ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
|
October 1, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
(Note)
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
101,363
|
|
|
$
|
69,225
|
|
Trade receivables, net
|
|
|
70,323
|
|
|
|
71,721
|
|
|
|
|
|
|
|
|
|
|
Gross inventories
|
|
|
89,858
|
|
|
|
81,278
|
|
Less LIFO reserve
|
|
|
(43,836
|
)
|
|
|
(42,061
|
)
|
Less excess and obsolescence reserve
|
|
|
(2,448
|
)
|
|
|
(2,118
|
)
|
Net inventories
|
|
|
43,574
|
|
|
|
37,099
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
9,085
|
|
|
|
8,219
|
|
Prepaid expenses and other current assets
|
|
|
6,773
|
|
|
|
3,008
|
|
Total Current Assets
|
|
|
231,118
|
|
|
|
189,272
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
320,465
|
|
|
|
308,597
|
|
Less allowances for depreciation
|
|
|
(218,401
|
)
|
|
|
(204,777
|
)
|
Net property, plant and equipment
|
|
|
102,064
|
|
|
|
103,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
27,670
|
|
|
|
22,791
|
|
Total Assets
|
|
$
|
360,852
|
|
|
$
|
315,883
|
|
The consolidated balance sheet at December
31, 2015 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.
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except per share
data
)
|
|
October 1, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
(Note)
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Trade accounts payable and accrued expenses
|
|
$
|
53,432
|
|
|
$
|
42,991
|
|
Product liability
|
|
|
1,455
|
|
|
|
642
|
|
Employee compensation and benefits
|
|
|
25,897
|
|
|
|
28,298
|
|
Workers’ compensation
|
|
|
4,421
|
|
|
|
5,100
|
|
Income taxes payable
|
|
|
—
|
|
|
|
4,962
|
|
Total Current Liabilities
|
|
|
85,205
|
|
|
|
81,993
|
|
|
|
|
|
|
|
|
|
|
Product liability
|
|
|
95
|
|
|
|
102
|
|
Deferred income taxes
|
|
|
9,436
|
|
|
|
6,050
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities – Note 10
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
2016 – 24,034,201 issued,
18,971,854 outstanding
2015 – 23,775,766 issued,
18,713,419 outstanding
|
|
|
24,034
|
|
|
|
23,776
|
|
Additional paid-in capital
|
|
|
26,371
|
|
|
|
29,591
|
|
Retained earnings
|
|
|
280,438
|
|
|
|
239,098
|
|
Less: Treasury stock – at cost
2016 – 5,062,347 shares
2015 – 5,062,347 shares
|
|
|
(64,727
|
)
|
|
|
(64,727
|
)
|
Total Stockholders’ Equity
|
|
|
266,116
|
|
|
|
227,738
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
360,852
|
|
|
$
|
315,883
|
|
The consolidated balance sheet at December
31, 2015 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.
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(Dollars in thousands, except per share data)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2016
|
|
|
September 26,
2015
|
|
|
October 1,
2016
|
|
|
September 26,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net firearms sales
|
|
$
|
160,058
|
|
|
$
|
119,281
|
|
|
$
|
497,889
|
|
|
$
|
394,084
|
|
Net castings sales
|
|
|
1,369
|
|
|
|
1,590
|
|
|
|
4,591
|
|
|
|
4,614
|
|
Total net sales
|
|
|
161,427
|
|
|
|
120,871
|
|
|
|
502,480
|
|
|
|
398,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
111,176
|
|
|
|
86,860
|
|
|
|
336,422
|
|
|
|
274,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50,251
|
|
|
|
34,011
|
|
|
|
166,058
|
|
|
|
123,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
13,378
|
|
|
|
9,170
|
|
|
|
41,261
|
|
|
|
34,255
|
|
General and administrative
|
|
|
6,805
|
|
|
|
6,880
|
|
|
|
22,045
|
|
|
|
21,214
|
|
Total operating expenses
|
|
|
20,183
|
|
|
|
16,050
|
|
|
|
63,306
|
|
|
|
55,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
30,068
|
|
|
|
17,961
|
|
|
|
102,752
|
|
|
|
68,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(32
|
)
|
|
|
(36
|
)
|
|
|
(102
|
)
|
|
|
(113
|
)
|
Other income, net
|
|
|
418
|
|
|
|
247
|
|
|
|
917
|
|
|
|
1,333
|
|
Total other income, net
|
|
|
386
|
|
|
|
211
|
|
|
|
815
|
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
30,454
|
|
|
|
18,172
|
|
|
|
103,567
|
|
|
|
69,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
10,604
|
|
|
|
6,209
|
|
|
|
36,925
|
|
|
|
24,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and comprehensive income
|
|
$
|
19,850
|
|
|
$
|
11,963
|
|
|
$
|
66,642
|
|
|
$
|
45,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.05
|
|
|
$
|
0.64
|
|
|
$
|
3.51
|
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.03
|
|
|
$
|
0.62
|
|
|
$
|
3.48
|
|
|
$
|
2.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.49
|
|
|
$
|
0.36
|
|
|
$
|
1.32
|
|
|
$
|
0.85
|
|
See notes to condensed consolidated financial statements.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
23,776
|
|
|
$
|
29,591
|
|
|
$
|
239,098
|
|
|
$
|
(64,727
|
)
|
|
$
|
227,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income and comprehensive income
|
|
|
|
|
|
|
|
|
|
|
66,642
|
|
|
|
|
|
|
|
66,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(25,036
|
)
|
|
|
|
|
|
|
(25,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid dividends accrued
|
|
|
|
|
|
|
|
|
|
|
(266
|
)
|
|
|
|
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of stock-based compensation expense
|
|
|
|
|
|
|
2,213
|
|
|
|
|
|
|
|
|
|
|
|
2,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of RSU’s
|
|
|
|
|
|
|
(14,001
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit realized from vesting of RSU’s
|
|
|
|
|
|
|
8,826
|
|
|
|
|
|
|
|
|
|
|
|
8,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued-compensation plans
|
|
|
258
|
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Balance at October 1, 2016
|
|
$
|
24,034
|
|
|
$
|
26,371
|
|
|
$
|
280,438
|
|
|
$
|
(64,727
|
)
|
|
$
|
266,116
|
|
See notes to condensed consolidated financial statements.
STURM, RUGER & COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(
Dollars in thousands)
|
|
Nine Months Ended
|
|
|
|
October 1,
2016
|
|
|
September 26,
2015
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
66,642
|
|
|
$
|
45,026
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25,257
|
|
|
|
26,693
|
|
Slow moving inventory valuation adjustment
|
|
|
630
|
|
|
|
(1,126
|
)
|
Stock-based compensation
|
|
|
2,213
|
|
|
|
3,442
|
|
Loss (gain) on sale of assets
|
|
|
50
|
|
|
|
(157
|
)
|
Deferred income taxes
|
|
|
2,520
|
|
|
|
(78
|
)
|
Impairment of assets
|
|
|
6
|
|
|
|
32
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
1,398
|
|
|
|
(3,247
|
)
|
Inventories
|
|
|
(7,105
|
)
|
|
|
5,054
|
|
Trade accounts payable and accrued expenses
|
|
|
9,762
|
|
|
|
956
|
|
Employee compensation and benefits
|
|
|
(2,667
|
)
|
|
|
8,602
|
|
Product liability
|
|
|
806
|
|
|
|
(101
|
)
|
Prepaid expenses, other assets and other liabilities
|
|
|
(5,340
|
)
|
|
|
5,652
|
|
Income
taxes payable and prepaid income taxes
|
|
|
(8,781
|
)
|
|
|
4,201
|
|
Cash provided by operating activities
|
|
|
85,391
|
|
|
|
94,949
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Property, plant and equipment additions
|
|
|
(23,049
|
)
|
|
|
(24,488
|
)
|
Proceeds from sale of assets
|
|
|
7
|
|
|
|
222
|
|
Cash used for investing activities
|
|
|
(23,042
|
)
|
|
|
(24,266
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of stock options and vesting of RSU’s
|
|
|
8,826
|
|
|
|
305
|
|
Remittance of taxes withheld from employees related to
share-based compensation
|
|
|
(14,001
|
)
|
|
|
(1,000
|
)
|
Proceeds from exercise of stock options
|
|
|
—
|
|
|
|
97
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
(2,841
|
)
|
Dividends paid
|
|
|
(25,036
|
)
|
|
|
(15,893
|
)
|
Cash used for financing activities
|
|
|
(30,211
|
)
|
|
|
(19,332
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
32,138
|
|
|
|
51,351
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
69,225
|
|
|
|
8,901
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
101,363
|
|
|
$
|
60,252
|
|
See notes to condensed consolidated financial statements.
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 nine months
ended October 1, 2016 may not be indicative of the results to be expected for the full year ending December 31, 2016. 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, 2015.
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 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 and metal injection molding (“MIM”) parts for internal use in its firearms
and for sale to unaffiliated, third-party customers. Less than 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.
Fair Value of Financial Instruments:
The carrying amounts of
financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due
to the short-term maturity of these items.
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 March 30, 2016, Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation -
Stock Compensation (Topic 718). The most significant change in the new compensation guidance is that all excess tax benefits and
tax deficiencies (including tax benefits of dividends) on share-based compensation awards should be recognized in the Statement
of Income as income tax expense. Previously such benefits or deficiencies were recognized in the Balance Sheet as adjustments to
additional paid-in capital. The new guidance is effective in fiscal years beginning after December 15, 2016 and interim periods
thereafter. Early application is permitted for all entities. The Company is currently evaluating the effect that the standard will
have on the consolidated financial statements and whether to adopt the guidance early.
On February 25, 2016, the
FASB issued ASU 2016-02, Leases (Topic 842), its long-awaited 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 will result 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 is effective in fiscal years
beginning after December 15, 2018 and interim periods thereafter. Early application is permitted for all entities. The Company
is currently evaluating the effect that the standard will have on the consolidated financial statements.
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:
|
|
October 1, 2016
|
|
|
December 31, 2015
|
|
Inventory at FIFO
|
|
|
|
|
|
|
|
|
Finished products
|
|
$
|
19,123
|
|
|
$
|
16,637
|
|
Materials and work in process
|
|
|
70,735
|
|
|
|
64,641
|
|
Gross inventories
|
|
|
89,858
|
|
|
|
81,278
|
|
Less: LIFO reserve
|
|
|
(43,836
|
)
|
|
|
(42,061
|
)
|
Less: excess and obsolescence reserve
|
|
|
(2,448
|
)
|
|
|
(2,118
|
)
|
Net inventories
|
|
$
|
43,574
|
|
|
$
|
37,099
|
|
NOTE 4 - LINE OF CREDIT
The Company has a $40 million
revolving line of credit with a bank. This facility is renewable annually and terminates on June 15, 2017. Borrowings under this
facility bear interest at LIBOR (1.556% at October 1, 2016) plus 200 basis points. The Company is charged three-eighths of a percent
(0.375%) per year on the unused portion. At October 1, 2016 and December 31, 2015, the Company was in compliance with the terms
and covenants of the credit facility, which remains unused.
NOTE 5 - 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 $0.8 million
and $2.5 million for the three and nine months ended October 1, 2016, respectively, and $0.7 million and $2.5 million for the three
and nine months ended September 26, 2015, respectively. The Company plans to contribute approximately $0.8 million to the plan
in matching employee contributions during the remainder of 2016.
In addition, the Company
provided supplemental discretionary contributions to the 401(k) plan totaling $1.4 million and $4.5 million for the three and nine
months ended October 1, 2016, respectively, and $1.3 million and $3.7 million for the three and nine months ended September 26,
2015, respectively. The Company plans to contribute approximately $1.4 million in supplemental contributions to the plan during
the remainder of 2016.
NOTE 6 - INCOME TAXES
The Company's 2016 and
2015 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 Company’s effective income tax rate in the three and nine
months ended October 1, 2016 was 34.8% and 35.7%, respectively. The Company’s effective income tax rate in the three and
nine months ended September 26, 2015 was 34.2% and 35.4%, respectively.
Income tax payments for
the three and nine months ended October 1, 2016 totaled $13.5 million and $34.4 million, respectively. Income tax payments for
the three and nine months ended September 26, 2015 totaled $8.3 million $20.6 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 2013.
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
|
|
|
|
October 1,
2016
|
|
|
September 26,
2015
|
|
|
October 1,
2016
|
|
|
September 26,
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,850
|
|
|
$
|
11,963
|
|
|
$
|
66,642
|
|
|
$
|
45,026
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – Basic
|
|
|
18,971,854
|
|
|
|
18,701,530
|
|
|
|
18,961,146
|
|
|
|
18,692,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans
|
|
|
232,321
|
|
|
|
673,013
|
|
|
|
204,731
|
|
|
|
650,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – Diluted
|
|
|
19,204,175
|
|
|
|
19,374,543
|
|
|
|
19,165,877
|
|
|
|
19,343,665
|
|
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 - 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 471,000 shares remain available for future grants as of October 1, 2016.
Compensation costs related
to all share-based payments recognized in the statements of operations aggregated $0.8 million and $2.2 million for the three and
nine months ended October 1, 2016, respectively, and $1.1 million and $3.4 million for the three and nine months ended September
26, 2015, respectively.
Stock Options
A summary of changes in
options outstanding under the 2007 SIP is summarized below:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Grant Date
Fair Value
|
|
Outstanding at December 31, 2015
|
|
|
11,838
|
|
|
$
|
8.95
|
|
|
$
|
6.69
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at October 1, 2016
|
|
|
11,838
|
|
|
$
|
8.95
|
|
|
$
|
6.69
|
|
The aggregate intrinsic
value (mean market price at October 1, 2016 less the weighted average exercise price) of options outstanding under the 2007 SIP
was approximately $0.6 million.
Restricted Stock Units
Beginning in 2009, the
Company began granting restricted stock units to senior employees in lieu of incentive stock options. The vesting of these awards
is 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 72,148 restricted
stock units issued during the nine months ended October 1, 2016. Total compensation costs related to these restricted stock units
are $4.0 million. These costs are being recognized ratably over vesting periods ranging from three to five years. Total compensation
cost related to restricted stock units was $0.8 million and $2.2 million for the three and nine months ended October 1, 2016, respectively,
and $1.1 million and $3.4 million for the three and nine months ended September 26, 2015, respectively.
NOTE 9 - OPERATING SEGMENT INFORMATION
The Company has two 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:
(in thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2016
|
|
|
September 26,
2015
|
|
|
October 1,
2016
|
|
|
September 26,
2015
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms
|
|
$
|
160,058
|
|
|
$
|
119,281
|
|
|
$
|
497,889
|
|
|
$
|
394,084
|
|
Castings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
|
1,369
|
|
|
|
1,590
|
|
|
|
4,591
|
|
|
|
4,614
|
|
Intersegment
|
|
|
9,114
|
|
|
|
7,635
|
|
|
|
27,564
|
|
|
|
23,926
|
|
|
|
|
10,483
|
|
|
|
9,225
|
|
|
|
32,155
|
|
|
|
28,540
|
|
Eliminations
|
|
|
(9,114
|
)
|
|
|
(7,635
|
)
|
|
|
(27,564
|
)
|
|
|
(23,926
|
)
|
|
|
$
|
161,427
|
|
|
$
|
120,871
|
|
|
$
|
502,480
|
|
|
$
|
398,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms
|
|
$
|
29,785
|
|
|
$
|
19,719
|
|
|
$
|
103,834
|
|
|
$
|
71,073
|
|
Castings
|
|
|
144
|
|
|
|
(1,897
|
)
|
|
|
(949
|
)
|
|
|
(2,906
|
)
|
Corporate
|
|
|
525
|
|
|
|
350
|
|
|
|
682
|
|
|
|
1,501
|
|
|
|
$
|
30,454
|
|
|
$
|
18,172
|
|
|
$
|
103,567
|
|
|
$
|
69,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
|
December 31,
2015
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firearms
|
|
|
|
|
|
|
|
|
|
$
|
233,686
|
|
|
$
|
221,670
|
|
Castings
|
|
|
|
|
|
|
|
|
|
|
15,259
|
|
|
|
15,289
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
111,907
|
|
|
|
78,924
|
|
|
|
|
|
|
|
|
|
|
|
$
|
360,852
|
|
|
$
|
315,883
|
|
NOTE 10 - CONTINGENT LIABILITIES
As of October 1, 2016,
the Company was a defendant in four (4) lawsuits and is aware of certain other such claims. The lawsuits fall into three categories:
traditional product liability litigation, patent litigation and municipal litigation, discussed in turn below.
Traditional Product Liability Litigation
Two of the four lawsuits
mentioned above involve claims for damages related to allegedly defective products due to their design and/or manufacture. The
lawsuits stem from specific incidents 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 the allegations in these cases are unfounded, that the incidents are unrelated to the design or manufacture of the firearms,
and that there should be no recovery against the Company.
Patent Litigation
Davies Innovations,
Inc. v. Sturm, Ruger & Company, Inc.
is a patent litigation suit originally filed in the United States District Court
for the Southern District of Texas, Galveston Division. The case subsequently was transferred to the United States District Court
for the Northern District of New Hampshire. The suit is based upon alleged patent infringement as the plaintiff claims that certain
features of the Ruger SR-556 and SR-762 modern sporting rifles infringe its patent. The complaint seeks a judgment of infringement
and unspecified monetary damages including costs, fees and treble damages.
The Company management
believes the allegations in this case are unfounded, that there is no infringement of plaintiff’s patent, that plaintiff’s
patent is invalid, and that there should be no recovery against the Company. The Company has filed a Motion for Summary Judgment
in the action,which is scheduled to be heard on December 6, 2016.
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 seventeen 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 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.
Last year, Indiana passed
a new law, Indiana Code § 34-12-3-1, (the “Indiana Immunity Statute”), which applies to the City's case. The defendants
have filed a joint motion for judgment on the pleadings, asserting immunity under the Indiana Immunity Statute and asking the court
to re-visit the Court of Appeals' earlier decision holding the Protection of Lawful Commerce in Arms Act (“PLCAA”)
inapplicable to the City's claims.
The United States and the
Indiana Attorney General filed motions and briefs in intervention in defense of the constitutionality of the PLCAA and the Indiana
Immunity Statute, respectively. A hearing on the motions to intervene was set for October 12, 2016.
The court subsequently
granted a Joint Motion to Stay Resolution of Manufacturers’ Motion for Judgment on the Pleadings for six months or until
the
KS&E Sports v. Runnels
case is decided by the Indiana Supreme Court, whichever is earlier. The court also
vacated the October 12
th
hearing on
motions to intervene by the United States and the Indiana Attorney General, given
the City’s consent to such motions.
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 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.
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 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 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 million and $0.0 million at December 31, 2015 and 2014, 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 11 - SUBSEQUENT EVENTS
On October 28, 2016, the
Company’s Board of Directors authorized a dividend of 41¢ per share, for shareholders of record as of November 18, 2016,
payable on November 25, 2016.
The Company has evaluated
events and transactions occurring subsequent to October 1, 2016 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.
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 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 and metal injection molding (“MIM”) parts for internal use in its firearms
and for sale to unaffiliated, third-party customers. Less than 1% of third-party 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.
Results of Operations
Demand
The estimated unit sell-through
of the Company’s products from the independent distributors to retailers increased 19% in the first nine months of 2016 from
the comparable prior year period. For the same period, the National Instant Criminal Background Check System (“NICS”)
background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) increased 16%. The increase in
estimated sell-through of the Company’s products from the independent distributors to retailers is attributable to:
|
·
|
stronger-than-normal seasonal industry demand, likely bolstered by the political campaigns for
the elections in November,
|
|
·
|
strong demand for certain new products,
|
|
·
|
greater availability of rimfire ammunition which spurred demand for our 10/22 rifle and other rimfire
firearms late in the third quarter, and
|
|
·
|
increased production of several products in strong demand
.
|
The Company launched new
Mark IV pistols, the LCP II pistol, and compact models of the American pistol in September.
Sales of new products,
including those launched in the third quarter as well as the Precision Rifle, the AR-556 modern sporting rifle, and the LC9s pistol,
represented $160.8 million or 32% of firearm sales in the first nine months of 2016. The new product sales percentage is expected
to decrease next quarter as sales of the AR-556 and the LC9s will no longer be included among the new products. 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 seven quarters follow:
|
|
2016
|
|
|
2015
|
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Units Sold from Distributors to Retailers (1)
|
|
|
453,400
|
|
|
|
453,700
|
|
|
|
571,000
|
|
|
|
552,700
|
|
|
|
374,900
|
|
|
|
379,400
|
|
|
|
486,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjusted NICS Background Checks (thousands) (2)
|
|
|
3,519
|
|
|
|
3,199
|
|
|
|
4,148
|
|
|
|
4,880
|
|
|
|
3,050
|
|
|
|
2,793
|
|
|
|
3,521
|
|
|
(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)
|
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 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.
Orders Received and Ending Backlog
The Company uses the estimated
unit sell-through of our products from the independent distributors to retailers, along with inventory levels at the independent
distributors and at the Company, as the key metrics for planning production levels. The Company generally does not use the orders
received or ending backlog for planning production levels.
The average sales price
of units in the third quarter of 2016 was reduced due to strong orders for the relatively lower priced LCP II pistol, and the cancellation
of orders for the original version of relatively higher priced Precision modern sporting rifle, which was discontinued due to the
popularity of the new Enhanced Precision rifle.
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.)
|
|
2016
|
|
|
2015
|
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Ordered
|
|
|
445,700
|
|
|
|
399,400
|
|
|
|
969,400
|
|
|
|
696,400
|
|
|
|
207,500
|
|
|
|
262,400
|
|
|
|
350,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders Received
|
|
$
|
116.5
|
|
|
$
|
145.7
|
|
|
$
|
296.1
|
|
|
$
|
203.4
|
|
|
$
|
73.1
|
|
|
$
|
71.9
|
|
|
$
|
114.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Sales Price of Units Ordered
|
|
$
|
261
|
|
|
$
|
365
|
|
|
$
|
305
|
|
|
$
|
292
|
|
|
$
|
352
|
|
|
$
|
274
|
|
|
$
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Backlog
|
|
$
|
219.1
|
|
|
$
|
257.6
|
|
|
$
|
276.1
|
|
|
$
|
137.8
|
|
|
$
|
80.5
|
|
|
$
|
123.8
|
|
|
$
|
185.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Unit Sales Price of Ending Backlog
|
|
$
|
306
|
|
|
$
|
331
|
|
|
$
|
313
|
|
|
$
|
320
|
|
|
$
|
379
|
|
|
$
|
310
|
|
|
$
|
319
|
|
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. These reviews resulted in increased total unit production of 20% for
both the three and nine months ended October 1, 2016 from the comparable prior year periods.
Summary Unit Data
Firearms unit data for
the trailing seven quarters are as follows (dollar amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for
long guns):
|
|
2016
|
|
|
2015
|
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Ordered
|
|
|
445,700
|
|
|
|
399,400
|
|
|
|
969,400
|
|
|
|
696,400
|
|
|
|
207,500
|
|
|
|
262,400
|
|
|
|
350,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Produced
|
|
|
527,600
|
|
|
|
529,600
|
|
|
|
502,100
|
|
|
|
425,400
|
|
|
|
439,900
|
|
|
|
487,000
|
|
|
|
369,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Shipped
|
|
|
507,500
|
|
|
|
504,000
|
|
|
|
516,700
|
|
|
|
478,400
|
|
|
|
394,700
|
|
|
|
442,900
|
|
|
|
422,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Sales Price of Units Shipped
|
|
$
|
315
|
|
|
$
|
330
|
|
|
$
|
332
|
|
|
$
|
315
|
|
|
$
|
302
|
|
|
$
|
314
|
|
|
$
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units on Backlog
|
|
|
716,600
|
|
|
|
778,400
|
|
|
|
883,000
|
|
|
|
430,300
|
|
|
|
212,300
|
|
|
|
399,500
|
|
|
|
580,000
|
|
Inventories
During the third quarter
of 2016, the Company’s finished goods inventory increased by 20,000 units and distributor inventories of the Company’s
products increased by 54,100 units. Increases in inventory, which often occur in the second and third quarters, can be beneficial
as they allow the Company to:
|
·
|
Level load production, which results in more efficient manufacturing,
|
|
·
|
Reduce capacity needed to meet the demand during the strongest seasonal peaks, and
|
|
·
|
Capitalize on unanticipated peaks in demand.
|
Inventory data for the trailing seven quarters
follows:
|
|
2016
|
|
|
2015
|
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units – Company Inventory
|
|
|
118,500
|
|
|
|
98,500
|
|
|
|
72,800
|
|
|
|
87,400
|
|
|
|
140,400
|
|
|
|
95,200
|
|
|
|
51,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units – Distributor Inventory (1)
|
|
|
321,100
|
|
|
|
267,000
|
|
|
|
216,700
|
|
|
|
271,000
|
|
|
|
345,300
|
|
|
|
325,500
|
|
|
|
262,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory (2)
|
|
|
439,600
|
|
|
|
365,500
|
|
|
|
289,500
|
|
|
|
358,400
|
|
|
|
485,700
|
|
|
|
420,700
|
|
|
|
313,100
|
|
|
(1)
|
Distributor ending inventory is 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.
|
|
(2)
|
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 $161.4 million for the three months ended October 1, 2016, an increase of 33.6% from $120.9 million in the comparable prior
year period.
For the nine months ended
October 1, 2016, consolidated net sales were $502.5 million, an increase of 26.0% from $398.7 million in the comparable prior year
period.
Firearms net sales were
$160.1 million for the three months ended October 1, 2016, an increase of 34.2% from $119.3 million in the comparable prior year
period.
For the nine months ended
October 1, 2016, firearms net sales were $497.9 million, an increase of 26.3% from $394.1 million in the comparable prior year
period.
Firearms unit shipments
increased 28.6% and 21.3% for the three and nine months ended October 1, 2016, respectively, from the comparable prior year periods.
Casting net sales were
$1.4 million for the three months ended October 1, 2016, a decrease of 13.9% from $1.6 million in the comparable prior year period.
For the nine months ended
October 1, 2016, castings net sales were $4.6 million, a decrease of 0.5% from $4.6 million in the comparable prior year period.
Cost of Products Sold and Gross Profit
Consolidated cost of products
sold was $111.2 million for the three months ended October 1, 2016, an increase of 28.0% from $86.9 million in the comparable prior
year period.
For the nine months ended
October 1, 2016, consolidated cost of products sold was $336.4 million, an increase of 22.4% from $274.8 million in the comparable
prior year period.
Gross margin was
31.1% and 33.0% for the three and nine months ended October 1, 2016, respectively, compared to 28.1% and 31.1% in the comparable
prior year periods as illustrated below (in thousands):
|
|
Three Months Ended
|
|
|
|
October 1, 2016
|
|
|
September 26, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
161,427
|
|
|
|
100.0
|
%
|
|
$
|
120,871
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory and product liability
|
|
|
109,302
|
|
|
|
67.7
|
%
|
|
|
84,377
|
|
|
|
69.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
576
|
|
|
|
0.4
|
%
|
|
|
694
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overhead rate adjustments to inventory
|
|
|
748
|
|
|
|
0.5
|
%
|
|
|
1,149
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor rate adjustments to inventory
|
|
|
(107
|
)
|
|
|
(0.1
|
)%
|
|
|
62
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product liability
|
|
|
657
|
|
|
|
0.4
|
%
|
|
|
578
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold
|
|
|
111,176
|
|
|
|
68.9
|
%
|
|
|
86,860
|
|
|
|
71.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
50,251
|
|
|
|
31.1
|
%
|
|
$
|
34,011
|
|
|
|
28.1
|
%
|
|
|
Nine Months Ended
|
|
|
|
October 1, 2016
|
|
|
September 26, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
502,480
|
|
|
|
100.0
|
%
|
|
$
|
398,698
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory and product liability
|
|
|
331,797
|
|
|
|
66.0
|
%
|
|
|
269,107
|
|
|
|
67.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
1,775
|
|
|
|
0.4
|
%
|
|
|
1,704
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overhead rate adjustments to inventory
|
|
|
1,239
|
|
|
|
0.3
|
%
|
|
|
2,952
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labor rate adjustments to inventory
|
|
|
116
|
|
|
|
—
|
|
|
|
346
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product liability
|
|
|
1,495
|
|
|
|
0.3
|
%
|
|
|
672
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products sold
|
|
|
336,422
|
|
|
|
67.0
|
%
|
|
|
274,781
|
|
|
|
68.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
166,058
|
|
|
|
33.0
|
%
|
|
$
|
123,917
|
|
|
|
31.1
|
%
|
Cost of products sold, before LIFO, overhead
and labor rate adjustments to inventory, and product liability
— During the three months ended October 1, 2016, cost
of products sold, before LIFO,
overhead and labor rate adjustments to inventory, and product liability decreased as a percentage
of sales by 2.1% compared with the comparable 2015 period primarily due to the increased sales volume and the leverage of fixed
overhead costs.
For the nine months ended October 1, 2016,
cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability decreased as a percentage
of sales by 1.5% compared with the comparable 2015 period due principally to the increased sales volume and the leverage of fixed
overhead costs.
LIFO
— For the three months ended
October 1, 2016, the Company recognized LIFO expense resulting in increased cost of products sold of $0.6 million. In the comparable
2015 period, the Company recognized LIFO expense resulting in increased cost of products sold of $0.7 million.
For the nine months ended October 1, 2016,
the Company recognized LIFO expense resulting in increased cost of products sold of $1.8 million. In the comparable 2015 period,
the Company recognized LIFO expense resulting in increased cost of products sold of $1.7 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 October 1, 2016, the Company became more efficient
in overhead spending and the overhead rates used to absorb overhead expenses into inventory decreased, resulting in decreases in
inventory values of $0.7 million and $1.2 million, respectively, and corresponding increases to cost of products sold.
During the three and nine months ended September
26, 2015, the Company became 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 $1.2 million and $3.0 million, respectively, and corresponding 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 months ended October 1, 2016, the Company became less efficient in direct
labor utilization and the labor rates used to absorb incurred labor expenses into inventory increased, resulting in an increase
in inventory value of $0.1 million. This increase in inventory carry values resulted in a decrease to cost of products sold.
During the nine months ended October 1, 2016,
the Company became more efficient in direct labor utilization and the labor rates used to absorb incurred labor expenses into inventory
decreased, resulting in a decrease in inventory value of $0.1 million. This decrease in inventory carrying values resulted in an
increase to cost of products sold.
During the three and nine months ended September
26, 2015, the Company became more efficient in direct labor utilization and the labor rates used to absorb incurred labor expenses
into inventory decreased, resulting in decreases in inventory value of $0.1 million and $0.3 million, respectively. These decreases
in inventory carrying values resulted in increases to cost of products sold.
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. During the three months ended October 1, 2016 product liability expense was $0.7 million. During the nine months ended
October 1, 2016 product liability expense was $1.5 million.
During the three and nine months ended September
26, 2015, product liability expense was $0.6 million and $0.7 million, respectively. See Note 10 to the notes to the condensed
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 and nine months ended October 1, 2016, gross profit was $50.3 million and $166.1 million,
respectively, an increase of $16.3 million and $42.2 million from $34.0 million and $123.9 million in the comparable prior year
periods.
Gross profit as a percentage of sales increased
to 31.1% and 33.0% in the three and nine months ended October 1, 2016, respectively, from 28.1% and 31.1% in the comparable prior
year periods.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses were $20.2 million for the three months ended October 1, 2016, an increase of $4.1 million or 25.8% from the comparable
prior year period. This increase is primarily attributable to the $5.0 million expense related to the “NRA-ILA $5 Million
Matching Challenge”, which began in July 2016, and the increased sales volume.
Selling, general and administrative
expenses were $63.3 million for the nine months ended October 1, 2016, an increase of $7.8 million or 14.1% from the comparable
prior year period. This increase is attributable to the $5.0 million expense related to the “NRA-ILA $5 Million Matching
Challenge”, which began in July 2016, and the $1.6 million in additional expense related to the “2 Million Gun Challenge
to Benefit the NRA”, which began in April 2015 and will run through October 2016, and the increased sales volume.
Other income, net
Other income, net was $0.4
million and $0.8 million in the three and nine months ended October 1, 2016, respectively, compared to $0.2 million and $1.2 million
in the three and nine months ended September 26, 2015, respectively.
Income Taxes and Net Income
The Company’s effective
income tax rate in the three and nine months ended October 1, 2016 was 34.8% and 35.7%, respectively. The Company’s effective
income tax rate in the three and nine months ended September 26, 2015 was 34.2% and 35.4%, respectively.
As a result of the foregoing
factors, consolidated net income was $19.9 million and $66.6 million for the three and nine months ended October 1, 2016, respectively.
This represents an increase of 65.9% and 48.0% from $12.0 million and $45.0 million in the comparable prior year periods.
Non-GAAP Financial Measure
In an effort to provide
investors with additional information regarding its financial results, the Company refers to various United States generally accepted
accounting principles (“GAAP”) financial measures and one non-GAAP financial measure, EBITDA, which management believes
provides useful information to investors. This non-GAAP financial measure may not be comparable to similarly titled financial measures
being disclosed by other companies. In addition, the Company believes that the non-
GAAP financial measure should be considered
in addition to, and not in lieu of, GAAP financial measures. The Company believes that EBITDA is useful to understanding its operating
results and the ongoing performance of its underlying business, as EBITDA provides information on the Company’s ability to
meet its capital expenditure and working capital requirements, and is also an indicator of profitability. The Company believes
that this reporting provides better transparency and comparability to its operating results. The Company uses both GAAP and non-GAAP
financial measures to evaluate the Company’s financial performance.
EBITDA is defined as earnings
before interest, taxes, and depreciation and amortization. The Company calculates its EBITDA by adding the amount of interest expense,
income tax expense, and depreciation and amortization expenses that have been deducted from net income back into net income, and
subtracting the amount of interest income that was included in net income from net income.
EBITDA was $39.1 million
for the three months ended October 1, 2016, an increase of 44.3% from $27.1 million in the comparable prior year period.
For the nine months ended
October 1, 2016, EBITDA was $128.9 million, an increase of 33.6% from $96.5 million in the comparable prior year period.
Non-GAAP
Reconciliation – EBITDA
EBITDA
(Unaudited, dollars in thousands)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2016
|
|
|
September 26, 2015
|
|
|
October 1,
2016
|
|
|
September 26, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,850
|
|
|
$
|
11,963
|
|
|
$
|
66,642
|
|
|
$
|
45,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
10,604
|
|
|
|
6,209
|
|
|
|
36,925
|
|
|
|
24,642
|
|
Depreciation and amortization expense
|
|
|
8,567
|
|
|
|
8,852
|
|
|
|
25,257
|
|
|
|
26,693
|
|
Interest expense, net
|
|
|
32
|
|
|
|
36
|
|
|
|
102
|
|
|
|
113
|
|
EBITDA
|
|
$
|
39,053
|
|
|
$
|
27,060
|
|
|
$
|
128,926
|
|
|
$
|
96,474
|
|
Financial Condition
Liquidity
At the end of the third
quarter of 2016, the Company’s cash totaled $101.4 million. Pre-LIFO working capital of $189.7 million, less the LIFO reserve
of $43.8 million, resulted in working capital of $145.9 million and a current ratio of 2.7 to 1.
Operations
Cash provided by operating
activities was $85.4 million for the nine months ended October 1, 2016, compared to $94.9 million for the comparable prior year
period. This decrease is primarily due to an increase in inventories in the current period compared to a decrease in inventories
in the prior year period and various other working capital fluctuations in both periods.
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 or on order
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 October 1, 2016 totaled $23.0 million, a decrease from $24.5 million in the comparable prior year period.
In 2016, the Company expects to spend approximately $30 million on capital expenditures to purchase tooling fixtures and equipment
for new product introductions 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.
Dividends of $25.0 million were paid during
the nine months ended October 1, 2016.
On October 28, 2016, the
Board of Directors authorized a dividend of 41¢ per share, for shareholders of record as of November 18, 2016, payable on
November 25, 2016. 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 has financed its dividends with
cash provided by operations and current cash.
During the nine months
ended September 26, 2015, the Company repurchased 82,100 shares of its common stock for $2.8 million in the open market. The average
price per share purchased was $34.57. These purchases were funded with cash on hand. As of October 1, 2016, $73.2 million remained
authorized for future stock repurchases. No shares were repurchased in the nine months ended October 1, 2016.
Based on its unencumbered
assets, the Company believes it has the ability to raise cash through the issuance of short-term or long-term debt. The Company’s
unsecured $40 million credit facility, which expires on June 15, 2017, remained unused at October 1, 2016 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 Bureau of Alcohol, Tobacco, Firearms & Explosives, 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 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 2015 Annual Report on Form
10-K filed on February 24, 2016, 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.