months ending December 31, 2006, one previously reported case was settled:
|
|
|
|
|
|
|
|
|
Case Name
Kasting
|
|
Jurisdiction
Indiana
|
|
|
The settlement amount was within the Companys limits of its self-insurance coverage.
For a description of all pending lawsuits against the Company through September 30, 2006, reference
is made to the discussion under the caption Item 1. LEGAL PROCEEDINGS of the Companys
17
Quarterly
Reports on Form 10-Q for the quarters ended September 30, 1999, March 31 and September 30, 2000,
and September 30, 2005.
ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Companys Common Stock is traded on the New York Stock Exchange under the symbol RGR. At
February 1, 2007, the Company had 1,851 stockholders of record.
The following table sets forth, for the periods indicated, the high and low sales prices for
the Common Stock as reported on the New York Stock Exchange and dividends paid on Common Stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
High |
|
|
Low |
|
|
Per Share |
|
|
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
8.83 |
|
|
$ |
6.89 |
|
|
$ |
0.10 |
|
Second Quarter |
|
|
8.50 |
|
|
|
6.51 |
|
|
|
0.10 |
|
Third Quarter |
|
|
11.19 |
|
|
|
8.43 |
|
|
|
0.10 |
|
Fourth Quarter |
|
|
9.20 |
|
|
|
6.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
8.03 |
|
|
$ |
6.75 |
|
|
|
|
|
Second Quarter |
|
|
7.78 |
|
|
|
5.56 |
|
|
|
|
|
Third Quarter |
|
|
7.85 |
|
|
|
5.65 |
|
|
|
|
|
Fourth Quarter |
|
|
10.78 |
|
|
|
7.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Comparison of Five-Year Cumulative Total Return*
Sturm, Ruger & Company, Inc., Standard & Poors 500 And
Value Line Recreation Index
(Performance Results Through 12/31/06)
Assumes $100 invested at the close of trading 12/01 in Sturm, Ruger & Company, Inc.
common stock, Standard & Poor 500, and Recreation Index.
*Cumulative total return assumes reinvestment of dividends.
Source: Value Line, Inc.
Factual material is obtained from sources believed to be reliable, but the publisher is not
responsible for any errors or omissions contained herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Sturm, Ruger & Company, Inc. |
|
|
100.00 |
|
|
|
85.17 |
|
|
|
109.32 |
|
|
|
91.56 |
|
|
|
73.64 |
|
|
|
100.84 |
|
Standard & Poors 500 |
|
|
100.00 |
|
|
|
76.63 |
|
|
|
96.85 |
|
|
|
105.56 |
|
|
|
108.73 |
|
|
|
123.54 |
|
Recreation |
|
|
100.00 |
|
|
|
101.07 |
|
|
|
151.52 |
|
|
|
205.20 |
|
|
|
191.42 |
|
|
|
215.79 |
|
19
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information regarding compensation plans under which equity securities
of the Company are authorized for issuance as of December 31, 2006:
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
future issuance under |
|
|
|
|
|
|
Weighted-average |
|
equity compensation |
|
|
Number of securities to be issued |
|
exercise price of |
|
plans (excluding |
|
|
upon exercise of outstanding |
|
outstanding options, |
|
securities reflected in |
|
|
options, warrants and rights |
|
warrants and rights |
|
column (a)) |
Plan category |
|
(a) |
|
(b) |
|
(c) |
Equity compensation
plans approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998 Stock Incentive Plan |
|
|
1,140,000 |
|
|
$9.57 per share |
|
860,000 |
2001 Stock Option Plan
for Non-Employee
Directors |
|
|
185,000 |
|
|
$8.81 per share |
|
15,000 |
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,325,000 |
|
|
$9.46 per share |
|
875,000 |
|
|
|
|
|
|
|
|
|
ITEM 6SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
Net firearms sales |
|
$ |
139,110 |
|
|
$ |
132,805 |
|
|
$ |
124,924 |
|
|
$ |
130,558 |
|
|
$ |
139,762 |
|
Net castings sales |
|
|
28,510 |
|
|
|
21,917 |
|
|
|
20,700 |
|
|
|
17,359 |
|
|
|
21,825 |
|
|
Total net sales |
|
|
167,620 |
|
|
|
154,722 |
|
|
|
145,624 |
|
|
|
147,917 |
|
|
|
161,587 |
|
|
Cost of products sold |
|
|
143,382 |
|
|
|
128,343 |
|
|
|
115,725 |
|
|
|
113,189 |
|
|
|
125,376 |
|
Gross profit |
|
|
24,238 |
|
|
|
26,379 |
|
|
|
29,899 |
|
|
|
34,728 |
|
|
|
36,211 |
|
Income before income taxes |
|
|
1,843 |
|
|
|
1,442 |
|
|
|
8,051 |
|
|
|
20,641 |
|
|
|
14,135 |
|
Income taxes |
|
|
739 |
|
|
|
578 |
|
|
|
3,228 |
|
|
|
8,277 |
|
|
|
5,668 |
|
Net income |
|
|
1,104 |
|
|
|
864 |
|
|
|
4,823 |
|
|
|
12,364 |
|
|
|
8,467 |
|
Basic and diluted earnings per share |
|
|
0.04 |
|
|
|
0.03 |
|
|
|
0.18 |
|
|
|
0.46 |
|
|
|
0.31 |
|
Cash dividends per share |
|
$ |
0.00 |
|
|
$ |
0.30 |
|
|
$ |
0.60 |
|
|
$ |
0.80 |
|
|
$ |
0.80 |
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Working capital |
|
$ |
60,522 |
|
|
$ |
83,522 |
|
|
$ |
90,947 |
|
|
$ |
102,715 |
|
|
$ |
103,116 |
|
Total assets |
|
|
117,066 |
|
|
|
139,639 |
|
|
|
147,460 |
|
|
|
162,873 |
|
|
|
183,958 |
|
Total stockholders equity |
|
|
87,326 |
|
|
|
111,578 |
|
|
|
120,687 |
|
|
|
133,640 |
|
|
|
137,983 |
|
Book value per share |
|
$ |
3.86 |
|
|
$ |
4.15 |
|
|
$ |
4.48 |
|
|
$ |
4.97 |
|
|
$ |
5.13 |
|
Return on stockholders equity |
|
|
1.3 |
% |
|
|
0.8 |
% |
|
|
4.0 |
% |
|
|
9.3 |
% |
|
|
6.1 |
% |
Current ratio |
|
|
3.8 to 1 |
|
|
|
5.5 to 1 |
|
|
|
5.7 to 1 |
|
|
|
5.7 to 1 |
|
|
|
4.8 to 1 |
|
Common shares outstanding |
|
|
22,638,700 |
|
|
|
26,910,700 |
|
|
|
26,910,700 |
|
|
|
26,910,700 |
|
|
|
26,910,700 |
|
Number of stockholders of record |
|
|
1,851 |
|
|
|
1,922 |
|
|
|
1,977 |
|
|
|
2,036 |
|
|
|
2,026 |
|
Number of employees |
|
|
1,108 |
|
|
|
1,250 |
|
|
|
1,291 |
|
|
|
1,251 |
|
|
|
1,418 |
|
ITEM 7MANAGEMENTS 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 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,
which is expected to be completed in the first quarter of 2007. The Company will consolidate its
casting operations in its New Hampshire foundry in 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
Year ended December 31, 2006, as compared to year ended December 31, 2005:
Sales
Consolidated net sales were $167.6 million in 2006. This represents an increase of $12.9 million
or 8.3% from 2005 consolidated net sales of $154.7 million.
Firearms segment net sales were $139.1 million in 2006. This represents an increase of $6.3 million
or 4.7% from 2005 firearm net sales of $132.8 million.
21
Firearms unit shipments increased 3% in 2006 due to increased shipments of revolvers, partially
offset by a decline in shipments of shotguns, pistols, and rifles. The increase in revolver
shipments for 2006 is due to greater availability of revolver models in stronger demand. The
decrease in shotgun shipments is due to decreased availability of the side-by-side shotgun, while
the decrease in pistol shipments in 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. The decrease in rifle shipments is the result of an apparent softening of demand.
A modest price increase and a shift in product mix toward firearms with greater unit sales prices
resulted in the greater percentage increase in
sales than unit shipments. Effective January 1, 2006, the Company instituted a unilateral minimum
distributor resale price policy for its firearms which remains in effect. This change in policy
does not appear to have had an adverse effect on the Companys firearm sales.
Casting segment net sales were $28.5 million in 2006. This represents an increase of $6.6 million
or 30.1% from 2005 casting sales of $21.9 million.
The casting sales increase was 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 $16.2 million or 56% of casting sales in 2006. The Company continues
to manufacture and sell steel investment castings for a wide variety of customers and end uses.
Cost of Products Sold and Gross Margin
Consolidated cost of products sold was $143.4 million in 2006. This represents an increase of
$15.1 million or 11.7% from 2005 consolidated cost of products sold of $128.3 million.
The gross margin as a percent of sales was 14.5% in 2006. This represents a decline from the 2005
gross margin of 17.0% as illustrated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
167,620 |
|
|
|
100.0 |
% |
|
$ |
154,722 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products
sold, before LIFO and
overhead rate inventory
adjustments and product
liability (Note 1) |
|
|
139,070 |
|
|
|
83.0 |
% |
|
|
124,715 |
|
|
|
80.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin before LIFO
and overhead rate inventory
adjustments and product
liability |
|
|
28,550 |
|
|
|
17.0 |
% |
|
|
30,007 |
|
|
|
19.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFO and overhead rate
inventory adjustments and
product liability (Note 2) |
|
|
4,312 |
|
|
|
2.5 |
% |
|
|
3,628 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
$ |
24,238 |
|
|
|
14.5 |
% |
|
$ |
26,379 |
|
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
Note 1: Gross margin before inventory adjustments and product liability was
favorably impacted by stronger sales, and was adversely impacted by an excess and
obsolete inventory charge of $3.2 million, compared to $0.5 million in 2005. The
impact of the excess and obsolete inventory charge was 1.9% of sales in 2006 as
compared to 0.3% of sales in 2005. |
|
|
|
Note 2: Gross margin was favorably impacted by a LIFO liquidation of $7.1 million
and a reduction in product liability of $2.4 million, and was adversely impacted by
a reduction in inventory value of $2.9 million related to overhead rate changes. |
Excess and Obsolete InventoryIn prior years, the Company received one cancelable annual
order in December from each of its distributors. Effective December 1, 2006 the Company changed
the manner in which distributors order firearms, and began receiving firm, non-cancelable purchase
orders on a frequent basis, with most orders for immediate delivery. In the past, the Company
adjusted production schedules to consume on-hand raw material and WIP inventories, regardless of
customer demand for the finished goods so produced. This practice led to increased investment in
inventory, and an unbalanced finished goods inventory.
Consistent with the change in the manner in which distributors order from the Company, the Company
significantly changed its production scheduling philosophy from an annual production cycle to a
customer-demand pull system in the fourth quarter of 2006. Under the Companys new system,
production is driven solely by customer demand. The Company is committed to producing the firearms
demanded by its customers and does not alter its production mix to achieve the short-sighted goal
of producing finished goods in excess of customer requirements for the purpose of consuming excess
or slow-moving raw material and WIP parts, components, or subassemblies, or absorbing overhead
expense. This change to a customer-demand pull system should result in a better match between
production and customer demand and is likely to result in further reduction in inventories.
As a result of this new production philosophy, it is apparent the Company has inventory in excess
of its needs over the foreseeable future. Given ever-changing market conditions, customer
preferences and the anticipated introduction of new products, the Company concluded that it was not
prudent nor supportable to carry inventory at full cost beyond that needed during the next 36
months. Therefore the Company evaluated the adequacy of the excess and obsolescence inventory
reserve and concluded that additional reserves were required to reflect the estimated recoverable
value of excess inventories below LIFO carrying cost. The required reserve was estimated based on
the following parameters, and resulted in an excess and obsolete expense of $3.2 million and a
reserve balance of $5.5 million:
|
|
|
|
|
Projected Year |
|
Required |
Of Consumption |
|
Reserve % |
2007 |
|
|
2 |
% |
2008 |
|
|
10 |
% |
2009 |
|
|
35 |
% |
2010 and thereafter |
|
|
90 |
% |
23
LIFODuring 2006, gross inventories were reduced by $24.0 million. This reduction
resulted in a liquidation of LIFO inventory quantities carried at lower costs that prevailed in
prior years as compared with the current cost of purchases, the effect of which decreased costs of
products sold by approximately $7.1 million. There was no LIFO liquidation in 2005.
The table below summarizes estimated LIFO impacts on the 2007 cost of products sold if further
inventory reduction is realized, which represent potential LIFO liquidation amounts partially
offset by estimated 2007 LIFO expenses. This is the amount by which costs of products sold might
decrease and
operating profit might increase in 2007. These estimates are based on potential levels of
inventory reduction and possible 2007 LIFO indices (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated 2007 LIFO Index Range |
|
Inventory Reduction
|
|
|
3 |
% |
|
|
4 |
% |
|
|
5 |
% |
|
|
6 |
% |
|
$10 million
|
|
$ |
2,200 |
|
|
$ |
1,900 |
|
|
$ |
1,600 |
|
|
$ |
1,400 |
|
$20 million
|
|
|
8,300 |
|
|
|
8,100 |
|
|
|
7,900 |
|
|
|
7,600 |
|
$30 million
|
|
|
14,700 |
|
|
|
14,500 |
|
|
|
14,300 |
|
|
|
14,200 |
|
Reduction in inventory will generate positive cash flow for the Company, partially offset by
the tax impact of a LIFO liquidation, which will generate negative cash flow as it creates taxable
income, resulting in higher tax payments.
Product LiabilityDuring the years ended December 31, 2006 and 2005, the Company incurred
product liability expense of $2.5 million and $4.9 million, respectively, which includes the cost
of outside legal fees, insurance, and other expenses incurred in the management and defense of
product liability matters. See Footnote 6 Contingent Liabilities for further discussion of the
Companys product liability.
Overhead Rate ChangeThe change in inventory value in 2006 was a reduction of $2.9
million, which recognized progress made in lowering overhead rates during 2006. The change in
inventory value in 2005 was an increase of $6.8 million, which recognized increasing overhead rates
in 2005. The impact of the change in inventory value on gross margin was (1.8%) of sales in
2006 as compared to 4.4% of sales in 2005. The year-over-year impact of overhead rate changes on
gross margin was a reduction of gross margin of $9.8 million, or 6.2% of sales.
Fourth Quarter ChargesIn the fourth quarter of 2006, a $2.5 million non-cash inventory
valuation adjustment, net of the LIFO impact, was recorded to recognize inefficiencies in labor and
overhead during a period of rapid inventory reduction as the Company converted to a manufacturing
system that emphasizes continuous improvement in customer service, quality and productivity. This
over-absorption of labor and overhead was quantified by a physical inventory taken in the fourth
quarter.
Due to the timing of the physical inventory, the Company was unable to quantify the impact of this
delayed recognition of labor and overhead efficiencies, if any, on the financial results of prior
quarters. As a consequence, raw material and work in process physical inventories are being
performed at the end of each quarter until a permanent corrective action is established and
determined to be adequate, making these physical inventories unnecessary.
The asset impairment charge of $0.5 million relates primarily to certain underutilized
non-manufacturing real property assets whose net book value exceeds current market value.
24
Selling, General and Administrative
Selling, general and administrative expenses were $24.0 million in 2006. This represents a
decrease of $0.5 million or 2.1% from 2005 selling, general and administrative expenses of $24.5
million. The decrease 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
Other income-net was $2.1 million in 2006. This represents an increase of $2.0 million from 2005
other income-net of $0.1 million. The increase is attributable to the gain on the sale of excess
casting machinery and equipment and the sale of certain non-manufacturing real estate in 2006.
Income Taxes and Net Income
The effective income tax rate of 40.1% in 2006 remained consistent with the income tax rate in
2005.
As a result of the foregoing factors, consolidated net income was $1.1 million in 2006. This
represents an increase of $0.2 million or 27.8% from 2005 consolidated net income of $0.9 million.
Results of Operations
Year ended December 31, 2005, as compared to year ended December 31, 2004:
Consolidated net sales of $154.7 million were achieved by the Company in 2005 representing an
increase of $9.1 million or 6.2% from net sales of $145.6 million in 2004.
Firearms segment net sales increased by $7.9 million or 6.3% to $132.8 million in 2005 from
$124.9 million in the prior year. Firearms unit shipments for 2005 increased 1.1% from 2004, as
the increase in shipments of pistols and shotguns was largely offset by the decline in shipments of
rifles and revolvers. The increase in pistol shipments in 2005 is attributable to the new Mark III
pistols and the P345 centerfire pistols. In 2004, rifle shipments benefited from the popularity of
the 40th Anniversary 10/22 carbine, which was available only in 2004. A modest price
increase and a change in mix from lower priced products to higher priced resulted in the greater
increase in sales versus unit shipments.
In 2005, the Company offered a sales incentive program for its distributors which allowed them
to earn rebates of up to 1.5% if certain annual overall sales targets were achieved. This program
replaced a similar sales incentive program in 2004. Effective January 1, 2006, the Company
instituted a unilateral minimum distributor resale price policy for its firearms.
Casting segment net sales increased 5.8% to $21.9 million in 2005 from $20.7 million in 2004
as a result of higher unit volume. Increased sales were generated from existing customers as well
as several new customers in 2005, in a variety of industries.
Consolidated cost of products sold for 2005 was $128.3 million compared to $115.7 million in
2004, representing and increase of 10.9%. This increase of $12.5 million was primarily
attributable to increased sales, and increased unitary overhead expenses resulting from a reduction
in firearm production volume, and increased product liability costs.
25
Gross profit as a percentage of net sales decreased to 17.0% in 2005 from 20.5% in 2004. This
deterioration was caused by less efficient firearms production due to lower rates of firearm
production, increased product liability expenses, and was partially offset by more efficient
production in the castings segment.
Selling, general and administrative expenses increased 7.3% to $24.5 million in 2005 from
$22.9 million in 2004 due principally to severance costs associated with several employee actions
taken predominantly in the fourth quarter of 2005.
Total other income decreased from $1.0 million in 2004 to $0.1 million in 2005. Included in
total other income in 2004 was a $0.9 million gain from the sale of the property and building that
housed the Companys Uni-Cast division prior to its sale in 2000. The Companys earnings on
short-term investments increased in 2005 as a result of more favorable interest rates, partially
offset by reduced principal.
The effective income tax rate of 40.1% remained consistent in 2005 and 2004.
As a result of the foregoing factors, consolidated net income in 2005 decreased to $0.9
million from $4.8 million in 2004, representing a decrease of $3.9 million or 81.8%.
Financial Condition
Operations
At December 31, 2006, the Company had cash, cash equivalents and short-term investments of
$29.3 million. The Companys working capital of $118.1 million, less the LIFO reserve of $57.6
million, results in working capital of $60.5 million and a current ratio of 3.8 to 1.
Cash provided by operating activities was $30.2 million, $5.2 million, and $1.3 million in
2006, 2005, and 2004, respectively. The increase in cash provided in 2006 compared to 2005 is
principally a result of a decrease in inventory and various fluctuations in operating asset and
liability accounts during 2006 compared to 2005. The increase in cash provided by operations in
2005 compared to 2004 is primarily attributable to the decrease in inventories and trade
receivables in 2005 compared to an increase in inventories and receivables in 2004, partially
offset by the decline in net income.
Third parties supply the Company with various raw materials for its firearms and castings,
such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle and
shotgun stocks, wax, ceramic material, metal alloys, various synthetic products and other component
parts. There is a limited supply of these materials in the marketplace at any given time which can
cause the purchase prices to vary based upon numerous market factors. The Company believes that it
has adequate quantities of raw materials in inventory to provide ample time to locate and obtain
additional items at then-current market cost without interruption of its manufacturing operations.
However, if market conditions result in a significant prolonged inflation of certain prices or if
adequate quantities of raw materials can not be obtained, the Companys manufacturing processes
could be interrupted and the Companys financial condition or results of operations could be
materially adversely affected.
26
Investing and Financing
Capital expenditures in 2006 totaled $3.9 million. For the past three years capital expenditures
averaged approximately $5.1 million per year. In 2007, the Company expects to spend approximately
$5 million on capital expenditures to purchase tooling for new product introductions and 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.
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.
On January 26, 2007, the Company announced that its Board of Directors authorized a stock
repurchase program. The program allows the Company to repurchase up to $20 million of its common
stock from time to time in the open market or through privately negotiated transactions.
There were no dividends paid in 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 cash through
issuance of short-term or long-term debt.
Contractual Obligations
The table below summarizes the Companys significant contractual obligations at December 31,
2006, and the effect such obligations are expected to have on the Companys liquidity and cash
flows in future periods. This table excludes amounts already recorded on the Companys balance
sheet as current liabilities at December 31, 2006.
Purchase Obligations as used in the below table includes all agreements to purchase goods or
services that are enforceable and legally binding on the Company and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Certain of the Companys purchase
orders or contracts for the purchase of raw materials and other goods and services that may not
necessarily be enforceable or legally binding on the Company, are also included in Purchase
Obligations in the table. Certain of the Companys purchase orders or contracts therefore
included in the table may represent authorizations to purchase rather than legally binding
agreements. The Company expects to fund all of these commitments with cash flows from operations
and current cash and short-terms investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period (in thousands) |
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
Contractual Obligations |
|
Total |
|
|
year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
|
Long-Term Debt Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations |
|
$ |
11,482 |
|
|
$ |
11,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period (in thousands) |
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
Contractual Obligations |
|
Total |
|
|
year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
Other Long-Term Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reflected on the
Registrants Balance
Sheet under GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,482 |
|
|
$ |
11,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected timing of payment of the obligations discussed above is estimated based on
current information. Timing of payments and actual amounts paid may be different depending on the
time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
Firearms Legislation
(The following disclosures within Firearms Legislation are identical to the disclosures within
Item 1A-Risk Factors 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 following disclosures within Firearms Litigation are identical to the disclosures within
Item 1A-Risk Factors Firearms Litigation and Footnote #6-Contingent Liabilities.)
28
As of December 31, 2006, the Company is a defendant in approximately four 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
29
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; 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. Gary is scheduled to begin trial in 2009. The
defendants filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms Act
(PLCAA). The state court judge held the PLCAA unconstitutional and the defendants filed a motion
with the Indiana Court of Appeals asking it to accept interlocutory appeal on the issue, which
appeal was accepted on February 5, 2007.
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
30
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 February 1, 2007,
plaintiffs counsel in the previously reported Arnold case advised that plaintiff intends
to voluntarily dismiss the case with prejudice. This will conclude this matter with no payment by
the Company.
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 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
31
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.
As of December 31, 2006 and 2005, the Company was a defendant in 4 and 6 lawsuits, respectively,
involving its products and is aware of other such claims. During the year ended December 31, 2006
and 2005, respectively, 2 and 3 claims were filed against the Company, 2 and 5 claims were
dismissed, and 2 and 1 claims were settled. The average cost per settled claim was $47,000 and
$150,000 in 2006 and 2005, respectively.
During the years ended December 31, 2006 and 2005, the Company incurred product liability expense
of $2.5 million and $4.9 million, respectively, which includes the cost of outside legal fees,
insurance, and other expenses incurred in the management and defense of product liability matters.
The Company 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 September 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.
Balance Sheet Rollforward for Product Liability Reserve
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
Beginning of |
|
|
(Reversal) |
|
|
Legal Fees |
|
|
Settlements |
|
|
Insurance |
|
|
Admin. |
|
|
End |
|
|
|
Year (a) |
|
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
Premiums |
|
|
Expense |
|
|
of Year (a) |
|
|
|
|
2004 |
|
$ |
6,665 |
|
|
|
($1,598 |
) |
|
|
($1,935 |
) |
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
3,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
3,132 |
|
|
|
2,514 |
|
|
|
(2,935 |
) |
|
|
(515 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
2,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2,196 |
|
|
|
688 |
|
|
|
(1,000 |
) |
|
|
(143 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
1,741 |
|
Income Statement Detail for Product Liability Expense
(Dollars in thousands)
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Insurance |
|
|
|
|
|
|
Total |
|
|
|
Legal |
|
|
Premium |
|
|
Admin. |
|
|
Product |
|
|
|
Expense |
|
|
Expense |
|
|
Expense |
|
|
Liability |
|
|
|
(b) |
|
|
(e) |
|
|
(f) |
|
|
Expense |
|
|
|
|
2004 |
|
$ |
(1,598 |
) |
|
$ |
1,524 |
|
|
$ |
878 |
|
|
$ |
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2,514 |
|
|
|
1,338 |
|
|
|
1,041 |
|
|
|
4,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
688 |
|
|
|
1,141 |
|
|
|
691 |
|
|
|
2,520 |
|
|
|
|
Notes |
|
(a) |
|
The beginning and ending liability balances represent accrued legal fees only. Settlements
and administrative costs are expensed as incurred. Only in rare instances is an accrual
established for settlements. |
|
(b) |
|
The expense accrued in the liability is for legal fees only. |
|
(c) |
|
Legal fees represent payments to outside counsel related to product liability matters. |
|
(d) |
|
Settlements represent payments made to plaintiffs or allegedly injured parties in exchange
for a full and complete release of liability. |
|
(e) |
|
Insurance expense represents the cost of insurance premiums. |
|
(f) |
|
Administrative expense represents personnel related and travel expenses of Company employees
and firearm experts related to the management and monitoring of product liability matters. |
There were no insurance recoveries during any of the above years.
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, 2006 and 2005
indicated that these plans were underfunded by $7.6 million and $11.3 million, respectively, and
resulted in a cumulative other comprehensive loss of $12.4 million and $12.2 million on the
Companys balance sheet at December 31, 2006 and 2005, respectively.
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
33
reported income which would result from the slower recognition of increased costs
when other methods are used. In 2006, however, the significant reduction in inventories resulted
in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as
compared with the current cost of purchases. This liquidation resulted in a reduction in costs of
products sold by approximately $7.1 million in 2006. There was no LIFO liquidation in 2005 or
2004.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make assumptions and estimates that affect the
reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses
recognized and incurred during the reporting period then ended. The Company bases estimates on
prior experience, facts and circumstances and other assumptions, including those reviewed with
actuarial consultants and independent counsel, when applicable, that are believed to be reasonable.
However, actual results may differ from these estimates.
The Company believes the determination of its product liability accrual is a critical
accounting policy. The Companys management reviews every lawsuit and claim at the outset and is
in contact with independent and corporate counsel on an ongoing basis. The provision for product
liability claims is based upon many factors, which vary for each case. These factors include the
type of claim, nature and extent of injuries, historical settlement ranges, jurisdiction where
filed, and advice of counsel. An accrual is established for each lawsuit and claim, when
appropriate, based on the nature of each such lawsuit or claim.
Amounts are charged to product liability expense in the period in which the Company becomes
aware that a claim or, in some instances a threat of claim, has been made when potential losses or
costs of defense can be reasonably estimated. Such amounts are determined based on the Companys
experience in defending similar claims. Occasionally, charges are made for claims made in prior
periods because the cumulative actual costs incurred for that claim, or reasonably expected to be
incurred in the future, exceed amounts already provided. Likewise credits may be taken if
cumulative actual costs incurred for that claim, or reasonably expected to be incurred in the
future, are less than amounts previously provided.
While it is not possible to forecast the outcome of litigation or the timing of costs, in the
opinion of management, after consultation with independent 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 believes the valuation of its inventory and the related excess and obsolescence reserve
is also a critical accounting policy. Inventories are carried at the lower of cost, principally
determined by the last-in, first-out (LIFO) method, or market. An actual valuation of inventory
under the LIFO method is made at the end of each year based on the inventory levels and prevailing
inventory costs existing at that time.
The Company determines its excess and obsolescence reserve by projecting the year in which
inventory will be consumed into a finished product. Given ever-changing market conditions,
customer preferences and the anticipated introduction of new products, it does not seem prudent nor
supportable to carry
34
inventory at full cost beyond that needed during the next 36 months.
Therefore, the Company estimates its excess and obsolescence inventory reserve based on the
following parameters:
|
|
|
|
|
Projected Year |
|
Required |
|
Of Consumption |
|
Reserve % |
|
2010 |
|
|
2 |
% |
2011 |
|
|
10 |
% |
2012 |
|
|
35 |
% |
2010 and thereafter |
|
|
90 |
% |
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. This Interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006.
We are currently evaluating the impact of this Interpretation on the Companys financial position,
results of operations and cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements, (FAS 157). This Standard defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles and expands disclosures about fair value
measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The adoption of FAS 157 is not
expected to have a material impact on the Companys financial position, results of operations and
cash flows.
The FASB also issued in September 2006 Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of
FASB Statement No. 87, 88, 106 and 132(R), (FAS 158). FAS 158 provides recognition and
disclosure elements to be effective as of the end of fiscal years ending after December 15, 2006
and measurement elements to be effective for fiscal years ending after December 15, 2008. At
December 31, 2006, the Company has reported $12.4 million of deferred pension losses, net of taxes,
in accumulated other comprehensive income and has reported the $7.6 million unfunded status of the
plans as a liability at December 31, 2006. See Footnote 3 Pension Plans for further discussion
of the Companys pension plans.
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
35
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 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changing interest rates on its investments, which consists primarily of
United States Treasury instruments with short-term (less than one year) maturities and cash. The
interest rate market risk implicit in the Companys investments at any given time is 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.
ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
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Sturm, Ruger & Company, Inc. Financial Statements
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40 |
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36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sturm, Ruger & Company, Inc.
Southport, Connecticut
We have audited managements assessment, included in Managements Report on Internal Control
over Financial Reporting appearing under Item 9A, that Sturm, Ruger & Company, Inc. maintained
effective internal control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Sturm, Ruger & Company, Inc.s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Sturm, Ruger & Company, Inc. maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
Sturm, Ruger & Company, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Sturm, Ruger & Company, Inc. as of December
31, 2006 and 2005, and the related statements of income, stockholders equity and cash flows for
the years then ended and our report dated March 2, 2007 expressed an unqualified opinion.
/s/
McGladrey & Pullen, LLP
Stamford, Connecticut
March 2, 2007
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
Sturm, Ruger & Company, Inc.
Southport, Connecticut
We have audited the balance sheets of Sturm, Ruger & Company, Inc. as of December 31, 2006 and
2005, and the related statements of income, stockholders equity and cash flows for the years then
ended. Our audits also included the financial statement schedule of Sturm, Ruger & Company, Inc.
listed in Item 15(a) for 2006 and 2005. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Sturm, Ruger & Company, Inc. as of December 31, 2006 and 2005,
and the results of its operations and its cash flows for the years then ended in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Sturm, Ruger & Company, Inc.s internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 2, 2007 expressed an unqualified opinion on
managements assessment of the effectiveness of Sturm, Ruger & Company, Inc.s internal control
over financial reporting and an unqualified opinion on the effectiveness of Sturm, Ruger and
Company, Inc.s internal control over financial reporting.
/s/
McGladrey & Pullen, LLP
Stamford, Connecticut
March 2, 2007
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Sturm, Ruger & Company, Inc.:
We have audited the accompanying statements of income, stockholders equity, and cash flows of
Sturm, Ruger & Company, Inc. for the year ended December 31, 2004. In connection with our audit of
the financial statements, we have also audited the accompanying financial statement schedule.
These financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the results of operations and the cash flows of Sturm, Ruger & Company, Inc. for the year
ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ KPMG LLP
Stamford, Connecticut
March 8, 2005, except as to note 4 to the financial statements which is as of March 31, 2006
39
Balance Sheets
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
|
2005 |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,316 |
|
|
$ |
4,057 |
|
Short-term investments |
|
|
22,026 |
|
|
|
21,926 |
|
Trade receivables, net |
|
|
18,007 |
|
|
|
15,777 |
|
|
|
|
|
|
|
|
|
|
Gross inventories: |
|
|
87,477 |
|
|
|
111,462 |
|
Less LIFO reserve |
|
|
(57,555 |
) |
|
|
(59,599 |
) |
Less excess and obsolescence reserve |
|
|
(5,516 |
) |
|
|
(3,137 |
) |
|
Net inventories |
|
|
24,406 |
|
|
|
48,726 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
8,347 |
|
|
|
6,018 |
|
Prepaid expenses and other current assets |
|
|
1,683 |
|
|
|
5,442 |
|
|
Total Current Assets |
|
|
81,785 |
|
|
|
101,946 |
|
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment |
|
|
128,042 |
|
|
|
155,174 |
|
Less allowances for depreciation |
|
|
(105,081 |
) |
|
|
(131,808 |
) |
|
Net property, plant and equipment |
|
|
22,961 |
|
|
|
23,366 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
3,630 |
|
|
|
3,200 |
|
Other assets |
|
|
8,690 |
|
|
|
11,127 |
|
|
Total Assets |
|
$ |
117,066 |
|
|
$ |
139,639 |
|
|
See accompanying notes to financial statements.
40
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
|
2005 |
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Trade accounts payable and accrued expenses |
|
$ |
6,342 |
|
|
$ |
3,619 |
|
Product liability |
|
|
904 |
|
|
|
1,207 |
|
Employee compensation and benefits |
|
|
6,416 |
|
|
|
7,544 |
|
Workers compensation |
|
|
6,547 |
|
|
|
5,119 |
|
Income taxes payable |
|
|
1,054 |
|
|
|
935 |
|
|
Total Current Liabilities |
|
|
21,263 |
|
|
|
18,424 |
|
|
|
|
|
|
|
|
|
|
Accrued pension liability |
|
|
7,640 |
|
|
|
8,648 |
|
Product liability |
|
|
837 |
|
|
|
989 |
|
|
|
|
|
|
|
|
|
|
Contingent liabilities (Note 6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 shares 2006-22,638,700;
2005-26,910,700 |
|
|
22,639 |
|
|
|
26,911 |
|
Additional paid-in capital |
|
|
2,615 |
|
|
|
2,508 |
|
Retained earnings |
|
|
74,505 |
|
|
|
94,334 |
|
Accumulated other comprehensive income (loss) |
|
|
(12,433 |
) |
|
|
(12,175 |
) |
|
Total Stockholders Equity |
|
|
87,326 |
|
|
|
111,578 |
|
|
Total Liabilities and Stockholders Equity |
|
$ |
117,066 |
|
|
$ |
139,639 |
|
|
See accompanying notes to financial statements.
41
Statements of Income
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Net firearms sales |
|
$ |
139,110 |
|
|
$ |
132,805 |
|
|
$ |
124,924 |
|
Net castings sales |
|
|
28,510 |
|
|
|
21,917 |
|
|
|
20,700 |
|
|
Total net sales |
|
|
167,620 |
|
|
|
154,722 |
|
|
|
145,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
143,382 |
|
|
|
128,343 |
|
|
|
115,725 |
|
|
Gross profit |
|
|
24,238 |
|
|
|
26,379 |
|
|
|
29,899 |
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
16,150 |
|
|
|
17,271 |
|
|
|
16,700 |
|
General and administrative |
|
|
7,874 |
|
|
|
7,271 |
|
|
|
6,175 |
|
Impairment of assets |
|
|
494 |
|
|
|
483 |
|
|
|
|
|
|
|
|
|
24,518 |
|
|
|
25,025 |
|
|
|
22,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(280 |
) |
|
|
1,354 |
|
|
|
7,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets |
|
|
1,326 |
|
|
|
|
|
|
|
874 |
|
Other income-net |
|
|
797 |
|
|
|
88 |
|
|
|
153 |
|
|
Total other income |
|
|
2,123 |
|
|
|
88 |
|
|
|
1,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,843 |
|
|
|
1,442 |
|
|
|
8,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
739 |
|
|
|
578 |
|
|
|
3,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,104 |
|
|
$ |
864 |
|
|
$ |
4,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings Per Share |
|
$ |
0.04 |
|
|
$ |
0.03 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Per Share |
|
$ |
0.00 |
|
|
$ |
0.30 |
|
|
$ |
0.60 |
|
|
See accompanying notes to financial statements.
42
Statements of Stockholders Equity
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
Common |
|
Additional |
|
Retained |
|
Comprehensive |
|
|
|
|
Stock |
|
Paid-in Capital |
|
Earnings |
|
Income (Loss) |
|
Total |
|
Balance at December 31, 2003 |
|
$ |
26,911 |
|
|
$ |
2,508 |
|
|
$ |
112,866 |
|
|
$ |
(8,645 |
) |
|
$ |
133,640 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
4,823 |
|
|
|
|
|
|
|
4,823 |
|
Additional minimum
pension liability, net of
deferred taxes of $1,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,630 |
) |
|
|
(1,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
(16,146 |
) |
|
|
|
|
|
|
(16,146 |
) |
|
Balance at December 31, 2004 |
|
|
26,911 |
|
|
|
2,508 |
|
|
|
101,543 |
|
|
|
(10,275 |
) |
|
|
120,687 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
864 |
|
|
|
|
|
|
|
864 |
|
Additional minimum
pension liability, net of
deferred taxes of $1,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,900 |
) |
|
|
(1,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
(8,073 |
) |
|
|
|
|
|
|
(8,073 |
) |
|
Balance at December 31, 2005 |
|
|
26,911 |
|
|
|
2,508 |
|
|
|
94,334 |
|
|
|
(12,175 |
) |
|
|
111,578 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
1,104 |
|
|
|
|
|
|
|
1,104 |
|
Pension liability, net of
deferred taxes of $172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
|
|
(258 |
) |
Stock-based compensation,
net of tax |
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of 4,272,000
shares of common stock |
|
|
(4,272 |
) |
|
|
|
|
|
|
(20,933 |
) |
|
|
|
|
|
|
(25,205 |
) |
|
Balance at December 31, 2006 |
|
$ |
22,639 |
|
|
$ |
2,615 |
|
|
$ |
74,505 |
|
|
$ |
(12,433 |
) |
|
$ |
87,326 |
|
|
See accompanying notes to financial statements.
43
Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,104 |
|
|
$ |
864 |
|
|
$ |
4,823 |
|
Adjustments to reconcile net income to cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
3,852 |
|
|
|
5,440 |
|
|
|
5,827 |
|
Impairment of assets |
|
|
494 |
|
|
|
483 |
|
|
|
|
|
Gain on sale of assets |
|
|
(1,326 |
) |
|
|
|
|
|
|
(874 |
) |
Deferred income taxes |
|
|
(2,759 |
) |
|
|
(328 |
) |
|
|
1,855 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
|
(2,230 |
) |
|
|
305 |
|
|
|
(3,268 |
) |
Inventories |
|
|
24,320 |
|
|
|
1,659 |
|
|
|
(1,855 |
) |
Trade accounts payable and other
liabilities |
|
|
3,023 |
|
|
|
13 |
|
|
|
(81 |
) |
Product liability |
|
|
(455 |
) |
|
|
(936 |
) |
|
|
(3,533 |
) |
Prepaid expenses and other assets |
|
|
4,077 |
|
|
|
(2,422 |
) |
|
|
(1,132 |
) |
Income taxes |
|
|
119 |
|
|
|
167 |
|
|
|
(451 |
) |
|
Cash provided by operating activities |
|
|
30,219 |
|
|
|
5,245 |
|
|
|
1,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment additions |
|
|
(3,906 |
) |
|
|
(4,460 |
) |
|
|
(6,945 |
) |
Purchases of short-term investments |
|
|
(114,585 |
) |
|
|
(125,245 |
) |
|
|
(123,098 |
) |
Proceeds from sales or maturities of short-term
investments |
|
|
114,485 |
|
|
|
131,749 |
|
|
|
144,693 |
|
Net proceeds from sale of assets |
|
|
2,251 |
|
|
|
|
|
|
|
1,580 |
|
|
Cash (used for) provided by investing activities |
|
|
(1,755 |
) |
|
|
2,044 |
|
|
|
16,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and retirement of common stock |
|
|
(25,205 |
) |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
|
|
|
|
(8,073 |
) |
|
|
(16,146 |
) |
|
Cash used for financing activities |
|
|
(25,205 |
) |
|
|
(8,073 |
) |
|
|
(16,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents |
|
|
3,259 |
|
|
|
(784 |
) |
|
|
1,395 |
|
Cash and cash equivalents at beginning of year |
|
|
4,057 |
|
|
|
4,841 |
|
|
|
3,446 |
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
7,316 |
|
|
$ |
4,057 |
|
|
$ |
4,841 |
|
|
See accompanying notes to financial statements.
44
Notes to Financial Statements
1. Significant Accounting Policies
Organization
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. More than 95% of all sales are
domestic. Export sales account for less than 5% of total sales. 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 to or through manufacturers representatives
to companies in a wide variety of industries.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
Revenue Recognition
Revenue is recognized, net of any estimated discounts, sales incentives, or rebates, when
product is shipped and the customer takes ownership and assumes risk of loss.
Cash Equivalents
The Company considers interest-bearing deposits with financial institutions with remaining
maturities of three months or less at the time of acquisition to be cash equivalents.
Short-term Investments
Short-term investments are recorded at cost plus accrued interest, which approximates market,
and consist of a bank-managed money market fund that invests principally in United States Treasury
instruments, all maturing within one year. The income from short-term investments is included in
other income net.
Accounts Receivable
Accounts receivable balances for significant customers follow:
|
|
|
|
|
|
|
|
|
As of December 31, (in thousands) |
|
2006 |
|
|
2005 |
|
|
Customer 1 |
|
$ |
2,200 |
|
|
$ |
1,900 |
|
Customer 2 |
|
$ |
1,800 |
|
|
$ |
2,900 |
|
Customer 3 |
|
$ |
1,300 |
|
|
$ |
2,200 |
|
Customer 4 |
|
$ |
700 |
|
|
$ |
800 |
|
|
The allowance for doubtful accounts and discounts was $0.4 million and $0.7 million in 2006
and 2005, respectively.
The Company establishes an allowance for doubtful accounts based on the credit worthiness of its
customers and historical experience. Bad debt expense has been immaterial during the last three
years.
45
Inventories
Inventories are stated at the lower of cost, principally determined by the last-in, first-out
(LIFO) method, or market. If inventories had been valued using the first-in, first-out method,
inventory values would have been higher by approximately $57.6 million and $59.6 million at
December 31, 2006 and 2005, respectively. During 2006, inventory quantities were reduced. This
reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing
in prior years as compared with the current cost of purchases, the effect of which decreased costs
of products sold by approximately $7.1 million and increased net income by $4.3 million in 2006.
There was no LIFO liquidation in 2005 or 2004.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
As of December 31, (in thousands) |
|
2006 |
|
|
2005 |
|
|
Finished products |
|
$ |
3,906 |
|
|
$ |
9,997 |
|
Materials and products in process |
|
|
20,500 |
|
|
|
38,729 |
|
|
|
|
|
|
|
|
Net inventories |
|
$ |
24,406 |
|
|
$ |
48,726 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment
Property, plant, and equipment are stated on the basis of cost. Depreciation is computed
using the straight-line and declining balance methods predominately over 15, 10, and 3 years for
buildings, machinery and equipment, and tools and dies, respectively.
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
As of December 31, (in thousands) |
|
2006 |
|
|
2005 |
|
|
Land and improvements |
|
$ |
1,652 |
|
|
$ |
1,652 |
|
Buildings and improvements |
|
|
23,795 |
|
|
|
23,501 |
|
Machinery and equipment |
|
|
86,155 |
|
|
|
100,903 |
|
Dies and tools |
|
|
16,440 |
|
|
|
29,118 |
|
|
|
|
|
|
|
|
|
|
$ |
128,042 |
|
|
$ |
155,174 |
|
|
|
|
|
|
|
|
Long-lived assets are reviewed for impairment whenever circumstances indicate that the carrying
amount of an asset may not be recoverable in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144. In performing this review, the carrying value of the assets is
compared to the projected undiscounted cash flows to be generated from the assets. If the sum of
the undiscounted expected future cash flows is less than the carrying value of the assets, the
assets are considered to be impaired. Impairment losses are measured as the amount by which the
carrying value of the assets exceeds the fair value of the assets. When fair value estimates are
not available, the Company estimates fair value using the estimated future cash flows discounted at
a rate commensurate with the risks associated with the recovery of the assets.
In 2006, $12.0 million of machinery and equipment and $13.4 million of dies and tools no longer
used in operations, and $25.4 million of corresponding accumulated depreciation, were reclassified
to other assets. As the net book value of these assets was zero, there was no increase to other
assets. In 2005,
46
$8.3 million of buildings and improvements no longer used in operations, and $5.6
million of corresponding accumulated depreciation were reclassified to other assets.
Income Taxes
Income taxes are accounted for using the asset and liability method in accordance with SFAS
No. 109. Under this method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory rates applicable to future years to temporary
differences between the financial statement carrying amounts and the tax basis of the Companys
assets and liabilities.
Product Liability
The Company provides for product liability claims including estimated legal costs to be
incurred defending such claims. The provision for product liability claims is charged to cost of
products sold.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses for the years ended
December 31, 2006, 2005, and 2004, were $1.9 million, $2.0 million, and $2.5 million, respectively.
Shipping Costs
Costs incurred related to the shipment of products are included in selling expense. Such
costs totaled $1.9 million, $1.9 million, and $1.7 million in 2006, 2005, and 2004, respectively.
Stock Options
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.
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 year ended
December 31, 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.
Earnings Per Share
Basic earnings per share is based upon the weighted-average number of shares of Common Stock
outstanding during the year, which was 25,775,400 in 2006 and 26,910,700 in 2005 and 2004. Diluted
earnings per share reflect the impact of options outstanding using the treasury stock method. This
results in diluted weighted-average shares outstanding of 25,787,600 in 2006, 26,910,700 in 2005
and 26,930,000 in 2004.
Reclassifications
Certain prior year balances may have been reclassified to conform with current year presentation.
47
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. This Interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Interpretation is effective for fiscal years beginning after December 15, 2006. We are
currently evaluating the impact of this Interpretation on the Companys financial position, results
of operations and cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements, (FAS 157). This Standard defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles and expands disclosures about fair value
measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The adoption of FAS 157 is not
expected to have a material impact on the Companys financial position, results of operations and
cash flows.
The FASB also issued in September 2006 Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of
FASB Statement No. 87, 88, 106 and 132(R), (FAS 158). FAS 158 provides recognition and
disclosure elements to be effective as of the end of fiscal years ending after December 15, 2006
and measurement elements to be effective for fiscal years ending after December 15, 2008. At
December 31, 2006, the Company has reported $12.4 million of deferred pension losses, net of taxes,
in accumulated other comprehensive income and has reported the $7.6 million unfunded status of the
plans as a liability at December 31, 2006. See Footnote 3 Pension Plans for further discussion
of the Companys pension plans.
2. Income Taxes
The Federal and state income tax provision consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Current |
|
|
Deferred |
|
|
Current |
|
|
Deferred |
|
|
Current |
|
|
Deferred |
|
|
Federal |
|
$ |
2,587 |
|
|
$ |
(1,925 |
) |
|
$ |
690 |
|
|
$ |
(260 |
) |
|
$ |
931 |
|
|
$ |
1,556 |
|
State |
|
|
739 |
|
|
|
(662 |
) |
|
|
204 |
|
|
|
(56 |
) |
|
|
442 |
|
|
|
299 |
|
|
|
|
$ |
3,326 |
|
|
$ |
(2,587 |
) |
|
$ |
894 |
|
|
$ |
(316 |
) |
|
$ |
1,373 |
|
|
$ |
1,855 |
|
|
Significant components of the Companys deferred tax assets and liabilities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
|
2005 |
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Product liability |
|
$ |
698 |
|
|
$ |
881 |
|
Employee compensation and benefits |
|
|
4,081 |
|
|
|
3,749 |
|
Allowances for doubtful accounts and discounts |
|
|
458 |
|
|
|
316 |
|
48
|
|
|
|
|
|
|
|
|
December 31, |
|
2006 |
|
|
2005 |
|
Inventories |
|
|
2,674 |
|
|
|
1,715 |
|
Additional minimum pension liability |
|
|
8,289 |
|
|
|
8,117 |
|
Other |
|
|
2,467 |
|
|
|
1,533 |
|
|
Total deferred tax assets |
|
|
18,667 |
|
|
|
16,311 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,030 |
|
|
|
783 |
|
Pension plans |
|
|
5,428 |
|
|
|
5,994 |
|
Other |
|
|
232 |
|
|
|
316 |
|
|
Total deferred tax liabilities |
|
|
6,690 |
|
|
|
7,093 |
|
|
Net deferred tax assets |
|
$ |
11,977 |
|
|
$ |
9,218 |
|
|
In accordance with the provisions of SFAS No. 87, Employers Accounting for Pension Plan Costs,
changes in deferred tax assets relating to the additional minimum pension liability are not charged
to expense and are therefore not included in the deferred tax provision, instead they are charged
to other comprehensive income.
The effective income tax rate varied from the statutory Federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Statutory Federal income tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
35.0 |
% |
State income taxes, net of Federal tax benefit |
|
|
4.2 |
|
|
|
7.5 |
|
|
|
6.2 |
|
Other items |
|
|
1.9 |
|
|
|
(1.4 |
) |
|
|
(1.1 |
) |
|
Effective income tax rate |
|
|
40.1 |
% |
|
|
40.1 |
% |
|
|
40.1 |
% |
|
The Company made income tax payments of approximately $0.2 million, $3.1 million, and $2.6
million, during 2006, 2005, and 2004, respectively. The Company expects to realize its deferred
tax assets through tax deductions against future taxable income or carry back against taxes
previously paid.
3. Pension Plans
The Company sponsors two defined benefit pension plans that cover substantially all employees.
A third defined benefit pension plan is non-qualified and covers certain executive officers of the
Company.
The cost of these defined benefit plans and the balances of plan assets and obligations are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
Change in Benefit Obligation |
|
2006 |
|
|
2005 |
|
|
Benefit obligation at January 1 |
|
$ |
64,481 |
|
|
$ |
59,114 |
|
Service cost |
|
|
1,670 |
|
|
|
1,650 |
|
Interest cost |
|
|
3,444 |
|
|
|
3,340 |
|
Actuarial loss (gain) |
|
|
(3,051 |
) |
|
|
2,248 |
|
Benefits paid |
|
|
(2,377 |
) |
|
|
(1,871 |
) |
|
Benefit obligation at December 31 |
|
|
64,167 |
|
|
|
64,481 |
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1 |
|
|
53,206 |
|
|
|
50,344 |
|
Actual return on plan assets |
|
|
3,463 |
|
|
|
1,876 |
|
49
|
|
|
|
|
|
|
|
|
Change in Benefit Obligation |
|
2006 |
|
|
2005 |
|
Employer contributions |
|
|
2,236 |
|
|
|
2,857 |
|
Benefits paid |
|
|
(2,378 |
) |
|
|
(1,871 |
) |
|
Fair value of plan assets at December 31 |
|
|
56,527 |
|
|
|
53,206 |
|
|
|
|
|
|
|
|
|
|
|
Funded Status |
|
|
|
|
|
|
|
|
|
Funded status |
|
|
(7,640 |
) |
|
|
(11,275 |
) |
Unrecognized net actuarial loss |
|
|
19,398 |
|
|
|
22,920 |
|
Unrecognized prior service cost |
|
|
1,324 |
|
|
|
1,484 |
|
Unrecognized transition obligation (asset) |
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
13,082 |
|
|
$ |
13,129 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions for the years |
|
|
|
|
|
|
ended December 31, |
|
2006 |
|
|
2005 |
|
|
Discount rate |
|
|
5.50 |
% |
|
|
5.75 |
% |
Expected long-term return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
Rate of compensation increases |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Pension Cost |
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,670 |
|
|
$ |
1,650 |
|
Interest cost |
|
|
3,444 |
|
|
|
3,340 |
|
Expected return on assets |
|
|
(4,235 |
) |
|
|
(4,041 |
) |
Amortization of unrecognized transition asset |
|
|
|
|
|
|
11 |
|
Recognized gains |
|
|
1,243 |
|
|
|
1,041 |
|
Prior service cost recognized |
|
|
161 |
|
|
|
257 |
|
|
Net periodic pension cost |
|
$ |
2,283 |
|
|
$ |
2,258 |
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized on the Balance Sheet |
|
2006 |
|
|
2005 |
|
|
Accrued benefit liability |
|
$ |
(7,640 |
) |
|
$ |
(8,648 |
) |
Intangible asset |
|
|
|
|
|
|
1,485 |
|
Accumulated other comprehensive income, net of tax |
|
|
12,433 |
|
|
|
12,175 |
|
Deferred tax asset |
|
|
8,289 |
|
|
|
8,117 |
|
|
|
|
$ |
13,082 |
|
|
$ |
13,129 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions as of December 31, |
|
2006 |
|
|
2005 |
|
|
Discount rate |
|
|
5.75 |
% |
|
|
5.50 |
% |
Rate of compensation increases |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
Information for Pension Plans with an Accumulated |
|
|
|
|
|
|
Benefit Obligation in excess of plan assets |
|
2006 |
|
|
2005 |
|
|
Projected benefit obligation |
|
$ |
64,167 |
|
|
$ |
64,481 |
|
Accumulated benefit obligation |
|
$ |
62,284 |
|
|
$ |
61,854 |
|
Fair value of plan assets |
|
$ |
56,527 |
|
|
$ |
53,206 |
|
|
50
|
|
|
|
|
|
|
|
|
Pension Weighted Average Asset Allocations as of |
|
|
|
|
|
|
December 31, |
|
2006 |
|
|
2005 |
|
|
Debt securities |
|
|
70 |
% |
|
|
70 |
% |
Equity securities |
|
|
27 |
% |
|
|
27 |
% |
Money market funds |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
100 |
% |
|
|
100 |
% |
|
The estimated future benefit payments for the defined benefit plans, which reflect future
service as appropriate, for each of the next five years and the total amount for years six through
ten, are as follows: 2007-$2.4 million, 2008-$2.6 million, 2009-$3.0 million, 2010-$3.1 million,
2011-$3.3 million and for the five year period ending 2016-$21.2 million.
The accumulated benefit obligation for all the defined benefit pension plans was $62.3 million
and $61.9 million as of December 31, 2006 and 2005, respectively.
The measurement dates of the assets and liabilities of all plans presented for 2006 and 2005
were December 31, 2006 and December 31, 2005, respectively.
Prior service cost of $0.2 million and unrecognized losses of $1.1 million included in accumulated
other comprehensive income as of December 31, 2006 are expected to be recognized as components of
net periodic pension cost in 2007.
The Company expects to contribute $1.9 million in the form of cash payments to its pension
plans in 2007. This contribution is not required by funding regulations or laws. The current
investment objective is to produce income and long-term appreciation through a target asset
allocation of 75% debt securities and other fixed income investments including cash and short-term
instruments, and 25% of equity investments, to provide for the current and future benefit payments
of the plans. The Company anticipates modifying the investment allocation during 2007 to include a
higher percentage of equity investments, and to transition to the new asset allocation over the 18
months thereafter. The pension plans are not invested in the common stock of the Company.
The Company determines the expected return on plan assets based on the target asset
allocations. In addition, the historical returns of the plan assets are also considered in
arriving at the expected rate of return.
In accordance with SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans and its predecessor, SFAS No. 87, Employers Accounting for Pension Costs,
the Company recorded an additional minimum pension liability, net of tax, which decreased
comprehensive income by $0.3 million, $1.9 million, and $1.6 million in 2006, 2005, and 2004,
respectively.
The Company also sponsors two defined contribution plans which cover substantially all of its
hourly and salaried employees and a non-qualified defined contribution plan which covers certain of
its salaried employees. Expenses related to the defined contribution plans were $1.1 million, $1.5
million, and $0.7 million in 2006, 2005, and 2004, respectively.
Effective January 1, 2007, all qualified and non-qualified defined contribution plans were merged
into a single 401(k) plan. Under the terms of the 401(k) plan, the Company will begin matching a
certain portion of employee contributions effective January 1, 2007. Company costs under the
matching
51
provisions of the new plan are expected to approximate aggregate Company costs recognized
under the three prior defined contribution plans.
FAS No. 158 requires an employer to measure the funded status of a plan as of its year-end date and
is first effective for fiscal 2006 for the Company and is reflected in the following presentation
of the Companys defined benefit plans. Upon adoption of this standard the Company recorded a
charge of $1.6 million, net of tax, to other comprehensive income and a $2.6 million credit to accrued
pension liability.
4. Restatement of 2004 Financial Statements
As previously reported in 2005, the financial statements for the year ended December 31, 2004
have been restated to reduce cost of goods sold by $0.9 million. The misstatement was caused by an
error in the calculation of the 2004 LIFO index. This restatement increased net income by $0.5
million or $0.02 per share for the year ended December 31, 2004.
5. Stock Incentive and Bonus Plans
In 1998, the Company adopted, and in May 1999 the shareholders approved, the 1998 Stock
Incentive Plan (the 1998 Plan) under which employees may be granted options to purchase shares of
the Companys Common Stock and stock appreciation rights. The Company has reserved 2,000,000
shares for issuance under the 1998 Plan. These options have an exercise price equal to the fair
market value of the shares of the Company at the date of grant, become vested ratably over five
years, and expire ten years from the date of grant. To date, no stock appreciation rights have
been granted.
On December 18, 2000, the Company adopted, and in May 2001 the shareholders approved, the 2001
Stock Option Plan for Non-Employee Directors (the 2001 Plan) under which non-employee directors
are granted options to purchase shares of the Companys authorized but unissued stock. The Company
has reserved 200,000 shares for issuance under the 2001 Plan. Options granted under the 2001 Plan
have an exercise price equal to the fair market value of the shares of the Company at the date of
grant and expire ten years from the date of grant. Twenty-five percent of the options vest
immediately upon grant and the remaining options vest ratably over three years.
The following table summarizes the activity of the Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg |
|
|
|
|
|
|
|
|
|
|
Weighted Avg |
|
Remaining |
|
|
|
|
|
|
Weighted Avg |
|
Grant Date |
|
Contractual |
|
|
Shares |
|
Exercise Price |
|
Fair Value |
|
Life (Years) |
|
Outstanding at December 31, 2003 |
|
|
1,095,000 |
|
|
$ |
11.55 |
|
|
$ |
1.86 |
|
|
|
5.32 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
1,095,000 |
|
|
|
11.55 |
|
|
|
1.86 |
|
|
|
4.32 |
|
Granted |
|
|
40,000 |
|
|
|
10.88 |
|
|
|
2.24 |
|
|
|
9.5 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(115,000 |
) |
|
|
11.74 |
|
|
|
1.83 |
|
|
|
3.15 |
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg |
|
|
|
|
|
|
|
|
|
|
Weighted Avg |
|
Remaining |
|
|
|
|
|
|
Weighted Avg |
|
Grant Date |
|
Contractual |
|
|
Shares |
|
Exercise Price |
|
Fair Value |
|
Life (Years) |
Outstanding at December 31, 2005 |
|
|
1,020,000 |
|
|
|
11.50 |
|
|
|
1.89 |
|
|
|
3.31 |
|
Granted |
|
|
660,000 |
|
|
|
8.51 |
|
|
|
3.51 |
|
|
|
9.7 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(355,000 |
) |
|
|
11.90 |
|
|
|
2.00 |
|
|
|
2.3 |
|
|
Outstanding at December 31, 2006 |
|
|
1,325,000 |
|
|
|
9.46 |
|
|
|
2.66 |
|
|
|
5.4 |
|
|
Exercisable Options Outstanding
at December 31, 2006 |
|
|
670,000 |
|
|
|
11.18 |
|
|
|
1.95 |
|
|
|
2.7 |
|
|
Non-Vested Options Outstanding
at December 31, 2006 |
|
|
655,000 |
|
|
$ |
7.70 |
|
|
$ |
3.50 |
|
|
|
9.7 |
|
|
There were 670,000 exercisable options at December 31, 2006, with a weighted average exercise
price of $11.18 and an average contractual life remaining of 2.7 years. At December 31, 2006, an
aggregate of 875,000 shares remain available for grant under the Plans.
The Company uses the Black-Scholes 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 44.3%, risk free rate of return of 4.0%, and expected lives of 5 years. The
estimated fair value of options granted is subject to the assumptions made and if the assumptions
changed, the estimated fair value amounts could be significantly different.
The Companys Stock Bonus Plan, as amended, covers its key employees excluding members of the
Ruger family. Pursuant to the Plan, awards are made of Common Stock and a cash bonus approximating
the estimated income tax on the awards. At December 31, 2005, 502,000 shares of Common Stock were
reserved for future awards.
As a result of adopting Statement 123(R) on January 1, 2006, the Companys income before income
taxes and net income for the year ended December 31, 2006 are $176,000 and $106,000 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. If the Company would
have adopted Statement 123(R) for the year ended December 31, 2005, the Companys income before
income taxes and net income for that period would have been $39,000 and $23,000 lower,
respectively, than the amounts previously reported and basic and diluted earnings per share would
have been unchanged.
At December 31, 2006, there was $2.2 million of unrecognized compensation cost related to
share-based payments that is expected to be recognized over a weighted-average period of 4.5 years.
At December 31, 2006, shares available for future stock option grants to employees and directors
under existing plans were 1.1 million and 60,000, respectively. At December 31, 2006 the aggregate
intrinsic value of all options, including 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 option plans.
6. Contingent Liabilities
(The following disclosures within Contingent Liabilities are identical to the disclosures within
Item 1A-Risk Factors Firearms Litigation and Firearms Litigation in Item 7-Managements
Discussion and Analysis of Financial Condition and Results of Operations.)
53
As of December 31, 2006, the Company is a defendant in approximately four 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
54
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; 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. Gary is scheduled to begin trial in 2009. The
defendants filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms Act
(PLCAA). The state court judge held the PLCAA unconstitutional and the defendants filed a motion
with the Indiana Court of Appeals asking it to accept interlocutory appeal on the issue, which
appeal was accepted on February 5, 2007.
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
55
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 February 1, 2007,
plaintiffs counsel in the previously reported Arnold case advised that plaintiff intends
to voluntarily dismiss the case with prejudice. This will conclude this matter with no payment by
the Company.
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 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
56
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.
As of December 31, 2006 and 2005, the Company was a defendant in 4 and 6 lawsuits, respectively,
involving its products and is aware of other such claims. During the year ended December 31, 2006
and 2005, respectively, 2 and 3 claims were filed against the Company, 2 and 5 claims were
dismissed, and 2 and 1 claims were settled. The average cost per settled claim was $47,000 and
$150,000 in 2006 and 2005, respectively.
During the years ended December 31, 2006 and 2005, the Company incurred product liability expense
of $2.5 million and $4.9 million, respectively, which includes the cost of outside legal fees,
insurance, and other expenses incurred in the management and defense of product liability matters.
The Company 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 September 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.
Balance Sheet Rollforward for Product Liability Reserve
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
Beginning |
|
|
(Reversal) |
|
|
Legal Fees |
|
|
|
|
|
|
Insurance |
|
|
Admin. |
|
|
End of |
|
|
|
of Year (a) |
|
|
(b) |
|
|
(c) |
|
|
Settlements (d) |
|
|
Premiums |
|
|
Expense |
|
|
Year (a) |
|
|
|
|
2004 |
|
$ |
6,665 |
|
|
|
($1,598 |
) |
|
|
($1,935 |
) |
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
3,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
3,132 |
|
|
|
2,514 |
|
|
|
(2,935 |
) |
|
|
(515 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
2,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2,196 |
|
|
|
688 |
|
|
|
(1,000 |
) |
|
|
(143 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
1,741 |
|
57
Income Statement Detail for Product Liability Expense
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Insurance |
|
|
|
|
|
|
Total |
|
|
|
Legal |
|
|
Premium |
|
|
Admin. |
|
|
Product |
|
|
|
Expense |
|
|
Expense |
|
|
Expense |
|
|
Liability |
|
|
|
(b) |
|
|
(e) |
|
|
(f) |
|
|
Expense |
|
|
|
|
2004 |
|
$ |
(1,598 |
) |
|
$ |
1,524 |
|
|
$ |
878 |
|
|
$ |
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2,514 |
|
|
|
1,338 |
|
|
|
1,041 |
|
|
|
4,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
688 |
|
|
|
1,141 |
|
|
|
691 |
|
|
|
2,520 |
|
Notes
(a) |
|
The beginning and ending liability balances represent accrued legal fees only. Settlements
and administrative costs are expensed as incurred. Only in rare instances is an accrual
established for settlements. |
|
(b) |
|
The expense accrued in the liability is for legal fees only. |
|
(c) |
|
Legal fees represent payments to outside counsel related to product liability matters. |
|
(d) |
|
Settlements represent payments made to plaintiffs or allegedly injured parties in exchange
for a full and complete release of liability. |
|
(e) |
|
Insurance expense represents the cost of insurance premiums. |
|
(f) |
|
Administrative expense represents personnel related and travel expenses of Company employees
and firearm experts related to the management and monitoring of product liability matters. |
There were no insurance recoveries during any of the above years.
7. Asset Impairment Charges
In the fourth quarter of 2006 and 2005 the Company recognized asset impairment charges of $0.5
million and $0.5 million, respectively, related to certain assets in the investment castings and
corporate segments. The Company was required to reduce the carrying value of these assets to fair
value and recognized asset impairment charges because the carrying value of the affected assets
exceeded their projected future undiscounted cash flows. The Companys cessation of titanium
castings operations did not result in an asset impairment charge.
8. Related Party Transactions
In 2006, 2005 and 2004, the Company paid Newport Mills, $9,800, $205,500 and $243,000,
respectively, for storage rental and office space. The sole proprietor of Newport Mills is William
B. Ruger, Jr. who was Chairman and Chief Executive Officer of the Company at the time. As of
December 31, 2006, the Company no longer occupied this storage and office space. On December 16,
2005, the Company sold two automobiles to Mr. Ruger, Jr. for $15,000.
9. Operating Segment Information
The Company has two reportable operating segments: firearms and investment castings. The
firearms segment manufactures and sells rifles, pistols, revolvers, and shotguns principally to a
select number of licensed independent wholesale distributors primarily located in the United
States. The investment
58
castings segment consists of two operating divisions which manufacture and sell titanium and steel
investment castings.
Corporate segment income relates to interest income on short-term investments, the sale of
non-operating assets, and other non-operating activities. Corporate segment assets consist of cash
and short-term investments and other non-operating assets.
The Company evaluates performance and allocates resources, in part, based on profit and loss
before taxes. The accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies (see Note 1). Intersegment sales are recorded at
the Companys cost plus a fixed profit percentage.
The Companys assets are located entirely in the United States and domestic sales represent
over 95% of total sales.
Revenues from significant customers in 2006, 2005, and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Customer 1 |
|
$ |
18,600 |
|
|
$ |
12,700 |
|
|
$ |
10,100 |
|
Customer 2 |
|
|
18,100 |
|
|
|
21,600 |
|
|
|
16,000 |
|
Customer 3 |
|
|
17,400 |
|
|
|
16,500 |
|
|
|
15,100 |
|
Customer 4 |
|
|
10,500 |
|
|
|
15,900 |
|
|
|
15,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
139,110 |
|
|
$ |
132,805 |
|
|
$ |
124,924 |
|
Castings |
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated |
|
|
28,510 |
|
|
|
21,917 |
|
|
|
20,700 |
|
Intersegment |
|
|
11,818 |
|
|
|
18,045 |
|
|
|
14,363 |
|
|
|
|
|
40,328 |
|
|
|
39,962 |
|
|
|
35,063 |
|
Eliminations |
|
|
(11,818 |
) |
|
|
(18,045 |
) |
|
|
(14,363 |
) |
|
|
|
$ |
167,620 |
|
|
$ |
154,722 |
|
|
$ |
145,624 |
|
|
Income (Loss) Before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
1,387 |
|
|
$ |
2,524 |
|
|
$ |
10,811 |
|
Castings |
|
|
(1,178 |
) |
|
|
(1,711 |
) |
|
|
(3,942 |
) |
Corporate |
|
|
1,634 |
|
|
|
629 |
|
|
|
1,182 |
|
|
|
|
$ |
1,843 |
|
|
$ |
1,442 |
|
|
$ |
8,051 |
|
|
Identifiable Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
53,525 |
|
|
$ |
73,035 |
|
|
$ |
77,824 |
|
Castings |
|
|
17,154 |
|
|
|
17,751 |
|
|
|
19,657 |
|
Corporate |
|
|
46,387 |
|
|
|
48,853 |
|
|
|
49,979 |
|
|
|
|
$ |
117,066 |
|
|
$ |
139,639 |
|
|
$ |
147,460 |
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
2,475 |
|
|
$ |
3,759 |
|
|
$ |
3,220 |
|
Castings |
|
|
1,377 |
|
|
|
1,681 |
|
|
|
2,607 |
|
|
|
|
$ |
3,852 |
|
|
$ |
5,440 |
|
|
$ |
5,827 |
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
Firearms |
|
$ |
3,486 |
|
|
$ |
3,116 |
|
|
$ |
4,403 |
|
Castings |
|
|
420 |
|
|
|
1,344 |
|
|
|
2,542 |
|
|
|
|
$ |
3,906 |
|
|
$ |
4,460 |
|
|
$ |
6,945 |
|
|
10. Retirement of Chief Executive Officer and Chairman of the Board
William B. Ruger, Jr. resigned as Chairman of the Board and Director of the Company effective
February 13, 2006. Mr. Ruger retired as Chief Executive Officer of the Company effective February
28, 2006. In connection with his retirement, the Company paid Mr. Ruger $0.7 million,
substantially all of which was recognized as an expense in the first quarter of 2006.
11. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the unaudited quarterly results of operations for the two
years ended December 31, 2006 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
3/31/06 |
|
|
6/30/06 |
|
|
9/30/06 |
|
|
12/31/06 |
|
|
Net Sales |
|
$ |
47,427 |
|
|
$ |
35,276 |
|
|
$ |
41,612 |
|
|
$ |
43,305 |
|
Gross profit |
|
|
9,139 |
|
|
|
7,457 |
|
|
|
5,234 |
|
|
|
2,407 |
|
Net income (loss) |
|
|
1,420 |
|
|
|
1,448 |
|
|
|
957 |
|
|
|
(2,721 |
) |
Basic and diluted
earnings (loss) per
share |
|
|
0.05 |
|
|
|
0.06 |
|
|
|
0.04 |
|
|
|
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
3/31/05 |
|
|
6/30/05 |
|
|
9/30/05 |
|
|
12/31/05 |
|
|
Net Sales |
|
$ |
44,260 |
|
|
$ |
34,395 |
|
|
$ |
35,090 |
|
|
$ |
40,978 |
|
Gross profit |
|
|
11,848 |
|
|
|
5,645 |
|
|
|
4,900 |
|
|
|
3,986 |
|
Net income (loss) |
|
|
3,681 |
|
|
|
(2 |
) |
|
|
(979 |
) |
|
|
(1,836 |
) |
Basic and diluted earnings (loss) per share |
|
|
0.14 |
|
|
|
|
|
|
|
(0.04 |
) |
|
|
(0.07 |
) |
In the fourth quarter of 2006, a $2.5 million non-cash inventory valuation adjustment, net of the
LIFO impact, was recorded to recognize inefficiencies in labor and overhead during a period of
rapid inventory reduction as the Company converted to a manufacturing system that emphasizes
continuous improvement in customer service, quality and productivity. This over-absorption of labor
and overhead was quantified by a physical inventory taken in the fourth quarter.
Due to the timing of the physical inventory, the Company was unable to quantify the impact of this
delayed recognition of labor and overhead efficiencies, if any, on the financial results of prior
quarters. As a consequence, raw material and work in process physical inventories are being
performed at the end of each quarter until a permanent corrective action is established and
determined to be adequate, making these physical inventories unnecessary.
60
ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9ACONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company conducted an evaluation, with the participation of its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of December 31, 2006. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31,
2006, the Companys controls and procedures over financial reporting were effective.
Managements Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company conducted an evaluation, with the participation of its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of its internal control over financial reporting as
of December 31, 2006. This evaluation was performed based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Management has concluded that the Company maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control Integrated
Framework issued by the COSO.
Managements assessment of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2006 has been audited by McGladrey & Pullen, LLP, an independent
registered public accounting firm, as stated in their report which is included in this Form 10-K.
Changes in Internal Control over Financial Reporting
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 except raw material and work in
process physical inventories are being performed at the end of each quarter.
61
ITEM 9BOTHER INFORMATION
None.
PART III
ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the Companys directors, including the Companys separately designated
standing audit committee, and on the Companys code of business conduct and ethics required by this
Item is incorporated by reference from the Companys Proxy Statement relating to the 2007 Annual
Meeting of Stockholders scheduled to be held April 24, 2007.
Information concerning the Companys executive officers required by this Item is set forth in Item
1 of this Annual Report on Form 10-K under the caption Executive Officers of the Company.
Information concerning beneficial ownership reporting compliance required by this Item is
incorporated by reference from the Companys Proxy Statement relating to the 2007 Annual Meeting of
Stockholders scheduled to be held April 24, 2007.
ITEM 11EXECUTIVE COMPENSATION
Information concerning director and executive compensation required by this Item is incorporated by
reference from the Companys Proxy Statement relating to the 2007 Annual Meeting of Stockholders
scheduled to be held April 24, 2007.
ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
Information concerning the security ownership of certain beneficial owners and management and
related stockholder matters required by this Item is incorporated by reference from the Companys
Proxy Statement relating to the 2007 Annual Meeting of Stockholders scheduled to be held April 24,
2007.
ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information concerting certain relationships and related transactions required by this Item is
incorporated by reference from the Companys Proxy Statement relating to the 2007 Annual Meeting of
Stockholders scheduled to be held April 24, 2007.
ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning the Companys principal accountant fees and services and the pre-approval
policies and procedures of the audit committee of the board of directors required by this Item is
incorporated by reference from the Companys Proxy Statement relating to the 2007 Annual Meeting of
the Stockholders scheduled to be held April 24, 2007.
62
PART IV
ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) |
|
Exhibits and Financial Statement Schedules |
|
(1) |
|
Financial Statements can be found under Item 8 of Part II of this Form 10-K |
|
|
(2) |
|
Schedules can be found on Page 67 of this Form 10-K |
|
|
(3) |
|
Listing of Exhibits: |
|
|
|
|
|
|
|
Exhibit 3.1
|
|
Certificate of Incorporation of the Company, as amended
(Incorporated by reference to Exhibits 4.1 and 4.2 to the
Form S-3 Registration Statement previously filed by the
Company File No. 33-62702). |
|
|
|
|
|
|
|
Exhibit 3.2
|
|
Bylaws of the Company, as amended. |
|
|
|
|
|
|
|
Exhibit 10.1
|
|
Sturm, Ruger & Company, Inc. 1986 Stock Bonus Plan
(Incorporated by reference to Exhibit 10.1 to the Companys
Annual Report on Form 10-K for the year ended December 31,
1988, as amended by Form 8 filed March 27, 1990, SEC File No.
1-10435). |
|
|
|
|
|
|
|
Exhibit 10.2
|
|
Amendment to Sturm, Ruger & Company, Inc. 1986 Stock Bonus
Plan (Incorporated by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 1991, SEC File No. 1-10435). |
|
|
|
|
|
|
|
Exhibit 10.3
|
|
Sturm, Ruger & Company, Inc. Supplemental Executive Profit
Sharing Retirement Plan (Incorporated by reference to
Exhibit 10.4 to the Companys Annual Report on Form 10-K for
the year ended December 31, 1991, SEC File No. 1-10435). |
|
|
|
|
|
|
|
Exhibit 10.4
|
|
Agreement and Assignment of Lease dated September 30, 1987
by and between Emerson Electric Co. and Sturm, Ruger &
Company, Inc. (Incorporated by reference to Exhibit 10.2 to
the Companys Annual Report on Form 10-K for the year ended
December 31, 1991, SEC File No. 1-10435). |
|
|
|
|
|
|
|
Exhibit 10.5
|
|
Sturm, Ruger & Company, Inc. Supplemental Executive
Retirement Plan (Incorporated by reference to Exhibit 10.5
to the Companys Annual Report on Form 10-K for the year
ended December 31, 1995, SEC File No. 1-10435). |
|
|
|
|
|
|
|
Exhibit 10.6
|
|
[Intentionally omitted.] |
|
|
|
|
|
|
|
Exhibit 10.7
|
|
Sturm, Ruger & Company, Inc. 1998 Stock Incentive Plan.
(Incorporated by reference to Exhibit 10.7 to the Companys
Annual Report on Form 10-K for the year ended December 31,
1998, SEC File No. 1-10435). |
63
|
|
|
|
|
|
|
Exhibit 10.8
|
|
Sturm, Ruger & Company, Inc. 2001 Stock Option Plan for
Non-Employee Directors (Incorporated by reference to Exhibit
4 to the Form S-8 Registration Statement filed by the
Company File No. 33-53234). |
|
|
|
|
|
|
|
Exhibit 10.9
|
|
Agreement and Release,dated as of February 28, 2006, by and
between Sturm, Ruger & Company, Inc. and William B. Ruger
(Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on April 4,
2006, SEC File No. 1-10435) |
|
|
|
|
|
|
|
Exhibit 10.10
|
|
Sale and Purchase Agreement, dated as of September 26, 2006,
by and between Sturm, Ruger & Company, Inc. and Ruger
Business Holdings, L.P. (Incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K
filed with the SEC on September 26, 2006, SEC File No.
1-10435) |
|
|
|
|
|
|
|
Exhibit 10.11
|
|
Severance Agreement, dated as of September 21, 2006, by and
between Sturm, Ruger & Company, Inc. and Stephen L. Sanetti
(Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on September
27, 2006, SEC File No. 1-10435) |
|
|
|
|
|
|
|
Exhibit 10.12
|
|
Severance Agreement, dated as of September 21, 2006, by and
between Sturm, Ruger & Company, Inc. and Thomas A. Dineen
(Incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed with the SEC on September
27, 2006, SEC File No. 1-10435) |
|
|
|
|
|
|
|
Exhibit 10.13
|
|
Severance Agreement, dated as of September 21, 2006, by and
between Sturm, Ruger & Company, Inc. and Robert R. Stutler
(Incorporated by reference to Exhibit 10.4 to the Companys
Current Report on Form 8-K filed with the SEC on September
27, 2006, SEC File No. 1-10435) |
|
|
|
|
|
|
|
Exhibit 10.14
|
|
Offer Letter, dated as of September 5, 2006, by and between
Sturm, Ruger & Company, Inc. and Michael O. Fifer
(Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on September
28, 2006, SEC File No. 1-10435) |
|
|
|
|
|
|
|
Exhibit 10.15
|
|
Severance Agreement, dated as of December 15, 2006, by and
between Sturm, Ruger & Company, Inc. and Michael O. Fifer
(Incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on December
19, 2006, SEC File No. 1-10435) |
|
|
|
|
|
|
|
Exhibit 10.16
|
|
Severance Agreement, dated as of December 15, 2006, by and
between Sturm, Ruger & Company, Inc. and Christopher John
Killoy (Incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed with the SEC on
December 19, 2006, SEC File No. 1-10435) |
|
|
|
|
|
|
|
Exhibit 10.17
|
|
Amended Severance Agreement, dated as of December 15, 2006,
by and between Sturm, Ruger & Company, Inc. and |
64
|
|
|
|
|
|
|
|
|
Thomas P.
Sullivan (Incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K filed with the SEC on
December 19, 2006, SEC File No. 1-10435) |
|
|
|
|
|
|
|
Exhibit 23.1
|
|
Consent of McGladrey & Pullen, LLP |
|
|
|
|
|
|
|
Exhibit 23.2
|
|
Consent of KPMG LLP |
|
|
|
|
|
|
|
Exhibit 31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) of the Exchange Act. |
|
|
|
|
|
|
|
Exhibit 31.2
|
|
Certification of Treasurer and Chief Financial Officer
Pursuant to Rule 13a-14(a) of the Exchange Act. |
|
|
|
|
|
|
|
Exhibit 32.1
|
|
Certification of the Chief Executive Officer Pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
|
Exhibit 32.2
|
|
Certification of the Treasurer and Chief Financial Officer
Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
Exhibit 99.1
|
|
Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form
10-Q of the Company for the quarter ended September 30, 1999,
SEC File No. 1-10435, incorporated by reference in Item 3
LEGAL PROCEEDINGS. |
|
|
|
|
|
|
|
Exhibit 99.2
|
|
Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form
10-Q of the Company for the quarters ended March 31, and
September 30, 2000, SEC File No. 1-10435, incorporated by
reference in Item 3 LEGAL PROCEEDINGS. |
|
|
|
|
|
|
|
Exhibit 99.3
|
|
Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form
10-Q of the Company for the quarter ended September 30, 2005,
SEC File No. 1-10435, incorporated by reference in Item 3
LEGAL PROCEEDINGS. |
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
|
|
|
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
S/THOMAS A. DINEEN |
|
|
|
|
|
|
|
Thomas A. Dineen |
|
|
|
|
Vice President, Treasurer and |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
March 5, 2007 |
|
|
|
|
|
|
|
Date |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
S/MICHAEL O. FIFER
|
|
3/5/07
|
|
S/STEPHEN L. SANETTI
|
|
3/5/07 |
|
|
|
Michael O. Fifer
|
|
|
|
Stephen L. Sanetti |
|
|
Chief Executive Officer, Director
|
|
|
|
President, Director |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
S/JOHN M. KINGSLEY, JR.
|
|
3/5/07
|
|
S/RICHARD T. CUNNIFF
|
|
3/5/07 |
|
|
|
John M. Kingsley, Jr.
|
|
|
|
Richard T. Cunniff |
|
|
Director
|
|
|
|
Director |
|
|
|
|
|
|
|
|
|
S/JAMES E. SERVICE .
|
|
3/5/07
|
|
S/JOHN A. COSENTINO
|
|
3/5/07 |
|
|
|
James E. Service
|
|
|
|
John A. Cosentino, Jr. |
|
|
Director
|
|
|
|
Director |
|
|
|
|
|
|
|
|
|
S/C. MICHAEL JACOBI
|
|
3/5/07
|
|
S/RONALD C. WHITAKER.
|
|
3/5/07 |
|
|
|
C. Michael Jacobi
|
|
|
|
Ronald C. Whitaker |
|
|
Director
|
|
|
|
Director |
|
|
|
|
|
|
|
|
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S/STEPHEN T. MERKEL
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3/5/07 |
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Stephen T. Merkel |
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Director |
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66
YEAR ENDED DECEMBER 31, 2006
STURM, RUGER & COMPANY, INC.
ITEMS 15(a)(2) AND 15(d)
FINANCIAL STATEMENT SCHEDULE
67
Sturm, Ruger & Company, Inc.
Item 15(a)(2) and Item 15(d)Financial Statement Schedule
Schedule IIValuation and Qualifying Accounts
(In Thousands)
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COL. A |
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COL. B |
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COL. C |
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COL. D |
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COL. E |
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ADDITIONS |
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(2) |
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(1) |
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Charged to |
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Balance at |
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Charged (Credited)to |
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Other |
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Balance |
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Beginning |
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Costs and |
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Accounts |
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at End |
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Description |
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of Period |
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Expenses |
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Describe |
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Deductions |
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of Period |
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Deductions from asset accounts: |
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Allowance for doubtful accounts: |
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Year ended December 31, 2006 |
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$ |
351 |
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$ |
(81 |
) |
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$ |
115 |
(a) |
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$ |
155 |
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Year ended December 31, 2005 |
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$ |
373 |
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$ |
22 |
(a) |
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$ |
351 |
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Year ended December 31, 2004 |
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$ |
441 |
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$ |
68 |
(a) |
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$ |
373 |
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Allowance for discounts: |
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Year ended December 31, 2006 |
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$ |
346 |
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$ |
2,808 |
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$ |
2,948 |
(b) |
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$ |
206 |
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Year ended December 31, 2005 |
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$ |
555 |
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$ |
3,508 |
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$ |
3,717 |
(b) |
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$ |
346 |
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Year ended December 31, 2004 |
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$ |
772 |
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$ |
3,957 |
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$ |
4,174 |
(b) |
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$ |
555 |
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Excess and obsolete inventory
reserve: |
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Year ended December 31, 2006 |
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$ |
(3,137 |
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$ |
3,217 |
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$ |
838 |
(c) |
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$ |
(5,516 |
) |
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Year ended December 31, 2005 |
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$ |
(2,698 |
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$ |
461 |
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$ |
22 |
(c) |
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$ |
(3,137 |
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Year ended December 31, 2004 |
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$ |
(2,015 |
) |
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$ |
1,009 |
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$ |
326 |
(c) |
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$ |
(2,698 |
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(a) |
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Accounts written off or (subsequently recovered) |
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(b) |
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Discounts taken |
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(c) |
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Inventory written off |
68