Firearms Industry Research

Advisory  Commi,ee  on  Socially  Responsible  Inves7ng   Firearms  Industry  Research   Firearms  Industry  Research   Firearms  Industry  Overview    US  Civilian  /  Retail  Market   Public   Foreign   1  company     Forjas  Taurus   • Private   Foreign   +100    serving   U.S.  market   (est.)   Small  Private   Domes6c     >5,000  small   licensed   manufacturers   Large  Private   Domes6c   1  company     Freedom  Group   Public   Domes6c   2  companies     Sturm,  Ruger  &  Co.   Smith  &  Wesson   Aerospace  and  defense  companies  (defense  contractors)  do  not  serve  the  civilian  firearms  market.   Ø i.e.  large  public  companies  like  Raytheon,  Lockheed  Mar7n,  Northrop  Grumman,  General  Dynamics,  etc.   2 Firearms  Industry  Research   Firearms  Industry:  Facts  &  Figures   • • • • • According  to  the  Federal  Bureau  of  Alcohol,  Tobacco,  Firearms  and  Explosives  (ATF).   Ø As  of  2011,  there  were  approximately  5,400  licensed  firearms  manufacturers,  950  licensed  importers  in  the  US  and   approximately  51,000  retail  gun  dealers  in  the  US.   Ø 39%  of  US  households  owned  a  gun  (according  to  The  Economist/YouGov  poll).   Ø Wal-­‐Mart  is  the  na7on’s  largest  gun  retailer;  Cabela’s  is  the  second  largest  followed  by  other  big-­‐box  retailers  like  Bass   Pro  Shops,  Dick’s,  Gander  Mountain,  Academy  Sports,  and  Big  Five  Spor7ng  Goods.     The  top  25  US  manufacturers  account  for  nearly  90%  of  all  guns  produced  in  the  US  annually.   Ø The  top  10  manufacturers  account  for  nearly  90%  of  industry  revenue  in  the  US  annually.   Ø These  include  the  brand  names  such  as  Ruger,  Smith  &  Wesson,  Remington,  Maverick,  Sig  Sauer,  Marlin,  Savage,   Bere,a,  Taurus,  Browning,  Henry,  etc.   In  the  United  States,  there  are  only  two  publicly  traded  firearms  and  ammuni7on  manufacturers  serving  the  retail  market:   Ø Sturm,  Ruger  &  Co.  (NYSE:  RGR).   Ø Smith  &  Wesson  Holding  Corp.  (Nasdaq:  SWHC).     Interna7onally,  there  is  one  publicly  traded  firearms  and  ammuni7on  manufacturer  (based  in  Brazil).   Ø Forjas  Taurus  SA  (BM&F  Bovespa:  FJTA4).   Ø In  2012,  the  top  three  importers  to  the  US  by  country  were  Brazil,  Austria,  and  Germany.   The  world’s  largest  manufacturer  of  commercial  firearms  is  the  US-­‐based  Freedom  Group,  also  known  as  the  Remington   Outdoor  Company.   Ø Currently  owned  by  Cerberus  Capital  Management.   3 Firearms  Industry  Research   Firearms  Industry:  Facts  &  Figures   • • In  2013,  the  major  domes7c  markets  for  firearm  industry  revenue  were  exports  (35.2%),  civilians  (34.8%),    and  military  and  law  enforcement  (30%).   Revenue  was  expected  to  grow  to  $14.7  billion  in  2013,  with  an  average  five-­‐year  annual  rate  of  8.4%  and  an  increase  of  20.2%  in  2013  due   primarily  to:   Ø Consumer  fear  of  increasing  crime  during  recession   Ø Fear  of  harsher  gun  control  regula7ons    from  the  Obama  legisla7on.  Concerns  were  heightened  further  by  mass  shoo7ngs  in  Aurora,  CO,  and   Sandy  Hook  Elementary  School  in  CT.   • From  2008  to  2012,  the  FBI  conducted  an  increased  number  of  Na7onal  Instant  Criminal  Background  Checks  (NICS)  at  an  average  annual  rate  of   11.4%.  Aker  the  CT  shoo7ng  in  December  2012,  the  number  of  background  checks  conducted  during  the  following  three  months  increased  44.5%   compared  to  the  same  7me  frame  in  2012.   • Per  the  graph  below,  in  2011,  pistols  account  for  40%  of  firearms  manufactured  in  the  US;  rifles  35%;  shotguns  13%;  revolvers  9%;  and  misc.   firearms  3%.   4 Firearms  Industry  Research   Sturm,  Ruger  &  Co.  (NYSE:  RGR)–Market  Cap:  $1.51  billion   • Founded  in  1949  in  Southport,  CT,  Ruger  is  one  of  the  major  manufacturers  of   firearms  and  ammuni7on  in  the  United  States.  The  company  listed  on  the  New   York  Stock  Exchange  in  1990.  Ruger  employs  1,460  full-­‐7me  employees  as  of   2/1/2013.   • For  the  year  ending  12/31/2012,  Ruger  recorded  revenues  of  $491.8  million,   represen7ng  approximately  3%  of  total  US  gun  industry  revenue.     Ø • For  the  nine  months  ending  9/28/2013,  Ruger  recorded  net  sales  of  $506.4   million,  a  44%  increase  from  $350.1  million  during  the  corresponding  period  in   2012.   Ø • • Firearms  segment  net  sales  were  $605.9  million,  an  increase  of   $202.4million,  or  50.2  %,  as  compared  to  the  nine  months  ended   September  30,  2012.   Ruger  offers  rifles,  pistols,  and  revolvers.    As  a  %  of  revenue:   Ø Pistols:  44%,  Rifles:  29%,  Revolvers:  19%,  Accessories  6%,  Cas7ngs:  1%.   Ø Included  in  “rifles”  are  hun7ng  rifles  and  modern  spor7ng  rifles.   Products  are  sold  to  federally  licensed,  independent  wholesale  distributors  who   purchase  the  products  directly  from  the  company.  They  resell  to  federally   licensed,  independent  retail  firearms  dealers  who  resell  to  legally  authorized  end   users.  Operates  an  online  retail  store.   Ø • • Firearms  segment  net  sales  were  $484.9  million  in  2012.  This  represents   an  increase  of  $160.7  million  or  49.7%  from  2011  firearm  net  sales  of   $324.2  million.  Firearms  unit  shipments  increased  51.0%  in  2012.   End  users  are  sportsmen,  hunters,  people  interested  in  self-­‐defense,  law   enforcement,  government  organiza7ons,  and  collectors.   Ruger  does  not  disclose  the  por7on  of  sales  derived  from  modern  spor7ng  rifles.   The  es7mated  sell-­‐through  of  the  Company’s  products  from  the  independent   distributors  to  retailers  increased  63%  in  2012  from  the  comparable  prior  year   periods.  For  the  same  periods,  NICS  background  checks  increased  28%.   TOP HOLDERS RGR London Co of Virginia Capital World Investors Vanguard Group, Inc. NFJ Investment Group LLC BlackRock Fund Advisors James Investment Research, Inc. Dimensional Fund Advisors, Inc. Southpoint Capital Advisors LP State Street Corp Northern Trust Investments, N.A. ARONSON+JOHNSON+ORTIZ Hays Advisory LLC ING Investment Management LLC Morgan Dempsey Capital Management, LLC Guggenheim Capital LLC Columbia Management Investment Advisers, LLC Mellon Capital Management Corporation Gotham Asset Management, LLC Schroder Investment Management Ltd. BMO Asset Management Inc. Shares Held 2,424,191 1,685,389 1,620,048 1,183,857 1,064,671 751,221 469,384 413,118 374,203 328,298 289,280 244,415 246,450 204,881 235,464 190,010 189,417 183,383 165,400 141,644 % Total Shares Held 12.53 8.71 8.37 6.12 5.5 3.88 2.43 2.14 1.93 1.7 1.5 1.26 1.27 1.06 1.22 0.98 0.98 0.95 0.85 0.73 %Total Assets 2.06 0.03 0.01 0.29 0.02 1.79 0.03 1.45 0 0.01 0.08 2.17 0.04 4.66 0.05 0.01 0.01 0.37 0.04 0.01 5 Firearms  Industry  Research Smith  &  Wesson  Holding  Corp.  (Nasdaq:  SWHC)  –  Market  Cap:  $778.9  million     • Founded  in  1852  in  Springfield,  MA,  Smith  &  Wesson  is  a  major   manufacturer  of  firearms  and  ammuni7on  in  the  United  States,  employing   1,475  full-­‐7me  as  of  5/21/2013.     • At  the  end  of  their  fiscal  year  (4/30/2013),  S&W  recorded  revenues  of   $587.5  million,  an  increase  of  42.6%  from  the  prior  fiscal  year.  This   represents  approximately  4%  of  total  US  gun  industry  revenue.     • Manufactures  handguns  (including  revolvers  and  pistols),  long  guns   (including  modern  spor7ng,  bolt  ac7on,  and  single  shot  rifles),  handcuffs,   and  firearm-­‐related  products  and  accessories.   • Customers  include  gun  enthusiasts,  collectors,  hunters,  sportsmen,   compe77ve  shooters,  individuals  desiring  home  and  personal  protec7on,   law  enforcement  and  security  agencies  and  officers,  and  military  agencies.   • Sells  products  under  the  Smith  &  Wesson,  M&P,  Thompson/Center  and   Performance  Center  brands.   • Company  es7mates  that  domes7c  non-­‐military  firearms  market  is   approximately  $2.0  billion  for  handguns  and  $1.6  billion  for  long  guns   (excluding  shotguns).   Ø • Sells  to  distributors  who  sell  to  federally  licensed  dealers  who  in  turn  sell   to  the  end  uses.    Also  sells  directly  to  large  retailers  and  dealers.  Operates   an  online  retail  store.   Ø • Owns  market  share  of  approximately  17%  and  11%,  respec7vely.   Sales  are  89.1%  to  domes7c  consumers;  7.6%  to  state  and  local  law   enforcement  and  federal  government;  3.3%  interna7onal.   Although  a,emp7ng  to  secure  military  supply  contracts,  approximately   88%  of  their  net  firearm  sales  are  in  the  spor7ng  goods  distribu7on   channel.   TOP HOLDERS SWHC Vanguard Group, Inc. Acadian Asset Management LLC BlackRock Fund Advisors Royal Bank of Canada ING Investment Management LLC Quantitative Management Associates LLC ARONSON+JOHNSON+ORTIZ State Street Corp Trafelet & CO LLC Northern Trust Investments, N.A. Eubel Brady & Suttman Asset Mgmt Inc Oxford Asset Management, LLC Olstein Capital Management, L.p. LSV Asset Management Millennium Management LLC % Total Shares Shares % Total Held Assets Held 5,376,236 8.58 0.01 2,349,898 4.2 0.18 1,969,170 3.14 0.01 1,572,023 2.51 0.01 1,408,197 2.25 0.04 1,296,519 2.07 0.03 1,240,100 1.98 0.06 1,080,979 1.72 0 950,000 1.52 7.54 943,382 1.51 0 914,830 1.46 2.74 682,021 1.22 0.28 796,000 1.27 1.34 778,200 1.24 0.02 676,385 1.08 0.02 Thompson, Siegel & Walmsley LLC 662,100 1.06 0.16 ING Investments, LLC TIAA-CREF Investment Management LLC Gotham Asset Management, LLC Batterymarch Financial Mgmt, Inc. 600,505 590,415 575,887 548,689 0.96 0.94 0.92 0.88 0.32 0.01 0.21 0.13 6 Firearms  Industry  Research   Freedom  Group  Interna7onal  (Cerberus  Capital  Management)   • • • • • • The  Freedom  Group  (FGI),  based  in  NC,  is  the  largest  manufacturer  of  firearms,   ammuni7on,  and  related  products  in  the  world  with  approximately  4,300   employees  and  12  manufacturing  facili7es.  It  is  also  known  as  the  Remington   Outdoor  Company.   The  company  was  formed  through  the  combina7on  of  Bushmaster,  Remington,   DPMS  and  Marlin.     Ø FGI  is  a  holding  company  controlled  by  Cerberus  Capital  Management,   owned  since  the  firm  acquired  Bushmaster  in  April  2006.   Ø Shortly  aker  the  Sandy  Hook  shoo7ng,  on  December  18,  2012,  Cerberus   Capital  Management  announced  its  inten7on  to  sell  its  investment  in  the   Freedom  Group.  To  date  a  transac7on  has  not  occurred  and  new  proposals   are  under  way  to  assist  investors  who  wish  to  distance  themselves  from   the  industry.   Holds  #1  market  share  posi7on  in  domes7c  shotgun  sales  and  commercial  AR-­‐ style  rifles,  lever  ac7on  sales,  rimfire  rifles,  and  bolt-­‐ac7on  rifles;    and  the  world   leader  in  centerfire  rifle  hun7ng  ammuni7on  sales.  Compe77ve  advantage  is   gained  by  leading  the  US  in  the  manufacture  of  both  firearms  and  ammuni7on.   For  year  ending  12/31/2012,  generated  net  sales  of  $931.9  million.  In  the  first   nine  months  of  2013,  generated  $1.0  billion  net  sales,  an  increase  of  50%  as   compared  to  the  nine  months  ending  9/30/2012.   End  customers  include  police  departments,  domes7c  and  foreign  government   organiza7ons,  including  the  U.S.  military,  and  consumers,  such  as  sportsmen,   hunters,  and  recrea7onal  shooters.   Distribu7on  channels  include  major  chain  retail  stores,  major  distributors,   smaller  dealers,  gun  clubs,  and  ranges.   Ø Sales  to  Wal-­‐Mart  have  ranged  from  12%–16%  of  FGI  total  net  sales  over   the  last  3  years,  making  Wal-­‐Mart,  FGI’s  largest  customer.   • Family  of  companies:   Ø Bushmaster   Ø Remington   Ø Remington  Military   Ø Remington  LE   Ø Remington  PMPD   Ø DPMS  Panther  Arms   Ø Marlin  Firearms   Ø H&R  1871   Ø Dakota  Arms   Ø Parker  Gun  Makers   Ø Barnes  Bullets   Ø Advanced  Armament   Ø Para  USA   Ø Mountain  Khakis   Ø Tapco   7 Firearms  Industry  Research   Forjas  Taurus  (BM&F  Bovespa:  FJTA4)–Market  Cap:  $130.9  million     • • • • • Forjas  Taurus  (“Taurus”)  is  a  diversified  manufacturing  conglomerate,  the  largest  weapons  manufacturer  in  La7n   America  and  one  of  the  largest  small  arms  manufacturers  in  the  world,  based  in  Porto  Alegre,  Brazil.   Ø The  company’s  main  segment,  the  Defense  and  Security  industry,  includes  the  manufacture  of  handguns   (revolvers  and  pistols),  long  guns  (rifles  and  shotguns)  for  hun7ng  and  target  shoo7ng  prac7ce,  and  weapons   for  military  and  police  use  (pistols,  shotguns,  submachine  guns,  rifles  and  grenade  launchers).    Accounts  for   77%  of  net  revenue.   Ø Also  operates  in  the  Metallurgy  and  Plas7cs  industry,  as  a  market  leader  in  the  produc7on  of  motorcycle   helmets,  bullet  proof  vests,  an7riot  shields,  plas7c  containers  and  forged  and  injected  parts.     Is  one  of  the  largest  importers  of  handguns  to  the  United  States,  opera7ng  under  Taurus  USA.   As  of  September  30,  2013,  net  revenues  for  the  year  had  increased  29%  to  approximately  $270  million  as  compared   to  the  first  nine  months  of  2012,  due  primarily  to  the  increases  in  exports.       The  US  market  accounted  for  64%  of  net  revenues  in  the  nine  months  ending  September  30,  2013.   Company’s  firearms  can  be  purchased  in  the  US  through  same  channels  as  US  firearms.   8 Firearms  Industry  Research   Federal  Gun  Laws  in  the  United  States   • Na7onal  Firearms  Act  (1934):  earliest  federal  regula7on  of  firearms;  set  defini7ons  for  classifica7on  of  firearms;   required  registra7on  of  firearms  and  imposed  an  excise  tax  on  manufacturing  and  transfer  of  firearms   • Omnibus  Crime  Control  and  Safe  Streets  Act  of  1968:  allowed  federal  wiretaps,  prohibited  interstate  trade  in   handguns,  increased  the  minimum  age  to  21  for  buying  handguns,  and  established  a  na7onal  gun  licensing  system     • Gun  Control  Act  of  1968:  regula7on  of  interstate  commerce  in  firearms,  generally  prohibi7ng  interstate  firearms   transfers  except  among  licensed  manufacturers,  dealers,  and  importers   • Firearm  Owners  Protec7on  Act  (1986):  revised  mul7ple  statutes  of  the  Act  of  1968   • Gun-­‐Free  School  Zones  Act  (1990):  prevents  possession  in  a  “school  zone”   • Brady  Handgun  Violence  Preven7on  Act  (1993):  imposed  background  check  requirement   • Federal  Assault  Weapons  Ban  (1994–2004)  (expired):  banned  assault  weapons   9 Firearms  Industry  Research   Public  Safety  and  Recrea7onal  Firearms  Use  Protec7on  Act  of  1994   (Federal  Assault  Weapons  Ban,  expired  2004)   v This  defini7on  of  an  assault  weapon  con7nues  to  be  the  standard  defini7on  in  context  of  assault  weapon   discussions  among  cri7cs,  enthusiasts,  poli7cians,  etc.,  for  “military-­‐style”  rifles  or  “modern  spor7ng”  rifles       • • Passed  by  President  Bill  Clinton  in  1994,  expired  in  2004.   As  defined  by  the  1994  Assault  Weapons  Ban,  an  “assault  weapon”  refers  primarily  (but  not  exclusively)  to  semi-­‐ automa7c  firearms  that  possess  the  cosme7c  features  (see  next  page  for  detail)  of  an  assault  rifle  or  “military-­‐style”   weapon  that  is  fully  automa7c.       Ø Simply  possessing  these  cosme7c  features  warrants  classifica7on  as  an  assault  weapon.       Ø Actually  possessing  the  opera7onal  features,  such  as  'full-­‐auto',  changes  the  classifica7on  from  assault   weapons  to  Title  II  weapons.       ─ Title  II  weapons  are  highly  regulated  by  the  Bureau  of  Alcohol,  Tobacco,  Firearms,  and  Explosives  under   the  Na7onal  Firearms  Act.       ─ Acquisi7on  of  these  firearms  is  subject  to  approval  by  the  A,orney  General,  and  federal  registra7on  is   required  for  possession.  A  $200  tax  is  imposed  for  each  transfer  or  produc7on  of  a  Title  II  weapon.     • Semi-­‐automa7c  firearms,  when  fired,  automa7cally  extract  the  spent  cartridge  casing  and  load  the  next  cartridge   into  the  chamber,  ready  to  fire  again.     • They  do  not  fire  automa7cally  when  the  trigger  is  held  down.     Ø Only  one  round  is  fired  with  each  trigger  pull.         10 Firearms  Industry  Research   Cosme7c  Features  of  an  Assault  Weapon   • • Semi-­‐auto  rifle  with  detachable  magazines  and  two  +  of  the  following:   • Semi-­‐auto  shotguns  with  two  +  of  the  following:   Ø A  folding  or  telescoping  stock   Ø Folding  or  telescoping  stock   Ø A  pistol  grip   Ø Pistol  grip   Ø A  bayonet  mount     Ø Fixed  capacity  of  more  than  5  rounds   Ø A  flash  suppressor,  or  threads  to  a,ach  one     Ø Detachable  magazine   Ø A  grenade  launcher   Semi-­‐auto  pistols  with  detachable  magazines  and  two  +  of  the  following:   Ø Magazine  that  a,aches  outside  the  pistol  grip   Ø Threaded  barrel  to  a,ach  barrel  extender,  flash  suppressor,  handgrip,  or  suppressor   Ø Barrel  shroud  that  can  be  used  as  a  hand-­‐hold   Ø Unloaded  weight  of  50  oz  (1.4  kg)  or  more   Ø A  semi-­‐automa7c  version  of  a  fully  automa7c  firearm   Same Rifle Same Shotgun Non-Assault Weapons Assault Weapons 11 Firearms  Industry  Research   Brady  Handgun  Violence  Preven7on  Act  of  1993     (required  background  checks  and  defines  “prohibited  persons”   • The  Brady  Act  requires  that  background  checks  be  conducted  on  individuals  before  any  firearm  may  be  purchased   from  a  federally  licensed  dealer,  manufacturer  or  importer.   • Prohibits  certain  persons  from  shipping  or  transpor7ng  any  firearm  in  interstate  or  foreign  commerce,  or  receiving   any  firearm  which  has  been  shipped  or  transported  in  interstate  or  foreign  commerce,  or  possessing  any  firearm  in   or  affec7ng  commerce.     Ø Those  convicted  of  felonies  and  certain  misdemeanors,  except  where  state  law  reinstates  rights,  or  removes  disability   Ø Fugi7ves  from  jus7ce   Ø Unlawful  users  of  certain  depressant,  narco7c,  or  s7mulant  drugs   Ø Those  adjudicated  as  mental  defec7ves  or  incompetents  or  those  commi,ed  to  any  mental  ins7tu7on  and  currently  containing  a   dangerous  mental  illness   Ø Non-­‐US  ci7zens,  unless  permanently  immigra7ng  into  the  US  or  in  possession  of  a  hun7ng  license  legally  issued  in  the  US   Ø Illegal  aliens   Ø Those  who  have  renounced  US  ci7zenship   Ø Minors  defined  as  under  the  age  of  18  for  long  guns  and  the  age  of  21  for  handguns,  with  the  excep7on  of  Vermont,  eligible  at   age  16   Ø Persons  convicted  in  any  court  of  a  misdemeanor  crime  of  domes7c  violence  (an  addi7on)   Ø Persons  under  indictment  for  a  crime  punishable  by  imprisonment  for  more  than  one  year  are  ineligible  to  receive,  transport,  or   ship  any  firearm  or  ammuni7on.     12 Firearms  Industry  Research   Recent  Developments  in  Gun  Control  Legisla7on   On  January  16,  2013,  in  response  to  the  violent  shoo7ngs  in  Colorado  and  Connec7cut,  President  Obama  announced  a  plan  of  23  execu7ve   ac7ons  on  gun  control.       The  following  proposed  amendments  to  the  gun  bill  were  brought  before  the  Senate.  Each  amendment  needed  to  clear  the  60-­‐vote   threshold  in  the  Senate  to  be  approved.  Results  as  follows:     • BACKGROUND  CHECKS  (Manchin-­‐Toomey  amendment)   Ø Require  background  checks  for  online  sales  and  sales  at  gun  shows,  but  not  sales  between  neighbors  and  family  members   ─ Failed  54–46   Ø Subs7tute  for  background  check  bill  that  increases  enforcement  and  repor7ng  on  mentally  ill  people   ─ Failed  52–48   • ASSAULT  WEAPONS   Ø Renew  and  strengthen  a  ban  on  assault  weapons  and  high-­‐capacity  magazines   ─ Failed  40–60   Ø Limit  magazine  sizes  to  10  rounds   ─ Failed  46–54   • GUN  TRAFFICKING   Ø Make  straw  purchasing  and  trafficking  a  federal  crime   ─ Failed  58–42   • MENTAL  HEALTH   Ø Reauthorize  and  improve  mental  health  programs   ─ Passed  95–2   • OTHER   Ø Impose  penal7es  on  states  for  releasing  gun  ownership  data   ─ Passed  67–30   Ø State  reciprocity  for  the  carrying  of  concealed  firearms   ─ Failed  57–43   Ø Allow  only  a  judge  to  deem  veterans  mentally  incompetent  to  own  a  gun   ─ Failed  56–44   More  recently,  on  January  3,  2014,  President  Obama  announced  two  new  execu7ve  ac7ons  on  gun  control:  the  first  change  by  the   Department  of  Defense  to  further  clarify  who  would  be  unable  to  possess  a  firearm  for  specific  situa7ons  related  to  mental  health;  and  the   second  by  the  Department  of  Health  and  Human  Services,  to  allow  certain  en77es  covered  by  pa7ent  privacy  protec7ons  to  submit   addi7onal  informa7on  to  the  background-­‐check  system.     13