arnie said:
Do any of you who blame lawyers have any data to back it up?
Don't you think that limited retail distribution, limited quantities sold (compared to typical consumer goods) and expensive machining might be more likely causes?
Arnie, it was intended as sarcastic humor, but with the suspicion that product liability costs (not all for the lawyers, but almost all
caused by the lawers) was a significant chunk of total costs. And I was right.
First, are you a lawyer? I think we'd like to know that in your next response.
Secondly, if you are not a product liability or class-action tort lawyer, you're probably a great guy, I'm not blaming you personally. Some of my best friends are lawyers. 90% of lawyers give the other 10% a bad name
! So please don't take this personally. Unless you are a product liability or class action lawyer, then feel free to take it as personally as you like.
Third, thanks for the link to the financial statements,
Bluetooth.
Now, to set the stage. The recent law passed to protect manufacturers from frivolous lawsuit abuse (I forget the name at the moment -- protection of lawful commerce or something like it, I believe) was passed for a
very good reason. A published tactic of the anti-gun left was to try to bankrupt gun manufacturers through specious tort litigation, and it was having a meaningful effect.
I won't go into the details here, but for a period of a decade or two there were no light airplanes manufactured in the United States for precisely this reason. I know at the time Piper aircraft went bankrupt, they estimated that roughly 1/3 of the total cost of producing their light aircraft was accounted for by product liability costs.
Great result for "the little guy", eh? Drive a viable industry completely out of the country so the little guy had to buy his light aircraft from foreign manufacturers at inflated prices. It's only after some protective legislation aimed at that industry that some US makers re-entered that market. But that's for some other forum. So, on to guns, using the Ruger 2006 annual report as research fodder. I'll leave it to others to generalize to the firearm industry as a whole.
For the non-business types here, income can come from many different sources, including sales of assets, settlements of legitimate lawsuits (yes there are some legitimate lawsuits
), and other sources. To avoid the distorting effects these non-recurring and/or non-operating-business related things can have on the way one views the health of the company, they are normally reported as separate line items on the income statement. That way, a reader of the income statement will know the entire amount of income a business receives, but still be able to see trends in the profitability of the main line of business. According to Ruger's Income Statement, they had some income from asset sales in 2004 and 2006, and, in fact, operating income (product sales minus expenses, but before taxes) was negative in 2004. Reported income for that year was solely due to asset sales.
Product liability costs are included in the
General and administrative line of Expenses. These include not just lawyers, but other court costs, the dollar amounts of settlements, product liability insurance premiums, etcetera. While some of this is normal and necessary in the absence of scum-sucking anti-gun tort lawyers, I think I won't get much of an argument when I posit that the majority of the product liability costs come from them and their activities. Mounting a defense by attacking this assumption on my part may work elsewhere, but be prepared to be laughed off of this forum if you go there.
So, where does that leave Ruger? I'll leave it to you folks to read the text of the report dealing with their litigation woes, but it's worth a few minutes. Here are the numbers. Because there is a lot of year-to-year variance, I've summed the figures for 2004, 2005 and 2006 and given the three-year total results.
I also want to focus on the forest, not the trees, so to avoid becoming too pedantic and complex (boring for the non-accounting types) I've left out a lot of detail from the income statement. Because a business lives on income, not sales, I'm going to focus on the income figures.
Total product liability expenses are included when calculating operating income, so to put these costs in perspective, I'm going to add them back to operating income and show you what income would have been without them, and to show the magnitude of these product liability costs on profitability.
Figures are three-year totals
Operating Income $ 8,098,000
Product liability costs (PLC) $ 8,217,000
Operating income before PLC $ 16,315,000 (added PLC back to operating income)
PLC as % of operating income before PLC 50.4%
Clearly, specious litigation is a serious drag on profitability. Just as clearly, the tactic of trying to bankrupt firearms makers through specious litigation might very well have succeeded in the absense of legislative protection. The Although there are many very large players, there are many, many smaller manufacturers in the firearms business. It is an incredibly competitive marketplace.
Had Congress not intervened the anti-gun cabal may have been successful in driving many manufacturers out of business. I think we'd agree that Ruger is a medium to large player. Their three-year total pre-tax income was 2.4% of sales. Their after-tax income was 1.5% of sales. There net income in 2006 of $ 4,823,000 divided by stockholder's equity of $ 87,326 results in a 5.5% net return on equity. Not a terrific business by any means. Tort lawyers could have easily killed it.
I rest my case.
John
