UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________

 

FORM 10-Q

(Mark One)

 

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934
		For the quarterly period ended September 29, 2012

 

OR

 

¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934
		For the transition period from_______________  to  _______________

 

Commission file number 1-10435

 

STURM, RUGER & COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		06-0633559
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)
Lacey Place, Southport, Connecticut		06890
(Address of principal executive offices)		(Zip code)

 

(203) 259-7843

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes x             No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x            No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨     Accelerated filer x     Non-accelerated filer ¨     Smaller reporting company      ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨         No  x

 

The number of shares outstanding of the issuer's common stock as of October 24, 2012: Common Stock, $1 par value –19,160,072.

 

 

INDEX

 

STURM, RUGER & COMPANY, INC.

 

PART I.      FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed balance sheets – September 29, 2012 and December 31, 2011	3
	Condensed statements of income and comprehensive income – Three and nine months ended September 29, 2012 and October 1, 2011	5
	Condensed statement of stockholders’ equity – Nine months ended September 29, 2012	6
	Condensed statements of cash flows –Nine months ended September 29, 2012 and October 1, 2011	7
	Notes to condensed financial statements – September 29, 2012	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II.     OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mining Safety Disclosures	28
Item 5.	Other Information	29
Item 6.	Exhibits	29
SIGNATURES		30

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED BALANCE SHEETS

(Dollars in thousands)

 

		September 29, 2012				December 31, 2011
						(Note)
Assets
Current Assets
Cash and cash equivalents		$	75,123			$	81,056
Short-term investments			29,973				-
Trade receivables, net			47,474				42,225
Gross inventories			53,517				49,004
Less LIFO reserve			(38,435	)			(37,476	)
Less excess and obsolescence reserve			(1,712	)			(1,311	)
Net inventories			13,370				10,217
Deferred income taxes			4,851				5,776
Prepaid expenses and other current assets			1,725				6,968
Total Current Assets			172,516				146,242
Property, plant and equipment			189,137				169,142
Less allowances for depreciation			(126,006	)			(116,195	)
Net property, plant and equipment			63,131				52,947
Deferred income taxes			1,222				32
Other assets			10,916				7,289
Total Assets		$	247,785			$	206,510

 

Note:

 

The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

See notes to condensed financial statements.

 

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED BALANCE SHEETS (Continued)

(Dollars in thousands, except share data)

  

		September 29, 2012				December 31, 2011
						(Note)
Liabilities and Stockholders’ Equity
Current Liabilities
Trade accounts payable and accrued expenses		$	31,330			$	28,592
Product liability			1,005				1,305
Employee compensation and benefits			16,591				14,882
Workers’ compensation			4,433				4,600
Income taxes payable			848				217
Total Current Liabilities			54,207				49,596
Accrued pension liability			19,142				19,082
Product liability			389				441
Contingent liabilities – Note 11			—				—
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
2012 – 23,459,506 issued,
19,160,072 outstanding
2011 – 23,382,566 issued,
19,083,132 outstanding			23,460				23,383
Additional paid-in capital			13,686				10,454
Retained earnings			202,328				168,981
Less: Treasury stock – at cost
2012 – 4,299,434 shares
2011 – 4,299,434 shares			(37,884	)			(37,884	)
Accumulated other comprehensive loss			(27,543	)			(27,543	)
Total Stockholders’ Equity			174,047				137,391
Total Liabilities and Stockholders’ Equity		$	247,785			$	206,510

  

Note:

 

The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

See notes to condensed financial statements.

 

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(In thousands, except per share data)

 

		Three Months Ended								Nine Months Ended
		September 29, 2012				October 1, 2011				September 29, 2012				October 1, 2011
Net firearms sales		$	116,270			$	79,214			$	345,203			$	232,126
Net castings sales			1,882				1,298				4,854				3,449
Total net sales			118,152				80,512				350,057				235,575
Cost of products sold			75,587				51,385				220,565				153,989
Gross profit			42,565				29,127				129,492				81,586
Operating expenses:
Selling			7,891				6,581				27,998				19,961
General and administrative			7,437				5,659				21,543				15,218
Total operating expenses			15,328				12,240				49,541				35,179
Operating income			27,237				16,887				79,951				46,407
Other income:
Interest expense, net			(18	)			(21	)			(62	)			(54	)
Other income, net			319				177				813				466
Total other income, net			301				156				751				412
Income before income taxes			27,538				17,043				80,702				46,819
Income taxes			10,189				6,306				29,860				17,323
Net income and comprehensive income		$	17,349			$	10,737			$	50,842			$	29,496
Basic earnings per share		$	0.91			$	0.57			$	2.66			$	1.56
Fully diluted earnings per share		$	0.88			$	0.56			$	2.58			$	1.55
Cash dividends per share		$	0.377			$	0.142			$	0.913			$	0.289

 

See notes to condensed financial statements.

 

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)

 

		Common Stock				Additional Paid-in Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Loss				Total
Balance at December 31, 2011		$	23,383			$	10,454			$	168,981			$	(37,884	)		$	(27,543	)		$	137,391
Net income and comprehensive income											50,842												50,842
Dividends paid											(17,495	)											(17,495	)
Recognition of stock-based compensation expense							3,317																3,317
Employee withholding tax related to share-based compensation							(1,045	)															(1,045	)
Tax benefit realized from exercise of stock options and vesting of RSU’s							1,037																1,037
Common stock issued – compensation plans			77				(77	)															-
Balance at September 29, 2012		$	23,460			$	13,686			$	202,328			$	(37,884	)		$	(27,543	)		$	174,047

 

See notes to condensed financial statements.

 

 

STURM, RUGER & COMPANY, INC.

 

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

 

		Nine Months Ended
		September 29, 2012				October 1, 2011
Operating Activities
Net income		$	50,842			$	29,496
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			10,151				8,792
Slow moving inventory valuation adjustment			446				(35	)
Stock-based compensation			3,317				2,110
Gain on sale of assets			(65	)			(82	)
Deferred income taxes			(265	)			1,376
Changes in operating assets and liabilities:
Trade receivables			(5,249	)			(1,856	)
Inventories			(3,599	)			2,107
Trade accounts payable and accrued expenses			2,571				2,870
Employee compensation and benefits			1,709				1,007
Product liability			(352	)			454
Prepaid expenses, other assets and other liabilities			1,656				(4,419	)
Income taxes payable			631				1,147
Cash provided by operating activities			61,793				42,967
Investing Activities
Property, plant and equipment additions			(20,315	)			(12,209	)
Proceeds from sale of assets			65				127
Purchases of short-term investments			(59,966	)			(122,978	)
Proceeds from maturities of short-term investments			29,993				149,473
Cash (used for) provided by investing activities			(50,223	)			14,413
Financing Activities
Tax benefit from exercise of stock options			1,037				3,087
Repurchase of common stock			-				(1,999	)
Payment of employee withholding tax related to share-based compensation			(1,045	)			(4,782	)
Dividends paid			(17,495	)			(5,474	)
Cash used for financing activities			(17,503	)			(9,168	)
(Decrease) Increase in cash and cash equivalents			(5,933	)			48,212
Cash and cash equivalents at beginning of period			81,056				5,132
Cash and cash equivalents at end of period		$	75,123			$	53,344

 

See notes to condensed financial statements.

 

 

 

STURM, RUGER & COMPANY, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share)

 

NOTE 1 - BASIS OF PRESENTATION

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

 

In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results of the interim periods. Operating results for the nine months ended September 29, 2012 may not be indicative of the results to be expected for the full year ending December 31, 2012. These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

 

Organization:

 

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of the Company’s total sales for the three and nine months ended September 29, 2012 were firearms sales, and approximately 1% was investment castings sales. Export sales represent approximately 3% of total sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic.

 

The Company’s firearms are sold through a select number of independent wholesale distributors principally to the commercial sporting market.

 

The Company manufactures investment castings made from steel alloys for internal use in its firearms and utilizes available investment casting capacity to manufacture and sell castings to unaffiliated, third-party customers.

 

Fair Value of Financial Instruments:

 

The carrying amounts of financial instruments, including cash, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short-term maturity of these items.

 

Short-term Investments:

 

Short-term investments consist principally of United States Treasury instruments, all maturing within one year, and are recorded at cost plus accrued interest, which approximates market. The income from short-term investments is included in other income, net. The Company intends to hold these investments until maturity.

 

 

The Company evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when market conditions warrant such evaluation. The Company has determined that the carrying value of short-term investments has not been impaired.

 

Use of Estimates:

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

NOTE 3 - INVENTORIES

 

Inventories are valued using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs existing at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation.

 

Inventories consist of the following:

 

		September 29, 2012				December 31, 2011
Inventory at FIFO
Finished products		$	4,424			$	3,318
Materials and work in process			49,093				45,686
Gross inventories			53,517				49,004
Less: LIFO reserve			(38,435	)			(37,476	)
Less: excess and obsolescence reserve			(1,712	)			(1,311	)
Net inventories		$	13,370			$	10,217

 

NOTE 4 - LINE OF CREDIT

 

In December 2011, the Company renewed a $25 million credit facility with a bank. This facility is renewable annually and now terminates on June 15, 2013. Borrowings under this facility bear interest at LIBOR (1.03% at September 29, 2012) plus 200 basis points. The Company is charged three-eighths of a percent (0.375%) per year on the unused portion. At September 29, 2012 and December 31, 2011, the Company was in compliance with the terms and covenants of the credit facility, which remains unused.

 

NOTE 5 - EMPLOYEE BENEFIT PLANS

 

The Company has migrated its retirement benefit focus from defined benefit pension plans to defined contribution retirement plans, utilizing its current 401(k) plan.

 

 

Defined Benefit Plans

 

In 2007, the Company amended its hourly and salaried defined benefit pension plans to freeze the benefits for current participants and to discontinue the plans for all future employees. All active participants became fully vested in the amount of benefit services accrued through December 31, 2007 and no benefits have accrued since that date. Currently, the Company provides supplemental discretionary contributions to substantially all employees’ individual 401(k) accounts.

 

In future years, the Company may be required to make cash contributions to the two defined benefit pension plans. The annual contributions will be based on the amount of the unfunded plan liabilities derived from the frozen benefits and will not include liabilities for any future accrued benefits for any new or existing participants. The total amount of these future cash contributions will depend on the investment returns generated by the plans’ assets and the then applicable discount rates used to calculate the plans’ liabilities.

 

The Company plans to contribute approximately $3 million in 2012, which is expected to satisfy the required minimum contribution. Contributions in the three and nine months ended September 29, 2012 totaled $0.8 million and $2.1 million, respectively.

 

The estimated cost of the frozen defined benefit plans for 2012 is $0.4 million.

 

Defined Contribution Plan

 

Effective January 1, 2007, the Company modified the terms of its 401(k) plan and now matches a certain portion of employee contributions. Expenses related to these matching contributions totaled $0.5 million and $1.6 million for the three and nine months ended September 29, 2012 and $0.5 million and $1.5 million for the three and nine months ended October 2, 2011, respectively. The Company plans to contribute approximately $0.5 million to the plan in matching employee contributions during the remainder of 2012.

 

In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $0.8 million and $2.1 million for the three and nine months ended September 29, 2012 and $0.5 million and $1.6 million for the three and nine months ended October 1, 2011, respectively. The Company plans to contribute supplemental contributions to the plan of approximately $0.7 million during the remainder of 2012.

 

NOTE 6 - INCOME TAXES

 

The Company's 2012 and 2011 effective tax rates differ from the statutory federal tax rate due principally to state income taxes partially offset by tax benefits related to the American Jobs Creation Act of 2004. The effective income tax rates for the three and nine months ended September 29, 2012 and October 1, 2011 are 37.0% and 37.0%, respectively.

 

Income tax payments in the three and nine months ended September 29, 2012 totaled $9.5 million and $23.6 million, respectively. Income tax payments in the three and nine months ended October 1, 2011 totaled $4.7 million and $11.7 million, respectively.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2008.

 

 

The Company does not believe it has included any “uncertain tax positions” in its federal income tax return or any of the state income tax returns it is currently filing. The Company has made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. The Company does not anticipate that such additional taxes, if any, would result in a material change to its financial position.

 

NOTE 7 - EARNINGS PER SHARE

 

Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:

 

		Three Months Ended								Nine Months Ended
		September 29, 2012				October 1, 2011				September 29, 2012				October 1, 2011
Numerator:
Net income		$	17,349			$	10,737			$	50,842			$	29,496
Denominator:
Weighted average number of common shares outstanding – Basic			19,160,072				18,978,755				19,143,988				18,875,788
Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans			599,480				317,425				561,105				141,944
Weighted average number of common shares outstanding – Diluted			19,759,552				19,296,180				19,705,093				19,017,732

 

The dilutive effect of outstanding options and restricted stock units is calculated using the treasury stock method. There were no stock options that were anti-dilutive and therefore not included in the diluted earnings per share calculation.

 

NOTE 8 - STOCK REPURCHASES

 

In the first quarter of 2011 the Company repurchased shares of its common stock. Details of these purchases are as follows:

 

Period		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Program				Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
1/4/11-1/29/11			133,400			$	14.94				133,400
Total			133,400			$	14.94				133,400			$	8,000,000

 

These purchases were made with cash held by the Company and no debt was incurred.

 

 

During the nine months ended September 29, 2012, the Company did not repurchase any shares of its common stock.

 

NOTE 9 - COMPENSATION PLANS

 

In April 2007, the Company adopted and the shareholders approved the 2007 Stock Incentive Plan (the “2007 SIP”) under which employees, independent contractors, and non-employee directors may be granted stock options, restricted stock, deferred stock awards, and stock appreciation rights, any of which may or may not require the satisfaction of performance objectives. Vesting requirements are determined by the Compensation Committee of the Board of Directors. The Company has reserved 2,550,000 shares for issuance under the 2007 SIP of which 839,000 remain available for future grants as of September 29, 2012.

 

Compensation costs related to all share-based payments recognized in the statements of operations aggregated $1.2 million and $3.3 million for the three and nine months ended September 29, 2012, respectively, and $0.9 million and $2.1 million for the three and nine months ended October 1, 2011, respectively.

 

Stock Options

 

A summary of changes in options outstanding under the plans is summarized below:

 

		Shares				Weighted Average Exercise Price				Grant Date Fair Value
Outstanding at December 31, 2011			328,700			$	8.58			$	4.42
Granted			-				-				-
Exercised			(46,956	)		$	7.81			$	3.80
Expired			-				-				-
Outstanding at September 29, 2012			281,744			$	8.71			$	4.52

 

The aggregate intrinsic value (mean market price at September 29, 2012 less the weighted average exercise price) of options outstanding under the plans was approximately $11.5 million.

 

Restricted Stock Units

 

Beginning in the second quarter of 2009, the Company began granting restricted stock units to senior employees in lieu of incentive stock options. These awards vest dependent on the achievement of corporate objectives established by the Compensation Committee of the Board of Directors. Beginning in 2011, a three year vesting period was added to the performance criteria, which had the effect of requiring both the achievement of the corporate performance objectives and the satisfaction of the vesting period.

 

There were no restricted stock units issued in the three months ended September 29, 2012. There were 149,725 restricted stock units issued during the nine months ended September 29, 2012. Total compensation costs related to these restricted stock units are $6.7 million. These costs are being recognized ratably over the vesting period which range from three to five years. Total compensation cost related to restricted stock units was $1.2 million and $3.3 million for the three and nine months ended September 29, 2012, respectively, and $0.7 million and $3.0 million for the three and nine months ended October 1, 2011, respectively.

 

 

NOTE 10 - OPERATING SEGMENT INFORMATION

 

The Company has two reportable segments: firearms and investment castings. The firearms segment manufactures and sells rifles, pistols, and revolvers principally to a select number of independent wholesale distributors primarily located in the United States. The investment castings segment manufactures and sells steel investment castings.

 

Selected operating segment financial information follows:

 

(in thousands)		Three Months Ended								Nine Months Ended
		September 29, 2012				October 1, 2011				September 29, 2012				October 1, 2011
Net Sales
Firearms		$	116,270			$	79,214			$	345,203			$	232,126
Castings
Unaffiliated			1,882				1,298				4,854				3,449
Intersegment			6,299				4,425				19,228				13,529
			8,181				5,723				24,082				16,978
Eliminations			(6,299	)			(4,425	)			(19,228	)			(13,529	)
		$	118,152			$	80,512			$	350,057			$	235,575
Income (Loss) Before Income Taxes
Firearms		$	26,452			$	17,026			$	80,068			$	46,618
Castings			(120	)			(512	)			(1,283	)			(959	)
Corporate			1,206				529				1,917				1,160
		$	27,538			$	17,043			$	80,702			$	46,819

 

											September 29, 2012				December 31, 2011
Identifiable Assets
Firearms										$	124,484			$	103,545
Castings											6,096				5,290
Corporate											117,205				97,675
										$	247,785			$	206,510

 

NOTE 11 - CONTINGENT LIABILITIES

 

As of September 29, 2012, the Company was a defendant in approximately three (3) lawsuits and is aware of certain other such claims. The lawsuits fall into two general categories, traditional product liability litigation and municipal litigation, discussed in turn below.

 

 

Traditional Product Liability Litigation

 

Two of the three lawsuits mentioned above involve claims for damages related to allegedly defective product design and/or manufacture and/or inadequate warnings. Both lawsuits stem from a specific incident of personal injury and are based on traditional product liability theories such as strict liability, negligence and/or breach of warranty.

 

The Company management believes that the allegations in these cases are unfounded, and that the incidents were caused by the negligence and/or misuse of the firearms by third parties or the claimant, and that there should be no recovery against the Company.

 

Municipal Litigation

 

Municipal litigation generally includes those cases brought by cities or other governmental entities against firearms manufacturers, distributors and retailers seeking to recover damages allegedly arising out of the misuse of firearms by third-parties.

 

There is only one remaining lawsuit of this type, filed by the City of Gary in Indiana State Court, over ten years ago. The complaint in that case seeks damages, among other things, for the costs of medical care, police and emergency services, public health services, and other services as well as punitive damages. In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacture, marketing and distribution practices of the various defendants. The suit alleges, among other claims, negligence in the design of products, public nuisance, negligent distribution and marketing, negligence per se and deceptive advertising. The case does not allege a specific injury to a specific individual as a result of the misuse or use of any of the Company’s products.

 

After a long procedural history, the case was scheduled for trial on June 15, 2009. The case was not tried on that date and no subsequent scheduling order has been entered. There has been no activity since that time.

 

Summary of Claimed Damages and Explanation of Product Liability Accruals

 

Punitive damages, as well as compensatory damages, are demanded in certain of the lawsuits and claims. Aggregate claimed amounts presently exceed product liability accruals. For claims made after July 10, 2000, insurance coverage is provided on an annual basis for losses exceeding $5 million per claim, or an aggregate maximum loss of $10 million annually, except for certain new claims which might be brought by governments or municipalities after July 10, 2000, which are excluded from coverage.

 

The Company management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, there is a remote likelihood 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 Company’s financial results for a particular period.

 

Product liability claim payments are made when appropriate if, as, and when claimants and the Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the lawsuits and claims develop, the timing of which may vary greatly from case to case. A time schedule cannot be determined in advance with any reliability concerning when payments will be made in any given case.

 

 

Provision is made for product liability claims based upon many factors related to the severity of the alleged injury and potential liability exposure, based upon prior claim experience. Because the Company’s experience in defending these lawsuits and claims is that unfavorable outcomes are typically not probable or estimable, only in rare cases is an accrual established for such costs. In most cases, an accrual is established only for estimated legal defense costs. Product liability accruals are periodically reviewed to reflect then-current estimates of possible liabilities and expenses incurred to date and reasonably anticipated in the future. Threatened product liability claims are reflected in the Company’s product liability accrual on the same basis as actual claims; i.e., an accrual is made for probable liability and claims-handling expenses on an ongoing basis.

 

A range of reasonably possible loss relating to unfavorable outcomes cannot be made. However, in product liability cases in which a dollar amount of damages is claimed, the amount of damages claimed, which totaled $5.4 million and $0.0 million at December 31, 2011 and 2010, respectively, are set forth as an indication of possible maximum liability that the Company might be required to incur in these cases (regardless of the likelihood or reasonable probability of any or all of this amount being awarded to claimants) as a result of adverse judgments that are sustained on appeal.

 

NOTE 12 - SUBSEQUENT EVENTS

 

The Company has evaluated events and transactions occurring subsequent to September 29, 2012 and determined that there were no such events or transactions that would have a material impact on the Company’s results of operations or financial position.

 

 

ITEM 2.

MANAGEMENT’S 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 to domestic customers. Approximately 99% of the Company’s total sales for the three and nine months ended September 29, 2012 were firearms sales, and 1% was investment castings sales. Export sales represent approximately 3% of total sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.

 

The Company also manufactures investment castings made from steel alloys for internal use in its firearms and for sale to unaffiliated, third-party customers.

 

Orders of many models of firearms from the independent distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.

 

Results of Operations

 

Demand

 

Demand for the Company’s products in the first nine months of 2012 was very strong. We believe this strong demand for our products was due to:

 

·

the Company’s continued practice of introducing innovative and exciting new products, and

·

new shooters joining the ranks of gun owners and the current political environment that favorably impacted the entire firearms industry.

 

New product introductions in the first nine months of 2012 included the 10/22 TakeDown rifle, the Ruger American Rifle, the SR22 pistol, the 22/45 Lite pistol, and the Single-Nine revolver. New products represented $130.3 million or 38% of firearm sales in the first nine months of 2012.

 

In response to this strong demand, the estimated sell-through of the Company’s products from the independent distributors to retailers increased 62% and 60% in the third quarter and first nine months of 2012, respectively, from the comparable prior year periods. For the same periods, the National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation) increased 22% and 21%, respectively.

 

 

Estimated sell-through from the independent distributors to retailers and total NICS background checks for the trailing seven quarters follows:

 

		2012												2011
		Q3				Q2				Q1				Q4				Q3				Q2				Q1
Estimated Units Sold from Distributors to Retailers (1)			396,900				410,300				460,800				291,800				244,700				264,400				284,300
Total adjusted NICS Background Checks (thousands) (2)			2,904				2,619				3,376				3,467				2,374				2,220				2,739

 

(1)

The estimates for each period were calculated by taking the beginning inventory at the distributors, plus shipments from the Company to distributors during the period, less the ending inventory at distributors. These estimates are only a proxy for actual market demand as they:

 

·

Rely on data provided by independent distributors that are not verified by the Company,

·

Do not consider potential timing issues within the distribution channel, including goods-in-transit, and

·

Do not consider fluctuations in inventory at retail.

 

(2)

While NICS background checks are not a precise measure of retail activity, they are commonly used as a proxy for retail demand. NICS background checks are performed when the ownership of most firearms, either new or used, is transferred by a Federal Firearms Licensee. NICS background checks are also performed for permit applications, permit renewals, and other administrative reasons.

 

The adjusted NICS data presented above was derived by the National Shooting Sports Foundation (“NSSF”) by subtracting out NICS checks that are not directly related to the sale of a firearm, including checks used for concealed carry (CCW) permit application checks as well as checks on active CCW permit databases. While not a direct correlation to firearms sales, the NSSF-adjusted NICS data provides a more accurate picture of current market conditions than raw NICS data.  

 

Orders Received and Ending Backlog

 

For the three and nine months ended September 29, 2012, orders received increased 89% and 93%, respectively, from the comparable prior year periods.

 

 

The units ordered, value of orders received and ending backlog, net of excise tax, for the trailing seven quarters are as follows (dollars in millions, except average sales price):

 

(All amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns.)

 

		2012												2011
		Q3				Q2				Q1				Q4				Q3				Q2				Q1
Units Ordered			318,300				291,500				1,200,100				452,300				168,700				263,500				503,500
Orders Received		$	92.9			$	84.6			$	308.7			$	120.3			$	49.6			$	81.4			$	134.7
Average Sales Price of Orders Received		$	292			$	290			$	257			$	266			$	294			$	309			$	268
Ending Backlog		$	249.7			$	273.2			$	304.4			$	98.2			$	69.8			$	97.4			$	92.9
Average Sales Price of Ending Backlog		$	275			$	269			$	264			$	291			$	341			$	309			$	279

 

Production

 

Total unit production in the third quarter of 2012 increased 51% from the third quarter of 2011. This increase in unit production resulted from investment in incremental capacity for new product introductions and from the utilization of lean methodologies for continuous improvement in our operations. Our increase in production was facilitated by $30 million of capital expenditures during the twelve months ended September 29, 2012. These capital expenditures exceeded depreciation by approximately $16 million during this period, which represented an approximate 8% increase to our capital equipment base.

 

Summary Unit Data

 

Firearms unit data for the trailing seven quarters are as follows:

 

		2012												2011
		Q3				Q2				Q1				Q4				Q3				Q2				Q1
Units Ordered			318,300				291,500				1,200,100				452,300				168,700				263,500				503,500
Units Produced			436,800				418,500				379,000				302,000				289,700				281,200				241,800
Units Shipped			425,500				421,100				382,500				315,100				276,500				279,600				251,800
Average Sales Price (3)		$	273			$	280			$	290			$	289			$	286			$	281			$	296
Units on Backlog			908,700				1,016,700				1,153,500				337,400				204,500				315,500				332,700

 

 

(3)

Net of Federal Excise Tax of 10% for handguns and 11% for long guns.

 

Inventories

 

The Company’s finished goods inventory increased 11,000 units during the third quarter of 2012 and remains below optimal levels to support rapid fulfillment of distributor demand. The Company has a goal of replenishing its finished goods inventory in future periods to levels that will better serve its customers. This replenishment could increase the FIFO value of finished goods inventory by as much as $15 million from the current level upon the attainment of the desired levels of finished goods inventory.

 

Distributor inventories of the Company’s products increased 28,600 units during the third quarter of 2012 but are below the optimal level to support rapid fulfillment of retailer demand.

 

Inventory data for the trailing seven quarters follows:

 

		2012												2011
		Q3				Q2				Q1				Q4				Q3				Q2				Q1
Units – Company Inventory			21,400				10,400				12,800				16,200				28,800				15,500				13,700
Units – Distributor Inventory (4)			96,600				68,000				57,200				135,600				112,300				80,500				65,300
Total inventory (5)			118,000				78,400				70,000				151,800				141,100				96,000				79,000

 

(4)

Distributor ending inventory as provided by the Company’s independent distributors. These numbers do not include goods-in-transit inventory that has been shipped from the Company but not yet received by the distributors.

 

(5)

This total does not include inventory at retailers. The Company does not have access to data on retailer inventories of the Company’s products.

 

Net Sales

 

Consolidated net sales were $118.2 million for the three months ended September 29, 2012, an increase of 46.8% from $80.5 million in the comparable prior year period.

 

Consolidated net sales were $350.1 million for the nine months ended September 29, 2012, an increase of 48.6% from $235.6 million in the comparable 2011 period.

 

Firearms net sales were $116.3 million for the three months ended September 29, 2012, an increase of 46.8% from $79.2 million in the comparable prior 2011 period.

 

Firearms net sales were $345.2 million for the nine months ended September 29, 2012, an increase of 48.7% from $232.1 million in the comparable 2011 period.

 

Firearms unit shipments increased 53.9% and 52.1% for the three and nine months ended September 29, 2012 from the comparable prior year periods, respectively.

 

 

Casting net sales were $1.9 million for the three months ended September 29, 2012, an increase of 45.0% from $1.3 million in the comparable prior year period.

 

Casting net sales were $4.9 million for the nine months ended September 29, 2012, an increase of 40.7% from $3.4 million in the comparable prior year period.

 

Cost of Products Sold and Gross Profit

 

Consolidated cost of products sold was $75.6 million for the three months ended September 29, 2012, an increase of 47.1% from $51.4 million in the comparable prior year period.

 

Consolidated cost of products sold was $220.6 million for the nine months ended September 29, 2012, an increase of 43.2% from $154.0 million in the comparable prior year period.

 

Gross margin was 36.0% and 37.0% for the three and nine months ended September 29, 2012, compared to 36.2% and 34.6% in comparable prior year periods, respectively, as illustrated below (in thousands):

 

 

		Three Months Ended
		September 29, 2012								October 1, 2011
Net sales		$	118,152				100.0	%		$	80,512				100.0	%
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory and product liability			74,062				62.7	%			50,440				62.6	%
LIFO expense			1,050				0.9	%			-				-
Overhead rate adjustments to inventory			278				0.2	%			369				0.5	%
Labor rate adjustments to inventory			72				0.1	%			32				-
Product liability			125				0.1	%			544				0.7	%
Total cost of products sold		$	75,587				64.0	%			51,385				63.8	%
Gross profit		$	42,565				36.0	%		$	29,127				36.2	%

 

		Nine Months Ended
		September 29, 2012								October 1, 2011
Net sales		$	350,057				100.0	%		$	235,575				100.0	%
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory and product liability			218,196				62.3	%			151,992				64.5	%
LIFO expense (income)			959				0.3	%			(252	)			(0.1	)%
Overhead rate adjustments to inventory			1,004				0.3	%			841				0.4	%
Labor rate adjustments to inventory			180				-				284				0.1	%
Product liability			226				0.1	%			1,124				0.5	%
Total cost of products sold			220,565				63.0	%			153,989				65.4	%
Gross profit		$	129,492				37.0	%		$	81,586				34.6	%

 

 

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability— During the three months ended September 29, 2012, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability increased as a percentage of sales by 0.1% compared with the comparable 2011 period.

 

During the nine months ended September 29, 2012, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability decreased as a percentage of sales by 2.2% compared with the comparable 2011 period. The main contributors to this decrease include the introduction of several new products which increased overall volume thereby favorably leveraging manufacturing overhead and improved productivity from continued emphasis on lean manufacturing techniques, which was partially offset by increased direct material cost.

 

LIFO— During the three months ended September 29, 2012, gross inventories increased by $5.7 million and the Company recognized LIFO expense resulting in increased cost of products sold of $1.1 million. In the comparable 2011 period, gross inventories increased by $3.7 million and no LIFO income or expense was recognized.

 

During the nine months ended September 29, 2012, gross inventories increased by $4.5 million and the Company recognized LIFO expense resulting in increased cost of products sold of $1.0 million. In the comparable 2011 period, gross inventories decreased $2.7 million and the Company recognized LIFO income resulting in decreased cost of products sold of $0.3 million.

 

Overhead Rate Adjustments— The Company uses actual overhead expenses incurred as a percentage of sales-value-of-production over a trailing six month period to absorb overhead expense into inventory. During the three and nine months ended September 29, 2012, the Company was more efficient in overhead spending and the overhead rates used to absorb overhead expenses into inventory decreased, resulting in a decrease in inventory value of $0.3 million and $1.0 million, respectively, and corresponding increases to cost of products sold.

 

During the three and nine months ended October 1, 2011, the overhead rates used to absorb overhead expenses into inventory decreased, resulting in decreases in inventory value of $0.4 million and $0.8 million, respectively. These decreases in inventory carrying values resulted in increases to cost of products sold.

 

Labor Rate Adjustments— The Company uses actual direct labor expense incurred as a percentage of sales-value-of-production over a trailing six month period to absorb direct labor expense into inventory.

 

During the three and nine months ended September 29, 2012, the labor rates used to absorb incurred labor expenses into inventory decreased, resulting in decreases in inventory value of $0.1 million and $0.2 million, respectively. These decreases in inventory carrying values resulted in increases to cost of products sold.

 

During the three months ended October 1, 2011, the changes in labor rates were insignificant.

 

During the nine months ended October 1, 2011, the labor rates used to absorb incurred labor expenses into inventory decreased, resulting in decreases in inventory value of $0.3 million. This decrease in inventory carrying values resulted in an increase to cost of products sold.

 

 

Product Liability— This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters.

 

For the three and nine months ended September 29, 2012 product liability costs totaled $0.1 million and $0.2 million, respectively. For the three and nine months ended October 1, 2011 product liability costs totaled $0.5 million and $1.1 million, respectively. See Note 11 to the notes to the financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

 

Gross Profit— As a result of the foregoing factors, for the three months ended September 29, 2012 gross profit was $42.6 million, an increase of $13.5 million from $29.1 million in the comparable prior year period. Gross profit as a percentage of sales decreased to 36.0% in the three months ended September 29, 2012 from 36.2% in the comparable prior year period.

 

For the nine months ended September 29, 2012, gross profit was $129.5 million, an increase of $47.9 million from $81.6 million in the comparable prior year period. Gross profit as a percentage of sales increased to 37.0% in the nine months ended September 29, 2012 from 34.6% in the comparable prior year period.

 

Selling, General and Administrative

 

Selling, general and administrative expenses were $15.3 million and $49.5 for the three and nine months ended September 29, 2012, an increase of $3.1 million and $14.3 million from the comparable prior year periods. The increase in selling, general and administrative expenses is attributable to the following:

 

·

increased promotional expenses,

·

increased equity and performance-based compensation expense,

·

increased expenses related to the ongoing implementation of a new information technology infrastructure, and

·

increased freight expense due to increased sales volume.

 

Other income, net

 

Other income, net was $0.3 million and $0.8 million in the three and nine months ended September 29, 2012 compared to $0.2 million and $0.4 million in the three and nine months ended October 1, 2011, respectively.

 

Income Taxes and Net Income

 

The effective income tax rate in the three and nine months ended September 29, 2012 and October 1, 2011 was 37.0%.

 

As a result of the foregoing factors, consolidated net income was $17.3 million for the three months ended September 29, 2012, an increase of 61.6% from $10.7 million in the comparable prior year period.

 

Consolidated net income was $50.8 million for the nine months ended September 29, 2012, an increase of 72.4% from the comparable prior year period.

 

 

Financial Condition

 

Liquidity

 

At the end of the third quarter of 2012, the Company’s cash, cash equivalents and short-term investments totaled $105.1 million. Pre-LIFO working capital of $156.7 million, less the LIFO reserve of $38.4 million, resulted in working capital of $118.3 million and a current ratio of 3.2 to 1.

 

The Company has a goal of replenishing its finished goods inventory in future periods to levels that will better serve its customers. This replenishment could increase the FIFO value of finished goods inventory by as much as $15 million from the current level upon the attainment of the desired levels of finished goods inventory.

 

Operations

 

Cash provided by operating activities was $61.8 million for the nine months ended September 29, 2012 compared to $43.0 million for the comparable prior year period. The increase in cash provided by operations is primarily attributable to greater earnings in the nine months ended September 29, 2012 compared to the prior year period, partially offset by increases in accounts receivable and inventories in the nine months ended September 29, 2012.

 

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory to provide sufficient time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

 

Investing and Financing

 

Capital expenditures for the nine months ended September 29, 2012 totaled $20.3 million. In 2012, the Company expects to spend $25 million on capital expenditures to purchase tooling and fixtures for new product introductions, to increase production capacity, and to upgrade and modernize manufacturing equipment. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash and short-term investments.

 

Dividends of $17.5 million were paid during the nine months ended September 29, 2012.

 

On October 27, 2012, Board of Directors authorized a dividend of 38.2¢ per share, for shareholders of record as of November 12, 2012, payable on November 26, 2012. This dividend varies every quarter because the Company pays a percentage of earnings rather than a fixed amount per share. On February 22, 2012 the Company announced that it was increasing the percentage of earnings to be paid out as dividends by 67%, effective with the dividend paid on March 23, 2012. This dividend is approximately 40% of net income. This decision was based on an analysis that indicated we could fund our high rate of organic growth, including both working capital and capital equipment and tooling expenditures, and fund our dividend while still modestly growing our cash reserves.

 

 

The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash and short-term investments, and the Company’s need for cash. The Company has financed its dividends with cash provided by operations and current cash and short-term investments.

 

During the nine months ended September 29, 2012, the Company did not repurchase any shares of its common stock. As of September 29, 2012, $8.0 million remained available for future stock repurchases.

 

The Company has migrated its retirement benefits from defined-benefit pension plans to defined-contribution retirement plans, utilizing its current 401(k) plan.

 

In 2007, the Company amended its hourly and salaried defined-benefit pension plans so that employees no longer accrue benefits under them effective December 31, 2007. This action “froze” the benefits for all employees and prevented future hires from joining the plans, effective December 31, 2007. Currently, the Company provides supplemental discretionary contributions to substantially all employees’ individual 401(k) accounts.

 

The Company contributed $2.1 million to the defined-benefit plans in the first nine months of 2012. The Company plans to contribute approximately $3 million in 2012, which is expected to satisfy the required minimum contribution.

 

In future years, the Company may again be required to make cash contributions to the two defined-benefit pension plans. The annual contributions will be based on the amount of the unfunded plan liabilities derived from the frozen benefits and will not include liabilities for any future accrued benefits for any new or existing participants. The total amount of these future cash contributions will depend on the investment returns generated by the plans’ assets and the then-applicable discount rates used to calculate the plans’ liabilities.

 

Based on its unencumbered assets, the Company believes it has the ability to raise cash through issuance of short-term debt, long-term debt, or an equity offering, if necessary. The Company’s unsecured $25 million credit facility, which expires on June 15, 2013, remains unused and the Company has no debt.

 

Other Operational Matters

 

In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to workplace safety, firearms serial number tracking and control, waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable BATFE, environmental, and safety regulations and the outcome of any proceedings or orders will not have a material adverse effect on the financial position or results of operations of the Company.

 

The Company self-insures a significant amount of its product liability, workers’ compensation, medical, and other insurance. It also carries significant deductible amounts on various insurance policies.

 

The Company is transitioning to a new enterprise resource planning system and converted one of its manufacturing facilities and a portion of its support functions, including sales and finance during 2011. The remaining manufacturing facilities were converted in the nine months ended September 29, 2012.

 

 

The valuation of the future defined-benefit pension obligations at December 31, 2011 and 2010 indicated that these plans were underfunded by $19.1 million and $9.4 million, respectively, and resulted in a cumulative other comprehensive loss of $27.5 million and $19.6 million on the Company’s balance sheet at December 31, 2011 and 2010, respectively.

 

The Company expects to realize its deferred tax assets through tax deductions against future taxable income.

 

Adjustments to Critical Accounting Policies

 

The Company has not made any adjustments to its critical accounting estimates and assumptions described in the Company’s 2011 Annual Report on Form 10-K filed on February 22, 2012, or the judgments affecting the application of those estimates and assumptions.

 

Forward-Looking Statements and Projections

 

The Company may, from time to time, make forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company, the impact of future firearms control and environmental legislation, and accounting estimates, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to changing interest rates on its investments, which consist primarily of United States Treasury instruments with short-term (less than one year) maturities and cash. The interest rate market risk implicit in the Company's investments at any given time is low, as the investments mature within short periods and the Company does not have significant exposure to changing interest rates on invested cash.

 

The Company has not undertaken any actions to cover interest rate market risk and is not a party to any interest rate market risk management activities.

 

A hypothetical 100 basis point change in market interest rates over the next year would not materially impact the Company’s earnings or cash flows. A hypothetical 100 basis point change in market interest rates would not have a material effect on the fair value of the Company’s investments.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (the “Disclosure Controls and Procedures”), as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 29, 2012.

 

Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 29, 2012, such Disclosure Controls and Procedures are effective to ensure that information required to be disclosed in the Company’s periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure.

 

Additionally, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, there have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 29, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

The Company is transitioning to a new enterprise resource planning system and converted one of its manufacturing facilities and a portion of its support functions, including sales and finance during 2011. The remaining manufacturing facilities were converted in the nine months ended September 29, 2012. It is anticipated that this implementation may result in changes to certain processes and related internal controls over financial reporting.

 

The effectiveness of any system of internal controls and procedures is subject to certain limitations, and, as a result, there can be no assurance that the Company’s Disclosure Controls and Procedures will detect all errors or fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system will be attained.

 

 

PART II.

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The nature of the legal proceedings against the Company is discussed at Note 11 to the financial statements, which are included in this Form 10-Q.

 

The Company has reported all cases instituted against it through June 30, 2012, and the results of those cases, where terminated, to the SEC on its previous Form 10-Q and 10-K reports, to which reference is hereby made.

 

There were no suits were formally instituted against the Company during the three months ended September 29, 2012.

 

On August 20, 2012, the Federal District Court for the District of Connecticut approved a $3 million settlement of the previously reported lawsuit entitled Steamfitters Local 449 Pension Fund, on Behalf of Itself and All Others Similarly Situated v. Sturm, Ruger & Co. Inc., et al. which had been consolidated with the matter of Alan R. Herrett, Individually and On Behalf of All Others Similarly Situated v. Sturm, Ruger & Co. Inc., et al.

 

ITEM 1A.      RISK FACTORS

 

The following risk factor has been identified by the Company and should be considered along with the risk factors disclosed in Item 1A. Risk Factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011:

 

Keeping Pace with Retail Demand

 

There has been a substantial increase in demand for our products in recent years. While the company believes it has sufficient capacity, if we are unable to keep pace with the increasing demand for our products, our revenues could be impaired, market acceptance of our products could be adversely affected and our customers might instead purchase our competitors’ products.

 

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	Not applicable
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES
	Not applicable
ITEM 4.	MINING SAFETY DISCLOSURES

 

 

	Not applicable
ITEM 5.	OTHER INFORMATION
	None
ITEM 6.	EXHIBITS

 

	(a)	Exhibits:
		31.1	Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		31.2	Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		32.1	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
		32.2	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

STURM, RUGER & COMPANY, INC.

 

FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2012

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

		STURM, RUGER & COMPANY, INC.
Date:  October 31, 2012		S/THOMAS A. DINEEN
		Thomas A. Dineen
		Principal Financial Officer,
		Principal Accounting Officer,
		Vice President, Treasurer and Chief Financial Officer