UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
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 No.file number 1-10435
STURM, RUGER & COMPANY, INCINC.
(Exact name of registrant as specified in its charter)
Delaware | 06-0633559 |
(State or other | (I.R.S. |
Lacey Place, Southport, Connecticut | 06890 |
(Address of | (Zip |
(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 ☑☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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). Yes ☑☒ 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 ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $1 par value | RGR | New York Stock Exchange |
The number of shares outstanding of the issuer's common stock as of July 26, 2019: 17,485,330
April 30, 2020: 17,483,154.
INDEX
STURM, RUGER & COMPANY, INC.
PART I —I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
June 29, 2019 | December 31, 2018 | March 28, 2020 | December 31, 2019 | |
(Note) |
| (Note) | ||
Assets |
|
| ||
|
|
| ||
Current Assets |
|
| ||
Cash | $32,220 | $38,492 | $37,979 | $35,420 |
Short-term investments | 99,562 | 114,326 | 149,575 | 129,488 |
Trade receivables, net | 41,494 | 45,031 | 55,836 | 52,640 |
|
| |||
Gross inventories (Note 4) | 92,619 | 80,288 | 68,795 | 79,011 |
Less LIFO reserve | (47,529) | (46,341) | (47,481) | (47,137) |
Less excess and obsolescence reserve | (3,623) | (2,527) | (3,025) | (3,573) |
Net inventories | 41,467 | 31,420 | 18,289 | 28,301 |
|
| |||
Prepaid expenses and other current assets | 5,742 | 2,920 | 2,939 | 3,467 |
Total Current Assets | 220,485 | 232,189 | 264,618 | 249,316 |
| ||||
Property, plant and equipment | 357,771 | 358,756 | 376,117 | 372,482 |
Less allowances for depreciation | (286,056) | (276,045) | (305,251) | (298,568) |
Net property, plant and equipment | 71,715 | 82,711 | 70,866 | 73,914 |
|
| |||
Deferred income taxes | 1,844 | 2,969 | 3,863 | 5,393 |
Other assets | 26,873 | 17,663 | 23,052 | 20,338 |
Total Assets | $320,917 | $335,532 | $362,399 | $348,961 |
Note:
The consolidated balance sheetCondensed Consolidated Balance Sheet at December 31, 20182019 has been derived from the audited consolidated 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 consolidated financial statements.
3
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
(Dollars in thousands, except per share data)
June 29, 2019 | December 31, 2018 | March 28, 2020 | December 31, 2019 | |
(Note) | (Note) | |||
Liabilities and Stockholders’ Equity | ||||
| ||||
Current Liabilities | ||||
Trade accounts payable and accrued expenses | $22,528 | $33,021 | $29,268 | $29,771 |
Contract liabilities with customers (Note 3) | 1,275 | 7,477 | 8,563 | 9,623 |
Product liability | 1,217 | 1,073 | 737 | 735 |
Employee compensation and benefits | 12,716 | 20,729 | 14,400 | 14,273 |
Workers’ compensation | 5,240 | 5,551 | 5,841 | 5,619 |
Income taxes payable | — | 3,340 | 3,683 | 1,223 |
Total Current Liabilities | 42,976 | 71,191 | 62,492 | 61,244 |
| ||||
Product liability | 73 | 99 | ||
Product liability accrual | 23 | 83 | ||
Lease liability (Note 5) | 2,028 | — | 2,065 | 2,176 |
| ||||
Contingent liabilities (Note 13) | — | — | — | — |
| ||||
| ||||
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 | ||||
2019 – 24,150,728 issued, 17,485,330 outstanding | ||||
2018 – 24,123,418 issued, 17,458,020 outstanding | 24,151 | 24,123 | ||
2020 – 24,193,052 issued, 17,483,154 outstanding | ||||
2019 – 24,160,424 issued, 17,450,526 outstanding | 24,193 | 24,160 | ||
Additional paid-in capital | 35,657 | 33,291 | 38,707 | 38,683 |
Retained earnings | 359,627 | 350,423 | 380,509 | 368,205 |
Less: Treasury stock – at cost | ||||
2019 – 6,665,398 shares | ||||
2018 – 6,665,398 shares | (143,595) | (143,595) | ||
2020 – 6,709,898 shares | ||||
2019 – 6,709,898 shares | (145,590) | (145,590) | ||
Total Stockholders’ Equity | 275,840 | 264,242 | 297,819 | 285,458 |
Total Liabilities and Stockholders’ Equity | $320,917 | $335,532 | $362,399 | $348,961 |
Note:
The consolidated balance sheetCondensed Consolidated Balance Sheet at December 31, 20182019 has been derived from the audited consolidated 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 consolidated financial statements.
4
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended | Six Months Ended | Three Months Ended | ||||
June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 | March 28, 2020 | March 30, 2019 | |
Net firearms sales | $94,971 | $127,017 | $207,903 | $256,899 | $122,765 | $112,932 |
Net castings sales | 1,358 | 1,394 | 2,464 | 2,670 | 874 | 1,106 |
Total net sales | 96,329 | 128,411 | 210,367 | 259,569 | 123,639 | 114,038 |
| ||||||
Cost of products sold | 74,027 | 91,812 | 155,467 | 187,150 | 87,630 | 81,441 |
| ||||||
Gross profit | 22,302 | 36,599 | 54,900 | 72,419 | 36,009 | 32,597 |
| ||||||
Operating expenses: | ||||||
Selling | 7,265 | 9,785 | 15,396 | 18,123 | 7,636 | 8,131 |
General and administrative | 7,572 | 7,446 | 15,586 | 16,332 | 8,210 | 8,014 |
Total operating expenses | 14,837 | 17,231 | 30,982 | 34,455 | 15,846 | 16,145 |
| ||||||
Operating income | 7,465 | 19,368 | 23,918 | 37,964 | 20,163 | 16,452 |
| ||||||
Other income: | ||||||
Interest income | 682 | — | 1,361 | — | 566 | 679 |
Interest expense | (25) | (22) | (51) | (49) | (25) | (26) |
Other income, net | 288 | 703 | 582 | 1,035 | 107 | 295 |
Total other income, net | 945 | 681 | 1,892 | 986 | 648 | 948 |
| ||||||
Income before income taxes | 8,410 | 20,049 | 25,810 | 38,950 | 20,811 | 17,400 |
| ||||||
Income taxes | 2,177 | 4,860 | 6,544 | 9,497 | 5,473 | 4,367 |
| ||||||
Net income and comprehensive income | $6,233 | $15,189 | $19,266 | $29,453 | $15,338 | $13,033 |
| ||||||
Basic earnings per share | $0.36 | $0.87 | $1.10 | $1.69 | $0.88 | $0.75 |
| ||||||
Diluted earnings per share | $0.35 | $0.86 | $1.09 | $1.68 | $0.87 | $0.74 |
| ||||||
Cash dividends per share | $0.29 | $0.32 | $0.57 | $0.55 | $0.18 | $0.28 |
See notes to condensed consolidated financial statements.
5
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands)
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total | |
Balance at December 31, 2018 | $24,123 | $33,291 | $350,423 | $(143,595) | $264,242 | |||||
Balance at December 31, 2019 | $24,160 | $38,683 | $368,205 | $(145,590) | $285,458 | |||||
Net income and comprehensive income | 19,266 | 19,266 | 15,338 | 15,338 | ||||||
Common stock issued – compensation plans | 28 | (28) | — | 33 | (33) | — | ||||
Vesting of RSUs | (780) | (780) | (1,297) | (1,297) | ||||||
Dividends paid | (9,956) | (9,956) | (3,034) | (3,034) | ||||||
Unpaid dividends accrued | (106) | (106) | ||||||||
Recognition of stock-based compensation expense | 3,174 | 3,174 | 1,354 | 1,354 | ||||||
Balance at June 29, 2019 | $24,151 | $35,657 | $359,627 | $(143,595) | $275,840 | |||||
Balance at March 28, 2020 | $24,193 | $38,707 | $380,509 | $(145,590) | $297,819 |
See notes to condensed consolidated financial statements.
6
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended | Three Months Ended | |||
June 29, 2019 | June 30, 2018 | March 28, 2020 | March 30, 2019 | |
Operating Activities | ||||
Net income | $19,266 | $29,453 | $15,338 | $13,033 |
Adjustments to reconcile net income to cash provided by operating activities: | ||||
Depreciation and amortization | 14,972 | 16,344 | 7,214 | 7,486 |
Slow moving inventory valuation adjustment | 1,096 | (348) | ||
Stock-based compensation | 3,174 | 2,668 | 1,354 | 1,541 |
(Gain) loss on sale of assets | 53 | (4) | ||
Deferred income taxes | 1,125 | (513) | 1,530 | 411 |
Changes in operating assets and liabilities: | ||||
Trade receivables | 3,537 | 9,944 | (3,196) | (7,187) |
Inventories | (11,143) | 16,049 | 10,012 | (5,062) |
Trade accounts payable and accrued expenses | (10,804) | (3,736) | (266) | (4,485) |
Contract liability to customers | (6,202) | 4,447 | (1,060) | (3,518) |
Employee compensation and benefits | (8,119) | 5,242 | 127 | (8,157) |
Product liability | 117 | 73 | (58) | 501 |
Prepaid expenses, other assets and other liabilities | (10,157) | 155 | (2,384) | (4,872) |
Income taxes payable | (3,340) | 1,221 | 2,460 | 7 |
Cash (used for) provided by operating activities | (6,425) | 80,995 | ||
Cash provided by (used for) operating activities | 31,071 | (10,302) | ||
| ||||
Investing Activities | ||||
Property, plant and equipment additions | (3,890) | (2,360) | (4,094) | (2,711) |
Proceeds from sale of assets | 14 | 4 | ||
Purchases of short-term investments | (118,972) | — | (89,535) | (44,961) |
Proceeds from maturities of short-term investments | 133,736 | — | 69,448 | 59,763 |
Cash provided by (used for) investing activities | 10,888 | (2,356) | ||
Cash (used for) provided by investing activities | (24,181) | 12,091 | ||
| ||||
Financing Activities | ||||
Remittance of taxes withheld from employees related to share-based compensation | (779) | (816) | (1,297) | — |
Dividends paid | (9,956) | (9,599) | (3,034) | (4,887) |
Cash used for financing activities | (10,735) | (10,415) | (4,331) | (4,887) |
| ||||
(Decrease) increase in cash and cash equivalents | (6,272) | 68,224 | ||
Increase (decrease) in cash and cash equivalents | 2,559 | (3,098) | ||
| ||||
Cash and cash equivalents at beginning of period | 38,492 | 63,487 | 35,420 | 38,492 |
| ||||
Cash and cash equivalents at end of period | $32,220 | $131,711 | $37,979 | $35,394 |
See notes to condensed consolidated financial statements.
7
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share)
NOTE 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 consolidated 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 sixthree months ended June 29, 2019March 28, 2020 may not be indicative of the results to be expected for the full year ending December 31, 2019.2020. These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
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 sales are from firearms. Export sales typically represent approximately 6%no more than 5% 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 and metal injection molding (“MIM”) parts for internal use in its firearms and for sale to unaffiliated, third-party customers. Approximately 1% of sales are from the castings segment.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition:
The Company recognizes revenue in accordance with the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), which became effective January 1, 2018. Substantially all product sales are sold FOB (free on board) shipping point. Customary payment terms are 2% 30 days, net 40 days. Generally, all performance obligations are satisfied when product is shipped and the customer takes ownership and assumes the risk of loss. In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which downstream customers are entitled to receive no charge products based on their purchases of certain of the Company’s products from the independent distributors. The fulfillment of these no charge products is the Company’s responsibility. In such instances, the Company allocates the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the firearms included in the promotional program, including the no charge firearms. Revenue is recognized proportionally as each performance obligation is satisfied, based on the relative customary price of each product. Customary prices are generally determined based on the prices charged to the independent distributors. The net change in contract liabilities for a given period is reported as an increase or decrease to sales.
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.
8
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.
Reclassifications:
Certain prior period balances have been reclassified to conform to current year presentation.
Recent Accounting Pronouncements:
On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842), its final standard on the accounting for leases. The most significant change in the new lease guidance requires lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. This change results in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under legacy U.S. GAAP. The new lease guidance was effective in fiscal years beginning after December 15, 2018 and interim periods thereafter. The Company adopted ASU 2016-02 effective January 1, 2019. As more fully discussed in Note 5, as a result of adopting ASU 2016-02, the Company recorded right-of-use assets totaling $2.6$2.5 million and lease liabilities of $2.6$2.5 million on its Condensed Consolidated Balance Sheets as of June 29, 2019.March 28, 2020. There was no impact on the Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Stockholders’ Equity, or Condensed Consolidated Statements of Cash Flows as a result of this adoption.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new guidance requires financial instruments measured at amortized cost basis to be presented at the net amount expected to be collected through application of the current expected credit losses model. The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This pronouncement was effective for fiscal years beginning after December 15, 2019. The Company adopted the new guidance effective January 1, 2020. There was no impact on the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Stockholders’ Equity, or Condensed Consolidated Statements of Cash Flows as a result of this adoption.
NOTE 3 — REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, applied to those contracts for which all performance obligations were not completed as of that date. Under the modified retrospective method, results for reporting periods beginning after January 1, 2018 are presented using the guidance of ASC 606, while prior period amounts were not adjusted and will continue to be presented in accordance with the previous guidance provided in ASC Topic 605, Revenue Recognition, when those periods are reported.606.
The impact of the adoption of ASC 606 on revenue recognized during the three and six months ended June 29,March 28, 2020 and March 30, 2019 and June 30, 2018 is as follows:
Three Months Ended | Six Months Ended | Three Months Ended | ||||
June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 | March 28, 2020 | March 30, 2019 | |
Contract liabilities with customers at beginning of period | $3,959 | $9,308 | $7,477 | $6,950 | $9,623 | $7,477 |
Revenue deferred | 1,971 | 2,261 | 3,037 | 9,441 | 3,484 | 1,066 |
Revenue recognized | (4,655) | (4,895) | (9,239) | (9,717) | (4,544) | (4,584) |
Contract liabilities with customers at end of period | $1,275 | $6,674 | $1,275 | $6,674 | $8,563 | $3,959 |
As more fully described in the Revenue Recognition section of Note 2, the deferral of revenue and subsequent recognition thereof relates to certain of the Company’s sales promotion programs that include the future shipment of free products. The Company expects the deferred revenue from this contract liability with customers to be recognized in the thirdsecond quarter of 2019.2020.
Practical Expedients and Exemptions
The Company has elected to account for shipping and handling activities that occur after control of the related product transfers to the customer as fulfillment activities that are recognized upon shipment of the goods.
9
NOTE 4 — 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.
During the three month period ended March 28, 2020, inventory quantities were reduced. If this reduction remains through year-end, it will result in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases. Although the effect of such a liquidation cannot be precisely quantified at the present time, management believes that if a LIFO liquidation occurs in 2020, the impact may be material to the Company’s results of operations for the period but will not have a material impact on the financial position of the Company.
Inventories consist of the following:
June 29, 2019 | December 31, 2018 | March 28, 2020 | December 31, 2019 | |
Inventory at FIFO |
| |||
Finished products | $26,050 | $17,313 | $6,040 | $13,131 |
Materials and work in process | 66,569 | 62,975 | 62,755 | 65,880 |
Gross inventories | 92,619 | 80,288 | 68,795 | 79,011 |
Less: LIFO reserve | (47,529) | (46,341) | (47,481) | (47,137) |
Less: excess and obsolescence reserve | (3,623) | (2,527) | (3,025) | (3,573) |
Net inventories | $41,467 | $31,420 | $18,289 | $28,301 |
NOTE 5 — LEASED ASSETS
The Company leases certain of its real estate and equipment. The Company has evaluated all its leases and determined that all are operating leases under the definitions of the guidance of ASU 2016-02. The Company’s lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
The Company adopted the provisions of ASU 2016-02 using the effective date method on January 1, 2019 and recorded right-of-use assets equal to the present value of the contractual liability for future lease payments. The table below presents the right-of-use assets and related lease liabilities recognized on the condensed consolidated balance sheetCondensed Consolidated Balance Sheet as of June 29, 2019:March 28, 2020:
Balance Sheet Line Item |
| |
Right-of-use assets | Other assets | $ |
Operating lease liabilities |
| |
Current portion | Trade accounts payable and accrued expenses | $449 |
| ||
Noncurrent portion | Lease liabilities |
|
Total operating lease liabilities | $ |
The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight line basis over the life of the lease.
The Company’s leases generally do not provide an implicit interest rate, and therefore the Company uses its incremental borrowing rate enumerated in its revolving line of credit (see Note 6) to determine the present value of its operating lease liabilities. The following table reconciles the undiscounted future minimum lease payments to the total operating lease liabilities recognized on the condensed consolidated balance sheetCondensed Consolidated Balance Sheet as of June 29, 2019:March 28, 2020:
Remainder of 2019 | $293 |
2020 | 540 |
2021 | 508 |
2022 | 192 |
2023 | 160 |
Thereafter | 1,760 |
Total undiscounted future minimum lease payments | 3,453 |
Less: Difference between undiscounted lease payments & the present value of future lease payments | 840 |
Total operating lease liabilities | $2,613 |
10
Remainder of 2020 | $430 |
2021 | 559 |
2022 | 244 |
2023 | 213 |
2024 | 215 |
Thereafter | 1,600 |
Total undiscounted future minimum lease payments | 3,261 |
Less: Difference between undiscounted lease payments & the present value of future lease payments | (747) |
Total operating lease liabilities | $2,514 |
Certain of the Company’s lease agreements contain renewal options at the Company’s discretion. The Company does not recognize right-of-use assets or lease liabilities for leases of one year or less or for renewal periods unless it is reasonably certain that the Company will exercise the renewal option at the inception of the lease or when a triggering event occurs. The Company’s weighted average remaining lease term for operating leases as of June 29, 2019March 28, 2020 is 11.8311.89 years.
NOTE 6 — LINE OF CREDIT
The Company has a $40 million revolving line of credit with a bank. This facility is renewable annually and terminates on August 31, 2019.September 30, 2020. Borrowings under this facility bear interest at the one-month LIBOR rate (2.403%(1.016% at June 29, 2019)March 28, 2020) plus 150 basis points. The Company is charged one-quarter of a percent (0.25%) per year on the unused portion. At June 29, 2019March 28, 2020 and December 31, 2018,2019, the Company was in compliance with the terms and covenants of the credit facility, which remains unused.
NOTE 7 — EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) plan that covers substantially all employees. The Company matches a certain portion of employee contributions using the safe harbor guidelines contained in the Internal Revenue Code. Expenses related to these matching contributions totaled $0.7 million and $1.9$0.9 million for the three and six months ended June 29, 2019, respectively,March 28, 2020, and $0.8 million and $1.6$1.2 million for the three and six months ended JuneMarch 30, 2018, respectively.2019. The Company plans to contribute approximately $1.5$2.7 million to the plan in matching employee contributions during the remainder of 2019.2020.
In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $1.1 million and $2.9$1.5 million for the three and six months ended June 29, 2019, respectively,March 28, 2020, and $1.3 million and $2.6$1.7 million for the three and six months ended JuneMarch 30, 2018, respectively.2019. The Company plans to contribute approximately $2.2$4.0 million in supplemental contributions to the plan during the remainder of 2019.2020.
NOTE 8 — INCOME TAXES
The Company'sCompany’s 2020 and 2019 and 2018 effective tax rates differ from the statutory federal tax rate due principally to state income taxes. The Company’s effective income tax rate was 25.9%26.3% and 25.4%25.1% for the three and six months ended June 29,March 28, 2020 and March 30, 2019, respectively. The Company’s effective income tax rate was 24.2% and 24.4% for the three and six months ended June 30, 2018, respectively.
Income tax payments for the three and six months ended June 29,March 28, 2020 and March 30, 2019 totaled $7.6$1.6 million and $11.6$4.0 million, respectively. Income tax payments for both the three and six months ended June 30, 2018 totaled $8.0 million.
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 2015.
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.
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NOTE 9 — 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 | Six Months Ended | Three Months Ended | ||||
June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 | March 28, 2020 | March 30, 2019 | |
Numerator: | ||||||
Net income | $6,233 | $15,189 | $19,266 | $29,453 | $15,338 | $13,033 |
Denominator: | ||||||
Weighted average number of common shares outstanding – Basic | 17,474,221 | 17,453,404 | 17,466,210 | 17,443,174 | 17,461,524 | 17,458,020 |
| ||||||
Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans | 196,220 | 197,155 | 170,986 | 140,909 | 257,894 | 263,718 |
| ||||||
Weighted average number of common shares outstanding – Diluted | 17,670,441 | 17,650,559 | 17,637,196 | 17,584,083 | 17,719,418 | 17,721,738 |
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 10 — COMPENSATION PLANS
In May 2017, the Company’s shareholders approved the 2017 Stock Incentive Plan (the “2017 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 750,000 shares for issuance under the 2017 SIP, of which 461,000 shares remain available for future grants as of June 29, 2019.March 28, 2020.
Restricted Stock Units
The Company grants performance-based and retention-based restricted stock units to senior employees. The vesting of the performance-based awards is dependent on the achievement of corporate objectives established by the Compensation Committee of the Board of Directors and a three-year vesting period. The retention-based awards are subject only to the three-year vesting period. There were 81,950no restricted stock units issued during the sixthree months ended June 29, 2019. Total compensation costs related to these restricted stock units are $4.4 million.March 28, 2020.
Compensation costs related to all outstanding restricted stock units recognized in the statements of income aggregated $1.6$1.4 million and $3.2$1.5 million for the three and six months ended June 29,March 28, 2020 and March 30, 2019, respectively, and $1.5 million and $2.7 million for the three and six months ended June 30, 2018, respectively.
Stock Options
The Company has not issued any stock options since 2010. A summary of changes in options outstanding under the 2007 Stock Incentive Plan is summarized below:
Shares | Weighted Average Exercise Price | Grant Date Fair Value | |
Outstanding at December 31, 2018 | 5,472 | $9.60 | $7.20 |
Granted | — | — | — |
Exercised | — | — | — |
Expired | — | — | — |
Outstanding at June 29, 2019 | 5,472 | $9.60 | $7.20 |
The aggregate intrinsic value (mean market price at June 29, 2019 less the weighted average exercise price) of options outstanding under the 2007 SIP was approximately $0.3 million.
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NOTE 11 — OPERATING SEGMENT INFORMATION
The Company has two2 reportable segments: firearms and 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 castings segment manufactures and sells steel investment castings and metal injection molding parts.
Selected operating segment financial information follows:
Three Months Ended | Six Months Ended | Three Months Ended | ||||
(in thousands) | June 29, 2019 | June 30, 2018 | June 29, 2019 | June 30, 2018 | March 28, 2020 | March 30, 2019 |
Net Sales | ||||||
Firearms | $94,971 | $127,017 | $207,903 | $256,899 | $122,765 | $112,932 |
Castings | ||||||
Unaffiliated | 1,358 | 1,394 | 2,464 | 2,670 | 874 | 1,106 |
Intersegment | 4,565 | 5,771 | 10,166 | 11,179 | 4,773 | 5,601 |
5,923 | 7,165 | 12,630 | 13,849 | 5,647 | 6,707 | |
Eliminations | (4,565) | (5,771) | (10,166) | (11,179) | (4,773) | (5,601) |
$96,329 | $128,411 | $210,367 | $259,569 | $123,639 | $114,038 |
Income (Loss) Before Income Taxes | ||||||
Firearms | $8,186 | $20,367 | $25,339 | $39,497 | $20,478 | $17,153 |
Castings | (557) | (455) | (1,034) | (943) | (210) | (477) |
Corporate | 781 | 137 | 1,505 | 396 | 543 | 724 |
$8,410 | $20,049 | $25,810 | $38,950 | $20,811 | $17,400 |
June 29, 2019 | December 31, 2018 | March 28, 2020 | December 31, 2019 | |||
Identifiable Assets | ||||||
Firearms | $172,381 | $166,975 | $154,573 | $163,792 | ||
Castings | 11,245 | 10,850 | 10,790 | 11,332 | ||
Corporate | 137,291 | 157,707 | 197,036 | 173,837 | ||
$320,917 | $335,532 | $362,399 | $348,961 |
NOTE 12 — RELATED PARTY TRANSACTIONS
The Company contracts with the National Rifle Association (“NRA”) for some of its promotional and advertising activities. Payments made to the NRA were de minimis in the three and six months ended June 29, 2019 totaled $0.2 millionMarch 28, 2020 and $0.3 million, respectively. Payments made to the NRA in the three and six months ended JuneMarch 30, 2018 totaled $0.1 million and $0.2 million, respectively.2019. One of the Company’s Directors also serves as a Director on the Board of the NRA.
NOTE 13 — CONTINGENT LIABILITIES
As of June 29, 2019,March 28, 2020, the Company was a defendant in five (5)four (4) lawsuits and is aware of certain other such claims. The lawsuits fall into three categories: traditional product liability litigation, non-product litigation, and municipal litigation, discussed in turn below.
Traditional Product Liability Litigation
Three of the five lawsuitsOne lawsuit mentioned above involve claimsinvolves a claim for damages related to an allegedly defective product due to its design and/or manufacture. These lawsuits stemThis lawsuit stems from a specific incidentsincident of personal injury and areis 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 casesthis case are unfounded, that the incidents areincident is unrelated to the design or manufacture of the firearm involved, and that there should be no recoveriesrecovery against the Company.
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Non-Product LiabilityLitigation
David S. Palmer,Primus Group LLC v. Smith and Wesson, et al. is a putative class action filed in the United States District Court for the Southern District of Ohio on behalfAugust 8, 2019. Plaintiff alleges that the defendants’ lawful sale of himselfmodern sporting rifles violates the Racketeer Influenced Corrupt Organizations Act and all others similarly situated vs.seeks a temporary restraining order (“TRO”) and permanent injunction. On August 20, 2019, the court denied plaintiff’s request for a TRO. On September 3, 2019, defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). On September 16, 2019, plaintiff filed an Amended Complaint. On October 9, 2019, the court dismissed plaintiff’s Amended Complaint, with prejudice. Plaintiff filed a Notice of Appeal on October 15, 2019 and sought two extensions of time to file its initial brief. Plaintiff’s subsequent motion to hold the appeal in abeyance was granted, though the court also ordered plaintiff to file periodic status reports. Plaintiff filed such a report on April 14, 2020, and claimed that it expected to be in a position to reactivate or dismiss the appeal within 60 days.
FN Herstal S.A. v. Sturm, Ruger & Co., Inc. is a putative class-action suitwas filed in Floridathe United States District Court for the Eastern District of Virginia on March 6, 2020. The Complaint alleges injury and economic loss based upon alleged federal and state court on behalftrademark infringement and unfair competition. These allegations arise from the Company’s use and efforts to seek registration of Florida consumers.the mark “Ruger-57” in connection with a recently launched pistol. The Company believes that the suit alleges breach of warrantylacks any merit and deceptive trade practices related to the sale of 10/22 Target Rifles. The Companyhas filed an Answer denying all material allegations and a Motion to Strike the putative class representative’s claims. That motion remains pending.Counterclaims seeking cancellation of certain of plaintiff’s registered trademarks.
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 in 1999. 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'sCompany’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 was largely dormant until a status conference was held on July 27, 2015. At that time, the court entered a scheduling order setting deadlines for plaintiff to file a Second Amended Complaint, for defendants to answer, and for defendants to file dispositive motions. The plaintiff did not file a Second Amended Complaint by the deadline.
In 2015, Indiana passed a new law such that Indiana Code §34-12-3-1 became applicable to the City's case. The defendants filed a joint motion for judgment on the pleadings, asserting immunity under §34-12-3-1 and asking the court to revisit the Court of Appeals' decision holding the Protection of Lawful Commerce in Arms Act inapplicable to the City's claims. The motion was fully briefed by the parties.
On September 29, 2016, the court entered an order staying the case pending a decision by the Indiana Supreme Court in KS&E Sports v.v. Runnels, which presented related issues. The Indiana Supreme Court decided KS&E Sports on April 24, 2017, and the City of Gary court lifted the stay. The City of Gary court also entered an order setting a supplemental briefing schedule under which the parties addressed the impact of the KS&E Sports decision on defendants' motion for judgment on the pleadings.
A hearing on the motion for judgment on the pleadings was held on December 12, 2017. On January 2, 2018, the court issued an order granting defendants’ motion for judgment on the pleadings, but denying defendants’ request for attorney’s fees and costs. On January 8, 2018, the court entered judgment for the defendants. The City filed a Notice of Appeal on February 1, 2018. Defendants cross-appealed the order denying attorney’s fees and costs.
Briefing in the Indiana Court of Appeals was completed on the City’s appeal and Defendants’defendants’ cross appeal on September 10, 2018. The Court of Appeals issued its ruling on May 23, 2019, affirming dismissal of the City’s negligent design and warnings count on the basis that the City had not alleged that manufacturer defendants’ conduct was unlawful. However, the court reversed dismissal of the City’s negligent sale and distribution and related public nuisance counts for damages and injunctive relief.
The manufacturer defendants
Defendants filed a Petition to Transfer the case to the Indiana Supreme Court on July 8, 2019. The Petition was denied on November 26, 2019. The case was been remanded to the trial court for further proceedings, though there has been no activity since then.
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. In many instances, the plaintiff does not seek a specified amount of money, though aggregate amounts ultimately sought may exceed product liability accruals and applicable insurance coverage. For product liability 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.
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The Company management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company’s financial results and cash flows 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'sCompany’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'sCompany’s 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 losses 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 $ 0.1$0.1 million and $0.1 million at December 31, 20182019 and 2017,2018, respectively, are set forth as an indication of possible maximum liability 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 14 — SUBSEQUENT EVENTS
On July 30, 2019,May 1, 2020, the Company’s Board of Directors authorized a dividend of 14¢35¢ per share, for shareholders of record as of August 15, 2019,May 18, 2020, payable on August 30, 2019.June 1, 2020.
The Company has evaluated events and transactions occurring subsequent to June 29, 2019March 28, 2020 and determined that there were no other unreported events or transactions that would have a material impact on the Company’s results of operations or financial position.
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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 sales are from firearms. Export sales typically represent approximately 6%no more than 5% 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 and metal injection molding (“MIM”) parts for internal use in its firearms and for sale to unaffiliated, third-party customers. Approximately 1% of sales are from the castings segment.
Orders for 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.
Impact of Covid-19
The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020. The COVID-19 pandemic has created significant uncertainty and adversely impacted many industries throughout the global economy. In the first quarter of 2020, the Company did not experience a significant adverse impact on its business resulting from government restrictions on the movement of people, goods, and services. The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, the Company cannot predict the extent to which its business, results of operations, financial condition, or cash flows will ultimately be impacted. Management continues to monitor and assess the situation and to prepare for implications to the Company’s business, supply chain and customer demand.
From a liquidity perspective, the Company believes it is currently well positioned to manage through this global crisis. At the end of the first quarter of 2020, the Company was debt-free, and had cash and short-term investments totaling $187.6 million and an unused $40.0 million revolving credit facility.
In the first quarter of 2020, the Company did not experience a significant adverse impact on its business as a result of COVID-19. While the adverse effects of COVID-19 on the Company increased in April 2020, the Company has taken many proactive steps to maintain the health and safety of its employees and to mitigate the impact on its business. These actions include:
•
Providing all hourly employees with an additional two weeks of paid time off,
•
Encouraging employees to work remotely, wherever possible, and implementing social distancing throughout each manufacturing facility, including in every manufacturing cell,
•
Communicating with and assisting employees with potential health issues,
•
Restricting visitor access to avoid introducing new people to the factory environment,
•
Implementing additional cleaning, sanitizing and other health and safety processes to maintain a clean and safe workplace, and
•
Manufacturing and donating personal protective equipment to hospitals, health care facilities, and police and fire departments in its local communities.
The costs of these actions are expected to total approximately $2.5 million in 2020, of which approximately $0.4 million was recognized during the first quarter of 2020.
The Company has been able to keep all of its facilities safe and open with only limited restrictions on production.
Since the latter stages of the first quarter of 2020, there has been a significant increase in consumer demand for firearms, as evidenced by the increase in adjusted National Instant Criminal Background Check System (“NICS”) checks. This increased demand may be attributable to COVID-19. The sustainability of this increased consumer demand, and the ultimate impact of COVID-19 on consumer demand, cannot be predicted at this time.
The ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. See Part II, Item 1A. Risk Factors, for an additional discussion of risk related to COVID-19.
Results of Operations
Demand
The estimated unit sell-through of the Company’s products from the independent distributors to retailers decreased 26%increased 37% in the first halfquarter of 20192020 compared to the prior year period. For the same period, the National Instant Criminal Background Check System (“NICS”)NICS background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) decreased 5%increased 42%. The greater reductionThese substantial increases are attributable to increased consumer demand for firearms in the sell-throughfirst quarter of 2020, especially the Company’s products relative to adjusted NICS background checks may be attributable to the following:
•
More aggressive promotions, discounts, rebates and the extension of payment terms offered by our competitors,
•
Relatively fewer new product shipments compared to the first half of 2018, which benefitted from the launch of four major products in December of 2017,
•
The loss of a formerly significant distributor that ultimately filed for bankruptcy protection in June 2019,
•
Increased sales of used firearms at retail, which are captured by adjusted NICS checks, and
•
Decreased retailer inventories as the anticipation of further discounting led to cautious buying behavior by retailers.latter stages.
Sales of new products, including the Wrangler, which was introducedthe Ruger-57, the LCP II in April 2019,.22 LR, the Pistol Caliber Carbine, the EC9s pistol, the Security-9 pistol,PC Charger, and the Precision Rimfire Rifle,AR-556 pistol, represented $43$23.0 million or 22%20% of firearm sales in the first halfquarter of 2019.2020. New product sales include only major new products that were introduced in the past two years.
Estimated sell-through from the independent distributors to retailers and total adjusted NICS background checks for the trailing sixfive quarters follow:
2019 | 2018 | |||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |
Estimated Units Sold from Distributors to Retailers(1) | 316,300 | 347,100 | 400,000 | 364,000 | 381,100 | 509,500 |
Total adjusted NICS Background Checks (thousands)(2) | 2,828 | 3,414 | 3,813 | 2,708 | 2,863 | 3,731 |
2020 | 2019 | ||||
Q1 | Q4 | Q3 | Q2 | Q1 | |
Estimated Units Sold from Distributors to Retailers (1) | 476,800 | 397,000 | 295,100 | 316,300 | 347,100 |
Total adjusted NICS Background Checks (thousands) (2) | 4,841 | 4,001 | 2,956 | 2,828 | 3,414 |
The adjusted NICS data presented above was derived by the 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. The adjusted NICS checks represent less than half of the total NICS checks. Adjusted NICS data can be impacted by changes in state laws and regulations and any directives and interpretations issued by governmental agencies. Orders Received and Ending Backlog The Company uses the estimated unit sell-through of The units ordered, value of orders received, average sales price of units ordered, and ending backlog for the trailing (All amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns.)
Production The Company reviews the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, semi-monthly to plan production levels.
Summary Unit Data Firearms unit data for the trailing
Inventories
Inventory data for the trailing
|