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EXPLANATORY NOTE:
In this Annual Report on Form 10-K, Sturm, Ruger & Company, Inc. (the “Company”) makes forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company, the impact of future firearms control and environmental legislation, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish re
vised 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.
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Company Overview
Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of the Company’s total sales for the year ended December 31, 2010 were from the firearms segment, and approximately 1% was from investment castings. Export sales represent less than 6% of firearms sales. The Company’s design and manufacturing operations are located in the United States and most product content is domestic.
The Company has been in business since 1949 and was incorporated in its present form under the laws of Delaware in 1969. The Company offers products in four industry product categories – rifles, shotguns, pistols, and revolvers. The Company’s firearms are sold through independent wholesale distributors, principally to the commercial sporting market.
The Company manufactures and sells investment castings made from steel alloys for both outside customers and internal use in the firearms segment. Investment castings sold to outside customers, either directly to or through manufacturers’ representatives, represented approximately 1% of the Company’s total sales for the year ended December 31, 2010.
For the years ended December 31, 2010, 2009, and 2008, net sales attributable to the Company’s firearms operations were approximately $251.7 million, $266.6 million and $174.4 million or approximately 99%, 98%, and 96%, respectively, of total net sales. The balance of the Company’s net sales for the aforementioned periods was attributable to its investment castings operations.
Firearms Products
The Company presently manufactures firearm products, under the “Ruger” name and trademark, in the following industry categories:
Rifles
Shotguns
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Single-shot
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Over and Under
Autoloading
Bolt-action
Modern sporting
Pistols
Revolvers
Rimfire autoloading
Single-action
Centerfire autoloading
Double-action
Most firearms are available in several models based upon caliber, finish, barrel length, and other features.
A rifle is a long gun with spiral grooves cut into the interior of the barrel to give the bullet a stabilizing spin after it leaves the barrel. Sales of rifles by the Company accounted for approximately $63.5 million, $102.2 million, and $69.4 million, of revenues for the years 2010, 2009 and 2008, respectively.
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A shotgun is a long gun with a smooth barrel interior which fires lead or steel pellets. Sales of shotguns by the Company accounted for approximately $1.4 million, $1.2 million, and $1.5 million of revenues for the years 2010, 2009 and 2008, respectively.
A pistol is a handgun in which the ammunition chamber is an integral part of the barrel and which typically is fed ammunition from a magazine contained in the grip. Sales of pistols by the Company accounted for approximately $108.1 million, $87.5 million, and $52.5 million of revenues for the years 2010, 2009 and 2008, respectively.
A revolver is a handgun that has a cylinder that holds the ammunition in a series of chambers which are successively aligned with the barrel of the gun during each firing cycle. There are two general types of revolvers, single-action and double-action. To fire a single-action revolver, the hammer is pulled back to cock the gun and align the cylinder before the trigger is pulled. To fire a double-action revolver, a single trigger pull advances the cylinder and cocks and releases the hammer. Sales of revolvers by the Company accounted for approximately $67.1 million, $58.3 million, and $41.0 million of revenues for the years 2010, 2009, and 2008, respectively.
Accessories
The Company also manufactures and sells accessories and replacement parts for its firearms. These sales accounted for approximately $11.5 million, $17.4 million, and $9.9 million of revenues for the years 2010, 2009 and 2008, respectively.
Investment Casting Products
Net sales attributable to the Company’s investment casting operations (excluding intercompany transactions) accounted for approximately $3.5 million, $4.4 million, and $7.1 million, or approximately 1%, 2%, and 4% of the Company’s total net sales for 2010, 2009, and 2008, respectively.
Manufacturing
The Company produces one model of pistol and all of its rifles, shotguns, and revolvers at the Newport, New Hampshire facility. All other pistols are produced at the Prescott, Arizona facility.
Many of the basic metal component parts of the firearms manufactured by the Company are produced by the Company’s castings facility through a process known as precision investment casting. See “Manufacturing-Investment Castings” for a description of the investment casting process. The Company initiated the use of this process in the production of component parts for firearms in 1953. The Company believes that the investment casting process provides greater design flexibility and results in component parts which are generally close to their ultimate shape and, therefore, require less machining than processes requiring machining a solid billet of metal to obtain a part. Through the use of investment castings, the Company endeavors to produce durable and less costly component parts for its firearms.
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All assembly, inspection, and testing of firearms manufactured by the Company are performed at the Company’s manufacturing facilities. Every firearm, including every chamber of every revolver manufactured by the Company, is test-fired prior to shipment.
To produce a product by the investment casting method, a wax model of the part is created and coated (“invested”) with several layers of ceramic material. The shell is then heated to melt the interior wax which is poured off, leaving a hollow mold. To cast the desired part, molten metal is poured into the mold and allowed to cool and solidify. The mold is then broken off to reveal a near net shape cast metal part.
Marketing and Distribution
The Company’s firearms are primarily marketed through a network of selected Federally licensed, independent wholesale distributors who purchase the products directly from the Company. They resell to Federally licensed retail firearms dealers who in turn resell to legally authorized end users. All retail purchasers are subject to a point-of-sale background check by law enforcement. These end users include sportsmen, hunters, people interested in self-defense, law enforcement and other governmental organizations, and gun collectors. Each distributor carries the entire line of firearms manufactured by the Company for the commercial market. Currently, 14 distributors service the domestic commercial market, with an additional 21 distributors servicing the domestic law enforcement market and two distributors servicing the Canadian mark
et.
In 2010, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-16%; Davidson’s-12%; Lipsey’s-11% and Sports South-11%. In 2009, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-16%; Davidson’s-11%; Lipsey’s-11%; Sports South-11% and Big Rock-10%. In 2008, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-17%; Lipsey’s-12%; Sports South-11% and Davidson’s-10%.
The Company employs eight employees and one independent contractor who service these distributors and call on retailers and law enforcement agencies. Because the ultimate demand for the Company’s firearms comes from end users rather than from the independent wholesale distributors, the Company believes that the loss of any distributor would not have a material, long-term adverse effect on the Company, but may have a material impact on the Company’s financial results for a particular period. The Company considers its relationships with its distributors to be satisfactory.
The Company also exports its firearms through a network of selected commercial distributors and directly to certain foreign customers, consisting primarily of law enforcement agencies and foreign governments. Foreign sales were less than 6% of the Company’s consolidated net sales for each of the past three fiscal years.
As of February 1, 2011, the order backlog was approximately $59 million. As of February 1, 2010, order backlog was approximately $70 million.
The Company does not consider its overall firearms business to be predictably seasonal; however, orders of many models of firearms from the distributors tend to be stronger in the first quarter of the year and
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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.