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| RGR > SEC Filings for RGR > Form 10-Q on 23-Jul-2008 | All Recent SEC Filings |
23-Jul-2008
Quarterly Report
Company Overview
Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 95% of the Company's total sales for the six months ended June 28, 2008 were firearms sales, and 5% were investment castings sales. Export sales represent less than 7% of total sales. The Company's design and manufacturing operations are located in the United States and substantially 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 outside customers.
Because most of the Company's 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 many models of firearms are usually lower in the third quarter of the year.
Results of Operations
Summary Unit Data
Firearms unit data for orders, production, shipments and ending inventory
for the last six quarters are as follows:
2008 2007
-------------------- --------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------- --------------------------------------------
Units Ordered 120,300 260,100 113,100 80,900 115,300 175,700
Units Produced 150,600 124,000 104,900 100,800 132,000 127,200
Units Shipped 136,700 135,700 111,900 98,600 129,600 141,700
Average Sales Price $ 270 $ 296 $ 283 $ 297 $ 306 $ 308
Units on Backorder 137,700 157,100 36,500 35,700 53,400 68,300
Units - Company Inventory
40,200 24,900 38,300 45,300 43,100 40,700
Units - Distributor Inventory (Note 1) 62,900 61,800 62,000 70,500 78,800 60,000
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Note 1: Distributor ending inventory as provided by the Company's
distributors.
Orders Received and Ending Backlog
The gross value of orders received and ending backlog for the trailing six
quarters are as follows (in millions except average unit value, including
Federal Excise Tax):
2008 2007
-------------------- --------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------- --------------------------------------------
Orders Received $ 37.0 $ 73.8 $ 32.8 $ 25.4 $ 39.1 $ 58.9
Average Unit Value of $ 275 $ 257 $ 262 $ 284 $ 307 $ 303
Orders Received
Ending Backlog $ 33.7 $ 40.7 $ 17.9 $ 16.2 $ 23.3 $ 27.9
Average Unit Value of
Ending Backlog $ 245 $ 234 $ 444 $ 411 $ 395 $ 370
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Note: Average unit value for orders received and ending backlog is net of Federal Excise Tax of 10% for handguns and 11% for long guns.
The product mix of orders received in the second quarter of 2008 showed a decline of demand for firearms related to hunting and sporting uses and an increase in demand for firearms related to self defense.
Certain product lines have been on backorder during this six-quarter period, including recent new product introductions and low-volume products that were not in regular production throughout this period.
The decrease in the average sales price of the units in backlog at the end of the first and second quarters of 2008 is due to the large quantity of new products on the backlog with lower unit sales prices and a reduction in backlog for certain rifle products where production has increased to meet demand.
Orders for certain discontinued models totaling $3.7 million at the end of 2007 were cancelled and have been eliminated from the 2008 backlog information. These orders were included in the backlog for 2007, and their elimination had a significant impact on the change in average unit value of the ending backlog from 2007 to 2008.
Production
In the first half of 2008, the Company continued to work on the transition from large-scale batch production to lean manufacturing, with an emphasis on setting up manufacturing cells that facilitate flow production and pull systems. Many of the initial single-piece flow cells are in place for assembly and major components manufacturing. The focus now is on establishing single-piece flow cells for new products and for small parts manufacturing. In addition to continuing to set up flow cells, the next phase of the lean transition includes developing pull systems to link the assembly cells, component manufacturing cells, and parts suppliers. There is also considerable, on-going engineering work in process to re-engineer existing product designs for improved manufacturability.
Production rates, which started to increase late in 2007, continued to improve in the second quarter of 2008. This allowed for a 21% increase in unit production from the first quarter of 2008 and a 44% increase from the fourth quarter of 2007. Also, second quarter 2008 unit production increased 14% from the second quarter of 2007, when production benefitted from the higher levels of pre-existing work-in-process inventory that allowed the Company to produce more units than its staffing and manufacturing processes would have otherwise allowed.
An increase in firearm unit shipments in near-term future periods is largely dependent on the Company's ability to increase unit production of those models in strong demand.
Inventories
The Company's finished goods unit inventory levels increased in the second quarter of 2008 as improvements in manufacturing capacity allowed for the production of finished goods safety stocks for many products.
Finished goods inventories are expected to increase during the remainder of 2008 as safety stock levels are built in anticipation of increased demand during the first quarter of 2009, potentially offset by planned decreases in work-in-process inventory and raw material inventory. Demand is typically strongest during the first quarter of the year.
Sales
Consolidated net sales were $38.7 million for the three months ended June 28, 2008. This represents a decrease of $3.4 million or 8.1% from consolidated net sales of $42.1 million in the comparable prior year period.
For the six months ended June 28, 2008, consolidated net sales were $81.2 million, a decrease of $9.4 million or 10.4% from sales of $90.6 million in the comparable 2007 period.
Firearms net sales were $36.8 million for the three months ended June 28, 2008. This represents a decrease of $2.8 million or 7.1% from firearms net sales of $39.6 million in the comparable prior year period.
For the six months ended June 28, 2008, firearms net sales were $76.9 million. This represents a decrease of $6.3 million or 7.6% from firearms net sales of $83.2 million in the comparable 2007 period.
Firearms unit shipments increased 5.5% for the three months ended June 28, 2008 when compared to the three months ended June 20, 2007 due principally from the improved ability for production to meet customer demand. A shift in product demand toward firearms with lower unit sales prices, including some new products, resulted in the decrease in average sales price of units shipped in the three months ended June 28, 2008 when compared to the three months ended June 20, 2007.
For the six months ended June 30, 2008, firearms unit shipments remained consistent with units shipped during the comparable 2007 period.
Casting net sales were $1.8 million for the three months ended June 28, 2008. This represents a decrease of $0.7 million or 28.0% from casting sales of $2.5 million in the comparable prior year period.
For the six months ended June 28, 2008, casting segment net sales were $4.3 million. This represents a decrease of $3.0 million or 41.1% from casting sales of $7.3 million in the comparable prior year period.
The casting sales decrease in the first half of 2008 reflects the cessation of titanium casting operations, as previously announced by the Company in July 2006. Titanium casting sales accounted for $2.4 million or 32.9% of casting sales for the first half of 2007.
Cost of Products Sold and Gross Margin
Consolidated cost of products sold was $30.2 million for the three months ended June 28, 2008. This represents an increase of $1.2 million or 4.1% from consolidated cost of products sold of $29.0 million in the comparable prior year period.
For the six months ended June 28, 2008, consolidated cost of products sold was $62.0 million. This represents an increase of $0.1 million or 0.2% from consolidated cost of products sold of $61.9 million in the comparable prior year period.
Gross margin as a percent of sales was 22.0% and 23.6% for the three and six months ended June 28, 2008. These represent decreases from the gross margins of 31.2% and 31.7% in the comparable prior year periods as illustrated below (in thousands):
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Three Months Ended Three Months Ended
June 28, 2008 June 30, 2007
-----------------------------------------------------------------------------------------------------------
Net sales $ 38,664 100.0% $ 42,107 100.0%
Cost of products sold, before LIFO, overhead and
labor rate adjustments to inventory, product
liability, and product recall 30,803 79.7% 31,479 74.8%
LIFO expense (income) 2,130 5.4% (6,144) (14.6)%
Overhead rate adjustments to inventory (1,062) (2.7)% 2,827 6.7%
Labor rate adjustments to inventory (1,879) (4.9)% -- --
Product liability 177 0.5% 817 1.9%
-------- ---- -------- ----
Total cost of products sold 30,169 78.0% 28,979 68.8%
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Gross margin $ 8,495 22.0% $ 13,128 31.2%
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Six Months Ended Six Months Ended
June 28, 2008 June 30, 2007
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Net sales $ 81,170 100.0% $ 90,564 100.0%
Cost of products sold, before LIFO, overhead and
labor rate adjustments to inventory, product
liability, and product recall 61,623 75.9% 67,039 74.0%
LIFO expense (income) 2,227 2.7% (10,566) (11.7)%
Overhead rate adjustments to inventory (1,526) (1.9)% 4,226 4.7%
Labor rate adjustments to inventory (1,879) (2.3)% -- --
Product liability 367 0.5% 1,173 1.3%
Product recall 1,208 1.5% -- --
-------- ---- -------- ----
Total cost of products sold 62,020 76.4% 61,872 68.3%
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Gross margin $ 19,150 23.6% $ 28,692 31.7%
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Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall-- During the three and six months ended June 28, 2008, cost of products sold, before LIFO, overhead rate, and labor standards adjustments to inventory, product liability, and product recall increased as a percentage of sales by 6.7% and 2.8%, respectively, compared to the comparable 2007 periods. These increases were primarily related
to a) an increase in non-personnel variable-overhead spending, especially maintenance and repairs and consumable tools and supplies during the second quarter of 2008, b) the recognition of excess and obsolete inventory charges in the second quarter of 2008 as a significant effort was made to identify and dispose of unusable inventory, and c) stable fixed-overhead expenses incurred over reduced comparable period sales.
LIFO-- During the three and six months ended June 28, 2008, gross inventories increased by $3.5 million and $3.1 million, respectively compared to decreases in gross inventories of $10.0 million and $26.6 million in the comparable 2007 periods. These inventory fluctuations were caused, in part, by the overhead and direct labor rate adjustments to inventory in the respective periods, as discussed below. The 2008 inventory increase resulted in LIFO expense and increased cost of products sold of $2.1 million and $2.2 million for the three and six month periods ending June 28, 2008 compared to LIFO income and decreased cost of products sold of $6.1 million and $10.6 million in the comparable 2007 periods.
Finished goods inventories are expected to increase during the remainder of 2008 as safety stock levels are built in anticipation of increased demand during the first quarter of 2009, potentially offset by planned decreases in work-in-process inventory and raw material inventory. Demand is typically strongest during the first quarter of the year.
Overhead Rate Adjustments-- During the three and six months ended June 28, 2008, the change in inventory value resulting from the change in the overhead rate used to absorb overhead expenses into inventory were increases of $1.1 million and $1.5 million, respectively. These increases in inventory value resulted in decreases to cost of products sold. During the comparable 2007 periods, the change in inventory value resulting from the change in the overhead rate used to absorb overhead expenses into inventory were decreases of $2.8 million and $4.2 million, respectively. These decreases in inventory values resulted in increases to cost of products sold.
Labor Rate Adjustments-- Effective April 1, 2008, the Company changed its methodology for estimating standard direct labor rates for its firearms. This change in estimation resulted in an increase to gross inventories of $1.9 million (approximately $0.5 million after the impact of the LIFO reserve) in the three and six months ended June 28, 2008, and a corresponding reduction in cost of sales.
Product Liability--During the three and six months ended June 28, 2008, the Company incurred product liability expense of $0.2 million and $0.4 million, respectively, which includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. For the comparable 2007 periods, product liability expenses totaled $0.8 million and $1.2 million, respectively.
Product Recall--In April 2008, the Company announced that it determined that Ruger SR9 pistols manufactured between October 2007 and April 2008 can, under certain conditions, fire if dropped with their manual safeties in the "off" or "fire" position and a round in the chamber. The Company has started to retrofit all Ruger SR9 pistols with serial number prefix "330" (330-xxxxx) at no charge to the firearm owners. The estimated cost of this retrofit program of approximately $1.2 million was recorded in the first quarter of 2008. This program is expected to be in effect for several years.
Selling, General and Administrative
Selling, general and administrative expenses were $7.1 million and $15.4 million for the three and six months ended June 28, 2008, respectively. This represents no change and an increase of $0.6 million from selling, general and administrative expenses of $7.1 million and $14.7 million in the comparable prior year periods. The increase reflects a retail co-op advertising program that was introduced on January 1, 2008 and increased promotional and advertising expenses, many of which related to new products.
Severance expenses were $0.0 million and $0.7 million for the three and six months ended June 28, 2008, respectively. This represents a decrease of $0.2 million and $0.3 million from severance expenses of $0.2 million and $1.0 million in the comparable prior year periods. In the first quarter of 2007, the severance expense related to the retirement of two executives. In the first and second quarter of 2007, the severance expense was primarily related to a voluntary reduction in force during those periods.
Gains on Sale of Real Estate
In the first and second quarters of 2007, the Company recorded gains on the sale of non-manufacturing real property of $5.2 million and $1.5 million, respectively. No real estate sales were made in the first half of 2008. The Company has two properties in Connecticut and one property in New Hampshire listed for sale. The timing on when these properties will sell is uncertain due to the weak real estate market and tight credit environment.
Interest income
Interest income was $0.1 million and $0.3 million for the three and six months ended June 28, 2008, respectively. This represents a decrease of $0.6 million and $0.8 million from interest income of $0.7 million and $1.1 in the comparable prior year periods. The decrease is attributable to lower interest rates and decreased principal invested in 2008 compared to 2007.
Income Taxes and Net Income
The effective income tax rates in the second quarter and first half of 2008 were 38.0%. The effective income tax rates in the second quarter and first half of 2007 were 40.1%.
As a result of the foregoing factors, consolidated net income was $1.1 million and $2.5 million for the three and six months ended June 28, 2008, respectively. This represents a decrease of $4.0 million and $10.7 million from consolidated net income of $5.1 million and $13.2 million for the three and six months ended June 30, 2007, respectively.
Financial Condition
Operations
At June 28, 2008, the Company had cash, cash equivalents and short-term investments of $30.8 million. The Company's pre-LIFO working capital of $98.4 million, less the LIFO reserve of $46.0 million, resulted in working capital of $52.4 million and a current ratio of 3.7 to 1.
Cash used for operating activities was $1.1 million for the six months ended June 28, 2008 compared to funds provided by operating activities of $30.0 million for the six months ended June 30, 2007. The decrease in cash provided in 2008 compared to 2007 is principally attributable to the significant reduction in gross inventory in 2007.
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 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 six months ended June 28, 2008 totaled $3.8 million. In 2008, the Company expects to spend approximately $6 million to $7 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. There were no dividends paid for the six months ended June 28, 2008. 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 funds. The Company does not expect to pay dividends in the near term.
In March 2007, the Company sold 42 parcels of non-manufacturing real property for $7.3 million to William B. Ruger, Jr., the Company's former Chief Executive Officer and Chairman of the Board. The sale included substantially all of the Company's raw land real property assets in New Hampshire. The sales price was based upon an independent appraisal, and the Company recognized a gain of $5.2 million on the sale.
In April 2007, the Company sold a non-manufacturing facility in Arizona for $5.0 million. This facility had not been used in the Company's operations for several years. The Company realized a gain of approximately $1.5 million from this sale.
In the third quarter of 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 effective December 31, 2007and prevents future hires from joining the plans. Starting January 1, 2008, the Company provides supplemental discretionary contributions to substantially all employees' individual 401(k) accounts. Costs attributable to the discretionary supplemental 401(k) Plan totaled $0.4 million and $0.8 million in the second quarter and first half of 2008, respectively. The Company plans to contribute an additional $0.8 million to the 401(k) plan during the remainder of 2008.
In late 2007, after authorizing the "freeze" amendment to its hourly and salaried defined benefit pension plans, the Company contributed an additional $5 million to these plans. The intent of this discretionary contribution was to reduce the amount of time that the Company will be required to continue to operate the frozen plans. The ongoing cost of running the plans (even if frozen) is approximately $0.2 million per year, which includes PBGC premiums, actuary and audit fees, and other expenses.
In 2008 and future years, the Company may be required to make cash contributions to the two defined benefit pension plans according to the new rules of the Pension Protection Act of 2006. 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 be dependent on the investment returns generated by the plans' assets and the then-applicable discount rates used to calculate the plans' liabilities.
There is no minimum required cash contribution for the defined benefit plans for 2008. However, the Company expects to contribute $0.5 million to the defined benefit plans in 2008, of which $0.2 million has been funded in the second quarter. The intent of this discretionary contribution in 2008 is to reduce the amount of time that the Company will continue to incur costs to operate the frozen plans.
The total annual cash outlays for retirement benefits, which include the continuing funding of the two defined benefit pension plans and the new supplemental discretionary 401(k) contributions, are expected to be comparable to the previous retirement funding levels.
In February 2008, the Company made lump sum benefit payments to two participants in its only non-qualified defined benefit plan, the Supplemental Executive Retirement Plan. These payments, which totaled $2.1 million, represented the actuarial present value of the participants' accrued benefit as of the date of payment. Only one, retired participant remains in this plan.
Firearms Litigation
As of June 30, 2008, the Company is a defendant in approximately 5 lawsuits involving its products and is aware of certain other such claims. These lawsuits and claims fall into two categories:
(iii) those that claim damages from the Company related to allegedly defective product design which stem from a specific incident. Pending 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
(iv) those brought by cities or other governmental entities, and individuals against firearms manufacturers, distributors and retailers 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 Company's 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 involving firearms, the allegations are unfounded, . . .
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