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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commission file number 0-4776
STURM, RUGER & COMPANY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0633559
- -------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Lacey Place, Southport, Connecticut 06890
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip code)
(203) 259-7843
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock as of
March 31, 2003: Common Stock, $1 par value - 26,910,720.
Page 1 of 27
INDEX
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 2003 and
December 31, 2002 3
Condensed consolidated statements of income--Three months ended
March 31, 2003 and 2002 5
Condensed consolidated statements of cash flows--Three months
ended March 31, 2003 and 2002 6
Notes to condensed consolidated financial statements--March 31, 2003 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, December 31,
2003 2002
--------- ----------
(unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents $ 3,061 $ 3,598
Short-term investments 51,400 49,776
Trade receivables, less allowances for
doubtful accounts ($448 and $449) and
discounts ($386 and $783) 14,302 14,026
Inventories:
Finished products 16,494 16,999
Materials and products in process 35,446 34,629
--------- ----------
51,940 51,628
Deferred income taxes 7,046 6,985
Prepaid expenses and other current assets 1,361 4,536
--------- ----------
Total current assets 129,110 130,549
Property, plant and equipment 155,098 153,732
Less allowances for depreciation (126,025) (124,538)
--------- ----------
29,073 29,194
Deferred income taxes 8,956 9,594
Other assets 14,612 14,621
--------- ----------
$ 181,751 $ 183,958
========= ==========
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, December 31,
2003 2002
--------- ----------
(unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and accrued expenses $ 5,388 $ 5,080
Product liability 4,000 4,000
Employee compensation and benefits 6,954 7,324
Workers' compensation 4,801 4,765
Dividends payable - 5,382
Income taxes 858 882
--------- ----------
Total current liabilities 22,001 27,433
Accrued pension liability 6,712 6,423
Deferred income taxes 5,886 5,886
Product liability accrual 4,642 6,233
Contingent liabilities --Note 8 - -
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; issued and outstanding 26,910,720 26,911 26,911
Additional paid-in capital 2,508 2,508
Retained earnings 121,176 116,649
Accumulated other comprehensive income (8,085) (8,085)
--------- ----------
142,510 137,983
--------- ----------
$ 181,751 $ 183,958
========= ==========
Note:
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
4
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended March 31,
2003 2002
----------------------------
Net firearms sales $ 36,483 $ 42,729
Net castings sales 4,649 5,711
---------- ---------
Total net sales 41,132 48,440
Cost of products sold 28,695 36,160
---------- ---------
Gross profit 12,437 12,280
Expenses:
Selling 3,897 3,532
General and administrative 1,375 1,713
---------- ---------
5,272 5,245
---------- ---------
Operating profit 7,165 7,035
Other income-net 392 419
---------- ---------
Income before income taxes 7,557 7,454
Income taxes 3,030 2,922
---------- ---------
Net income $ 4,527 $ 4,532
========== =========
Earnings per share
Basic $ 0.17 $ 0.17
========== =========
Diluted $ 0.17 $ 0.17
========== =========
Cash dividends per share $ 0.20 $ 0.20
========== =========
Average shares outstanding
Basic 26,911 26,911
========== =========
Diluted 26,911 26,997
========== =========
See notes to condensed consolidated financial statements.
5
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended March 31,
2003 2002
----------------------------
Cash Provided by Operating Activities $ 7,894 $ 9,148
Investing Activities
Property, plant and equipment additions (1,424) (384)
Purchases of short-term investments (36,366) (46,641)
Proceeds from sales or maturities of
short-term investments 34,741 42,397
---------- ---------
Cash used by investing activities (3,049) (4,628)
---------- ---------
Financing Activities
Dividends paid (5,382) (5,382)
---------- ---------
Cash used by financing activities (5,382) (5,382)
---------- ---------
Decrease in cash and cash equivalents (537) (862)
Cash and cash equivalents at beginning of period 3,598 3,838
---------- ---------
Cash and cash equivalents at end of period $ 3,061 $ 2,976
========== =========
See notes to condensed consolidated financial statements.
6
STURM RUGER & COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
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 footnotes required by generally accepted accounting principles 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 three months ended March 31,
2003 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2003. For further information refer to the consolidated
financial statements and footnotes thereto included in the Sturm, Ruger &
Company, Inc. Annual Report on Form 10-K for the year ended December 31, 2002.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Organization: Sturm, Ruger & Company, Inc. ("Company") is principally
engaged in the design, manufacture, and sale of firearms and the manufacture and
sale of investment castings. The Company's design and manufacturing operations
are located in the United States. Substantially all sales are domestic. The
Company's firearms are sold through a select number of independent wholesale
distributors to the sporting and law enforcement markets. Investment castings
are sold either directly to or through manufacturers' representatives to
companies in a wide variety of industries.
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.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. Certain
prior year balances have been reclassified to conform with current year
presentation.
Recent Accounting Pronouncements: Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations,"
requires the recognition of an asset and a liability equal to the present value
of the estimated costs associated with the retirement of long-lived assets where
a legal or contractual obligation exists.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
Financial Accounting Standards Board ("FASB") Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," requires a guarantor to
recognize a liability with respect to a non-contingent obligation to stand ready
to perform under the guarantee even if the probability of future payments under
the conditions of a guarantee is remote, for periods beginning after December
15, 2002, and requires certain related disclosures as of December 31, 2002.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, as opposed to
when management is committed to an exit plan.
The Company adopted these statements effective January 1, 2003. The
adoption of these statements did not have a material impact on the Company's
financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," introduces a new consolidation model with respect to variable
interest entities. The new model requires that the determination of control
should be based on the potential variability in gains and losses of the variable
interest entity being evaluated. This interpretation is effective on July 1,
2003. The Company does not expect the adoption of this interpretation to have a
material impact on its 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 forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
NOTE 4--INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate
principally as a result of state income taxes. Total income tax payments during
the three months ended March 31, 2003 and 2002 were $0.1 million and $0.3
million, respectively.
NOTE 5--BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflect
the impact of options outstanding using the treasury stock method, when
applicable. This resulted in diluted weighted-average shares outstanding of
26,911,000 and 26,997,000 for the three months ended March 31, 2003 and 2002,
respectively. For the three month period ended March 31, 2003, 1,330,000 shares
were not included in the calculation of earnings per share as the effect would
have been anti-dilutive.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 6--COMPREHENSIVE INCOME
As there were no non-owner changes in equity during the first quarter
of 2003 and 2002, total comprehensive income equals net income, or $4.5 million
and $4.5 million, respectively.
NOTE 7--STOCK INCENTIVE AND BONUS PLANS
The Company accounts for employee stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure." Had compensation expense for the Plans been determined in
accordance with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts (in thousands, except
per share data):
Three months ended March 31, 2003 2002
- ----------------------------------------------------------------------------------------------------
Net Income:
As reported $ 4,527 $ 4,532
Add: Recognized stock-based employee
compensation, net of tax -- 10
Deduct: Employee compensation expense
determined under fair value method, net of tax (97) (97)
- ----------------------------------------------------------------------------------------------------
Pro forma $ 4,430 $ 4,445
====================================================================================================
Earnings per Share (Basic and Diluted):
As reported $ 0.17 $ 0.17
Pro forma $ 0.16 $ 0.16
====================================================================================================
The fair value of stock-based compensation expense was computed using
the Black-Scholes option-pricing model.
NOTE 8--CONTINGENT LIABILITIES
As of March 31, 2003, the Company is a defendant in approximately 26
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into two categories:
(i) those that claim damages from the Company related to allegedly
defective product design which stem from a specific incident.
These lawsuits and claims are based principally on the theory
of "strict liability" but also may be based on negligence,
breach of warranty, and other legal theories, and
(ii) those brought by cities, municipalities, counties,
associations, individuals and one state Attorney General
against numerous firearms manufacturers, distributors and
dealers seeking to recover damages allegedly arising out of
the misuse of firearms by third parties in the commission of
homicides, suicides and other shootings involving juveniles
and adults. The complaints by municipalities seek damages,
among other things, for the costs
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
of medical care, police and emergency services, public health
services, and the maintenance of courts, prisons, and other
services. In certain instances, the plaintiffs seek to recover
for decreases in property values and loss of business within
the city due to criminal violence. In addition, nuisance
abatement and/or injunctive relief is sought to change the
design, manufacture, marketing and distribution practices of
the various defendants. These suits allege, among other
claims, strict liability or negligence in the design of
products, public nuisance, negligent entrustment, negligent
distribution, deceptive or fraudulent advertising, violation
of consumer protection statutes and conspiracy or concert of
action theories. None of these cases allege a specific injury
to a specific individual as a result of the misuse or use of
any of the Company's products.
Management believes that, in every case, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses further exist to the suits brought
by cities, municipalities, counties, and the Attorney General based, among other
reasons, on established state law precluding recovery by municipalities for
essential government services, the remoteness of the claims, the types of
damages sought to be recovered, and limitations on the extraterritorial
authority which may be exerted by a city, municipality, county or state under
state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a jury, Hamilton,
et. al. v. Accu-tek, et. al., resulted in a defense verdict in favor of the
Company on February 11, 1999. In that case, numerous firearms manufacturers and
distributors had been sued, alleging damages as a result of alleged negligent
sales practices and "industry-wide" liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of
the seven cases decided by the jury. The Court upheld the verdict of the jury
and dismissed each case as to the Company in its later opinion. The three
defendants found liable filed a notice of appeal from the Court's decision. On
August 16, 2000, the U.S. 2nd Circuit Court of Appeals certified certain
questions to the Appellate Division of the New York State Supreme Court for
resolution. On April 26, 2001, the Appellate Division of the New York State
Supreme Court responded to the U.S. 2nd Circuit Court of Appeals' certified
questions. The questions involved whether firearms manufacturers have a legal
duty to prevent criminal misuses of their lawfully-sold products and whether any
liability of the firearms manufacturers should be apportioned by a market share
theory. The New York State Appellate Division answered both questions in the
negative. On August 30, 2001, the United States Court of Appeals for the 2nd
Circuit vacated and remanded the case with instructions for the trial court to
enter a final judgment of dismissal. The trial court finally dismissed the case
on its merits on September 17, 2001.
Of the lawsuits brought by municipalities or a state Attorney General,
thirteen have been dismissed as a matter of law. Eight of those cases are
concluded (Atlanta - dismissal by intermediate Appellate Court, no further
appeal; Bridgeport - dismissal affirmed by Connecticut Supreme Court; County of
Camden - dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami -
dismissal affirmed by intermediate appellate court, Florida Supreme Court
declined review; New Orleans -
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
dismissed by Louisiana Supreme Court, United States Supreme Court declined
review; Philadelphia - U.S. Third Circuit Court of Appeals affirmed dismissal,
no further appeal; and Wilmington - dismissed by trial court, no appeal). Boston
was voluntarily dismissed with prejudice by the City at the close of fact
discovery and is now concluded.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by
the trial court and a decision by the Indiana Supreme Court is pending. New York
State and Washington, D.C. are on appeal from their complete dismissals.
Detroit/Wayne County is also on appeal from partial dismissal. On March 7, 2003,
the consolidated California Cities case involving nine cities and three counties
was dismissed as to all manufacturer defendants, and it is unknown at present if
plaintiffs will appeal.
Cleveland and New York City are stayed. Camden City and St. Louis have
pending motions to dismiss at the trial level. Jersey City was filed on the same
day the Boston suit was dismissed but has not seen significant activity. The
Chicago dismissal was reversed on appeal, and an appeal to the Illinois Supreme
Court is pending. The Ohio Supreme Court voted 4-3 to reverse the dismissals of
the Cincinnati case by the trial and appellate courts and remanded the case to
the trial court for discovery proceedings. On March 11, 2003, the intermediate
New Jersey Court of Appeals in the Newark lawsuit affirmed the decision of the
trial court permitting certain claims to proceed into pretrial discovery. On
March 24, 2003, trial began in the NAACP case.
Legislation has been passed in approximately 31 states precluding suits
of the type brought by the municipalities mentioned above, and similar federal
legislation has been introduced in the U.S. Congress.
Punitive damages, as well as compensatory damages, are demanded in many
of the lawsuits and claims. Aggregate claimed amounts presently exceed product
liability accruals and applicable insurance coverage. For claims made after July
10, 1994, compensatory and punitive damage insurance coverage is provided, in
states where permitted, coverage is provided for losses exceeding $2.0 million
per claim, or an aggregate maximum loss of $6.0 million. For claims made after
July 10, 1997, coverage is provided for annual losses exceeding $2.0 million per
claim, or an aggregate maximum loss of $5.5 million annually. For claims made
after July 10, 2000, coverage is provided for annual 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.
On March 17, 2000, Smith & Wesson announced that it had reached a
settlement to conclude some of the municipal lawsuits with various governmental
entities. On March 30, 2000, the Office of the Connecticut Attorney General
began an investigation of certain alleged "anticompetitive practices in the
firearms industry." On April 17, the State of Maryland's Attorney General also
made similar inquiries as to the Company. On August 9, 2000, the U.S. Federal
Trade Commission also filed such a civil investigative demand regarding the
Smith & Wesson settlement. During April 2002, after the city of Boston
voluntarily withdrew its case with prejudice as to all remaining defendants,
Boston moved jointly with Smith & Wesson to dissolve their consent decree
settlement, which motion the court accepted. The Company has not engaged in any
improper conduct and has cooperated with these investigations.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
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 our 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 our 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 loss relating to unfavorable outcomes
can not be made. However, in the product liability cases in which a dollar
amount of damages is claimed, the amount of damages claimed, which totaled $837
million at March 31, 2003, is set forth as an indication of possible maximum
liability that 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.
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 can not be
determined in advance with any reliability concerning when payments will be made
in any given case.
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.
The Company has reported all cases instituted against it through
December 31, 2002 and the results of those cases, where terminated, to the
S.E.C. on its previous Form 10-K and 10-Q reports, to which reference is hereby
made.
NOTE 9--RELATED PARTY TRANSACTIONS
During the first quarter of both 2003 and 2002, the Company paid
Newport Mills, of which William B. Ruger, Jr., Chairman and Chief Executive
Officer of the Company, is the sole proprietor, $60,750 for storage rental and
office space.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 10--OPERATING SEGMENT INFORMATION
The Company has two reportable segments: firearms and investment
castings. The firearms segment manufactures and sells rifles, pistols,
revolvers, and shotguns principally to a select number of independent wholesale
distributors primarily located in the United States. The investment castings
segment consists of two operating divisions which manufacture and sell titanium
and steel investment castings.
Selected operating segment financial information follows (in
thousands):
Three months ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------
Net Sales
Firearms $ 36,483 $ 42,729
Castings
Unaffiliated 4,649 5,711
Intersegment 5,340 4,661
- ------------------------------------------------------------------------------------------------------------
9,989 10,372
Eliminations (5,340) (4,661)
- ------------------------------------------------------------------------------------------------------------
$ 41,132 $ 48,440
============================================================================================================
Income Before Income Taxes
Firearms $ 7,616 $ 9,118
Castings (382) (2,022)
Corporate 323 358
- ------------------------------------------------------------------------------------------------------------
$ 7,557 $ 7,454
============================================================================================================
March 31, December 31,
2003 2002
--------- ------------
Identifiable Assets
Firearms $ 77,533 $ 79,301
Castings 19,091 19,394
Corporate 85,127 85,263
- --------------------------------------------------------------------------------------------------------------
$ 181,751 $ 183,958
==============================================================================================================
NOTE 11--SUBSEQUENT EVENT
On April 30, 2003, Erle G. Blanchard, Vice Chairman, President, Chief
Operating Officer and Treasurer of the Company, resigned for personal reasons
unrelated to the performance of his duties at the Company.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Consolidated net sales of $41.1 million were achieved by the Company in
the first quarter of 2003. This represents a decrease of $7.3 million or 15.1%
from the first quarter of 2002 consolidated net sales of $48.4 million.
Firearms segment net sales were $36.5 million in the first quarter of
2003 compared to $42.7 million in the corresponding 2002 period, a decrease of
$6.2 million or 14.6%. Firearms unit shipments decreased 13.3%. Shipments
decreased in all four major product categories, however bolt action and lever
action rifles both experienced significant sales growth due to the continuing
popularity of the .17 HMR caliber models introduced in 2002. In 2003, the
Company instituted a sales incentive program for its distributors which allows
them to earn rebates of up to 1.5% if certain annual overall sales targets are
achieved. This program replaces a similar sales incentive program in 2002. In
April 2003 the Company announced a consumer-driven sales incentive program for
certain pistol models sold from May to September 2003.
Castings segment net sales decreased $1.1 million or 18.6% from $5.7
million in the first quarter of 2002 to $4.6 million in the first quarter of
2003. The downturn in castings sales was due to weakened demand for titanium
castings. Shipments of titanium golf clubheads to Karsten Manufacturing
Corporation decreased by $1.8 million. Shipments to Karsten Manufacturing
Corporation in 2003 are expected to remain significantly below the level of
shipments in 2002, and may cease entirely. The Company plans to continue to
actively pursue other casting business opportunities.
Consolidated cost of products sold for the first quarter of 2003 was
$28.7 million compared to $36.1 million for the first quarter of 2002, a
decrease of $7.4 million or 20.6%. This was primarily attributable to the
decline in sales of both segments, decreased product liability costs, and
reduced production costs in the castings segment.
Gross profit as a percentage of net sales increased to 30.2% in the
first quarter of 2003 from 25.4% in the comparable 2002 period. This improvement
is primarily attributable to the decreased production costs in the castings
segment, decreased product liability costs, partially offset by the decline in
sales.
Selling, general and administrative expenses increased slightly to $5.3
million in the first quarter of 2003 from $5.2 million in the first quarter of
2002.
Other income-net remained consistent at $0.4 million in the first
quarter of 2003 and 2002.
The effective income tax rate of 40.1% in the first quarter of 2003
increased slightly from the income tax rate of 39.2% in the corresponding period
in 2002.
As a result of the foregoing factors, consolidated net income remained
consistent at $4.5 million for the first quarter of 2003 and 2002.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
Financial Condition
At March 31, 2003, the Company had cash, cash equivalents and
short-term investments of $54.5 million, working capital of $107.1 million and a
current ratio of 5.9 to 1, compared to $53.4 million, $103.1 million, and 4.8 to
1, respectively, at December 31, 2002.
Operating activities provided $7.9 million and $9.1 million in the
first quarter of 2003 and 2002, respectively. This change in cash flows is a
result of fluctuations in various operating accounts.
The Company follows an industry-wide practice of offering a "dating
plan" to its firearms customers on selected products, which allows the
purchasing distributor to buy the products commencing in December, the start of
the Company's marketing year, and pay for them on extended terms. Discounts are
offered for early payment. The dating plan provides a revolving payment plan
under which payments for all shipments made during the period December through
February must be made by April 30. Generally, shipments made in subsequent
months must be paid within approximately 90 days. Dating plan receivable
balances were $6.7 million at March 31, 2003 compared to $8.2 million at March
31, 2002. The Company has reserved the right to discontinue the dating plan at
any time and has been able to finance this dating plan from internally generated
funds provided by operating activities.
Capital expenditures during the three months ended March 31, 2003
totaled $1.4 million. For the past two years capital expenditures averaged
approximately $1.2 million per quarter. In 2003, the Company expects to spend
approximately $8 million on capital expenditures in its ongoing effort to
upgrade and modernize all of its divisions. The Company finances, and intends to
continue to finance, all of these activities with funds provided by operations.
For the three months ended March 31, 2003 dividends paid totaled $5.4
million. This amount reflects the regular quarterly dividend of $.20 per share
paid on March 15, 2003. Future dividends will depend on many factors, including
internal estimates of future performance and the Company's need for funds.
In conjunction with the sale of its Uni-Cast division in June 2000, the
Company extended credit to the purchaser in the form of a note and a line of
credit, both of which are collateralized by certain of the assets of Uni-Cast.
In 2002, the Company established an additional collateralized line of credit for
the purchaser and, as of March 31, 2003, the total amount due from the purchaser
was $2.3 million. The Company purchases aluminum castings used in the
manufacture of certain models of pistols exclusively from Uni-Cast.
Historically, the Company has not required external financing. Based on
its cash flow and unencumbered assets, the Company believes it has the ability
to raise substantial amounts of short-term or long-term debt. The Company does
not anticipate any need for external financing through 2003.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
The sale, purchase, ownership, and use of firearms are subject to
thousands of federal, state and local governmental regulations. The basic
federal laws are the National Firearms Act, the Federal Firearms Act, and the
Gun Control Act of 1968. These laws generally prohibit the private ownership of
fully automatic weapons and place certain restrictions on the interstate sale of
firearms unless certain licenses are obtained. The Company does not manufacture
fully automatic weapons, other than for the law enforcement market, and holds
all necessary licenses under these federal laws. From time to time,
congressional committees review proposed bills relating to the regulation of
firearms. These proposed bills generally seek either to restrict or ban the sale
and, in some cases, the ownership of various types of firearms. Several states
currently have laws in effect similar to the aforementioned legislation.
Until November 30, 1998, the "Brady Law" mandated a nationwide five-day
waiting period and background check prior to the purchase of a handgun. As of
November 30, 1998, the National Instant Check System, which applies to both
handguns and long guns, replaced the five-day waiting period. The Company
believes that the "Brady Law" has not had a significant effect on the Company's
sales of firearms, nor does it anticipate any impact on sales in the future. The
"Crime Bill" took effect on September 13, 1994, but none of the Company's
products were banned as so-called "assault weapons." To the contrary, all the
Company's then-manufactured commercially-sold long guns were exempted by name as
"legitimate sporting firearms." The Company remains strongly opposed to laws
which would restrict the rights of law-abiding citizens to lawfully acquire
firearms. The Company believes that the lawful private ownership of firearms is
guaranteed by the Second Amendment to the United States Constitution and that
the widespread private ownership of firearms in the United States will continue.
However, there can be no assurance that the regulation of firearms will not
become more restrictive in the future and that any such restriction would not
have a material adverse effect on the business of the Company.
The Company is a defendant in numerous lawsuits involving its products
and is aware of certain other such claims. The Company has expended significant
amounts of financial resources and management time in connection with product
liability litigation. Management believes that, in every case, the allegations
are unfounded, and that the shootings and any results therefrom were due to
negligence or misuse of the firearms by third-parties or the claimant, and that
there should be no recovery against the Company. Defenses further exist to the
suits brought by cities, municipalities, counties, and a state attorney general
based, among other reasons, on established state law precluding recovery by
municipalities for essential government services, the remoteness of the claims,
the types of damages sought to be recovered, and limitations on the
extraterritorial authority which may be exerted by a city, municipality, county
or state under state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a jury, Hamilton,
et. al. v. Accu-tek, et. al., resulted in a defense verdict in favor of the
Company on February 11, 1999. In that case, numerous firearms manufacturers and
distributors had been sued, alleging damages as a result of alleged negligent
sales practices and "industry-wide" liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of
the seven cases decided by the jury. The Court upheld the
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
verdict of the jury and dismissed each case as to the Company in its later
opinion. The three defendants found liable filed a notice of appeal from the
Court's decision. On August 16, 2000, the U.S. Second Circuit Court of Appeals
certified certain questions to the Appellate Division of the New York State
Supreme Court for resolution. On April 26, 2001, the Appellate Division of the
New York State Supreme Court responded to the U.S. Second Circuit Court of
Appeals' certified questions. The questions involved whether firearms
manufacturers have a legal duty to prevent criminal misuses of their
lawfully-sold products and whether any liability of the firearms manufacturers
should be apportioned by a market share theory. The New York State Appellate
Division answered both questions in the negative. On August 30, 2001, the United
States Second Circuit Court of Appeals vacated and remanded the case with
instructions for the trial court to enter a final judgment of dismissal. The
trial court finally dismissed the case on its merits on September 17, 2001.
Of the lawsuits brought by municipalities or a state Attorney General,
thirteen have been dismissed as a matter of law. Eight of those cases are
concluded (Atlanta - dismissal by intermediate Appellate Court, no further
appeal; Bridgeport - dismissal affirmed by Connecticut Supreme Court; County of
Camden - dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami -
dismissal affirmed by intermediate appellate court, Florida Supreme Court
declined review; New Orleans - dismissed by Louisiana Supreme Court, United
States Supreme Court declined review; Philadelphia - U.S. Third Circuit Court of
Appeals affirmed dismissal, no further appeal; and Wilmington - dismissed by
trial court, no appeal). Boston was voluntarily dismissed with prejudice by the
City at the close of fact discovery and is now concluded.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by
the trial court and a decision by the Indiana Supreme Court is pending. New York
State and Washington, D.C. are on appeal from their complete dismissals.
Detroit/Wayne County is also on appeal from partial dismissal. On March 7, 2003,
the consolidated California Cities case involving nine cities and three counties
was dismissed as to all manufacturer defendants, and it is unknown at present if
plaintiffs will appeal.
Cleveland and New York City are stayed. Camden City and St. Louis have
pending motions to dismiss at the trial level. Jersey City was filed on the same
day the Boston suit was dismissed but has not seen significant activity. The
Chicago dismissal was reversed on appeal, and an appeal to the Illinois Supreme
Court is pending. The Ohio Supreme Court voted 4-3 to reverse the dismissals of
the Cincinnati case by the trial and appellate courts and remanded the case to
the trial court for discovery proceedings. On March 11, 2003, the intermediate
New Jersey Court of Appeals in the Newark lawsuit affirmed the decision of the
trial court permitting certain claims to proceed into pretrial discovery. On
March 24, 2003, trial began in the NAACP case.
Legislation has been passed in approximately 31 states precluding suits
of the type brought by the municipalities mentioned above, and similar federal
legislation has been introduced in the U.S. Congress.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
The Company's management reviews every lawsuit and claim at the outset
and is in contact with independent and corporate counsel on an ongoing basis.
The provision for product liability claims is based upon many factors, which
vary for each case. These factors include the type of claim, nature and extent
of injuries, historical settlement ranges, jurisdiction where filed, and advice
of counsel. An accrual is established for each lawsuit and claim, when
appropriate, based on the nature of each such lawsuit or claim.
Amounts are charged to product liability expense in the period in which
the Company becomes aware that a claim or, in some instances a threat of claim,
has been made when potential losses or costs of defense can be reasonably
estimated. Such amounts are determined based on the Company's experience in
defending similar claims. Occasionally, charges are made for claims made in
prior periods because the cumulative actual costs incurred for that claim, or
reasonably expected to be incurred in the future, exceed amounts already
provided. Likewise credits may be taken if cumulative actual costs incurred for
that claim, or reasonably expected to be incurred in the future, are less than
amounts previously provided.
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.
In the normal course of its manufacturing operations, the Company is
subject to occasional governmental proceedings and orders pertaining to waste
disposal, air emissions and water discharges into the environment. The Company
believes that it is generally in compliance with applicable environmental
regulations and the outcome of such proceedings and orders will not have a
material adverse effect on its business.
The valuation of the future defined benefit pension obligations at
December 31, 2002 indicated that these plans were underfunded. While this
estimation has no bearing on the actual funded status of the pension plans, it
resulted in the recognition of other comprehensive loss of $7.9 million in 2002.
The Company expects to realize its deferred tax assets through tax
deductions against future taxable income or carry back against taxes previously
paid.
Inflation's effect on the Company's operations is most immediately felt
in cost of products sold because the Company values inventory on the LIFO basis.
Generally under this method, the cost of products sold reported in the financial
statements approximates current costs, and thus, reduces distortion in reported
income which would result from the slower recognition of increased costs when
other methods are used. The use of historical cost depreciation has a beneficial
effect on cost of products sold. The Company has been affected by inflation in
line with the general economy.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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 including
lawsuits filed by mayors, a state attorney general and other governmental
entities and membership organizations, and 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this interest rate
market risk exposure to be material to its financial condition or results of
operations. The Company invests primarily in United States Treasury instruments
with short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Under its
current policies, the Company does not use derivative financial instruments,
derivative commodity instruments or other financial instruments to manage its
exposure to changes in interest rates or commodity prices.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and President, Chief Operating
Officer and Treasurer have both concluded, based on their evaluation within 90
days of the filing date of this report, that the Company's disclosure controls
and procedures are adequately designed to ensure that the information the
Company is required to disclose in its reports filed or submitted by the Company
under the Securities Exchange Act of 1934, as amended, has been recorded,
processed, summarized and reported on a timely basis. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls and there have been no corrective
actions taken with regard to significant deficiencies and material weaknesses
subsequent to the date of such evaluation by the officers.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at
Note 8 to this Form 10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through
December 31, 2002, and the results of those cases, where terminated, to the
S.E.C. on its previous Form 10-K and 10-Q reports, to which reference is hereby
made.
No cases were formally instituted against the Company during the three
months ended March 31, 2003, which involved significant demands for compensatory
and/or punitive damages and in which the Company has been served with process.
During the three months ending March 31, 2003, no previously reported
cases were settled.
On March 7, 2003, summary judgment was granted in the previously
reported consolidated California Cities (CA) litigation. This case combined the
claims of the cities of Los Angeles, Compton, Inglewood, West Hollywood, San
Francisco, Berkley, Sacramento, Oakland, East Palo Alto, and Los Angeles County,
San Mateo County, and Alameda County. It is presently unknown if plaintiffs will
appeal.
On March 11, 2003, the intermediate New Jersey Court of Appeals in the
previously reported Newark (NJ) lawsuit affirmed the decision of the trial court
permitting certain claims to proceed into pretrial discovery.
On March 21, 2003, in the previously reported Wallace (D.C.) lawsuit,
the plaintiffs agreed to voluntarily dismiss the case with prejudice and an
order of dismissal was entered.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) The Company did not file any reports on Form 8-K during the
three months ended March 31, 2003.
20
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STURM, RUGER & COMPANY, INC.
Date: May 6, 2003 /S/ THOMAS A. DINEEN
---------------------------------
Thomas A. Dineen
Principal Financial Officer,
Treasurer and Chief Financial
Officer
21
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William B. Ruger, Jr., Chief Executive Officer of Sturm, Ruger & Company,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sturm,
Ruger & Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
22
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 6, 2003
/S/ WILLIAM B. RUGER, JR.
- ---------------------------
William B. Ruger, Jr.
Chief Executive Officer
See also the certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, which are also attached to this report as Exhibits 99.1 and 99.2.
23
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas A. Dineen, Treasurer and Chief Financial Officer of Sturm, Ruger &
Company, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sturm,
Ruger & Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
24
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 6, 2003
/S/ THOMAS A. DINEEN
- -------------------------------------
Thomas A. Dineen
Treasurer and Chief Financial Officer
See also the certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, which are also attached to this report as Exhibits 99.1 and 99.2.
25