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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 June 30, 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
July 31, 2003: Common Stock, $1 par value - 26,910,720.
Page 1 of 21
INDEX
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 2003 and December 31, 2002 3
Condensed consolidated statements of income--Three months ended June 30, 2003 and 2002,
Six months ended June 30, 2003 and 2002 5
Condensed consolidated statements of cash flows--Six months ended June 30, 2003 and 2002 6
Notes to condensed consolidated financial statements--June 30, 2003 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2003 2002
---------- ------------
(Unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents $ 2,726 $ 3,598
Short-term investments 45,430 49,776
Trade receivables, less allowances for
doubtful accounts ($451 and $449) and
discounts ($134 and $783) 13,305 14,026
Inventories:
Finished products 19,424 16,999
Materials and products in process 36,165 34,629
---------- ----------
55,589 51,628
Deferred income taxes 7,436 6,985
Prepaid expenses and other assets 2,849 4,536
---------- ----------
Total current assets 127,335 130,549
Property, plant and equipment 156,098 153,732
Less allowances for depreciation (127,507) (124,538)
---------- ----------
28,591 29,194
Deferred income taxes 8,837 9,594
Other assets 14,266 14,621
---------- ----------
$ 179,029 $ 183,958
========== ==========
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- CONTINUED
(Dollars in thousands, except per share data)
June 30, December 31,
2003 2002
---------- ------------
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and accrued expenses $ 5,486 $ 5,080
Product liability 4,000 4,000
Employee compensation 7,797 7,324
Workers' compensation 4,805 4,765
Dividends payable -- 5,382
Income taxes 810 882
---------- ----------
Total current liabilities 22,898 27,433
Accrued pension liability 5,765 6,423
Deferred income taxes 7,857 5,886
Product liability accrual 4,346 6,233
Contingent liabilities -- Note 7 -- --
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 116,829 116,649
Accumulated other comprehensive income (8,085) (8,085)
---------- ----------
138,163 137,983
---------- ----------
$ 179,029 $ 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)
(Dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended 30,
2003 2002 2003 2002
--------------------------- -----------------------
Firearms sales $ 27,156 $ 33,427 $ 63,639 $ 76,156
Castings sales 4,645 6,357 9,294 12,068
---------- ---------- ---------- ----------
Net sales 31,801 39,784 72,933 88,224
Cost of products sold 25,294 29,839 53,989 65,999
---------- ---------- ---------- ----------
Gross profit 6,507 9,945 18,944 22,225
Expenses:
Selling 3,313 3,883 7,210 7,415
General and administrative 1,692 1,503 3,067 3,216
---------- ---------- ---------- ----------
5,005 5,386 10,277 10,631
---------- ---------- ---------- ----------
Operating income 1,502 4,559 8,667 11,594
Other income-net 226 403 618 822
---------- ---------- ---------- ----------
Income before income taxes 1,728 4,962 9,285 12,416
Income taxes 693 2,057 3,723 4,979
---------- ---------- ---------- ----------
Net income $ 1,035 $ 2,905 $ 5,562 $ 7,437
========== ========== ========== ==========
Earnings per share
Basic $ 0.04 $ 0.11 $ 0.21 $ 0.28
========== ========== ========== ==========
Diluted $ 0.04 $ 0.11 $ 0.21 $ 0.27
========== ========== ========== ==========
Cash dividends per share $ 0.20 $ 0.20 $ 0.40 $ 0.40
========== ========== ========== ==========
Average shares outstanding
Basic 26,911 26,911 26,911 26,911
========== ========== ========== ==========
Diluted 26,911 27,106 26,911 27,056
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
5
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended June 30,
2003 2002
------------------------
Cash Provided by Operating Activities $ 8,011 $ 14,522
Investing Activities
Property, plant and equipment additions (2,465) (1,271)
Purchases of short-term investments (67,761) (82,346)
Proceeds from maturities of short-term investments 72,107 80,585
---------- ----------
Cash provided by (used by) investing activities 1,881 (3,032)
---------- ----------
Financing Activities
Dividends paid (10,764) (10,763)
---------- ----------
Cash used by financing activities (10,764) (10,763)
---------- ----------
Increase (decrease) in cash and cash equivalents (872) 727
Cash and cash equivalents at beginning of period 3,598 3,838
---------- ----------
Cash and cash equivalents at end of period $ 2,726 $ 4,565
========== ==========
See notes to condensed consolidated financial statements.
6
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and 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 six months ended June 30, 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 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.
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 (using the Black-Scholes option-pricing model), 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):
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
Net Income:
As reported $ 1,035 $ 2,905 $ 5,562 $ 7,437
Add: Recognized stock-based employee
compensation, net of tax -- -- -- 10
Deduct: Employee compensation expense
determined under fair value method, net of tax (97) (97) (194) (194)
- --------------------------------------------------------------------------------------------------------------
Pro forma $ 938 $ 2,808 $ 5,368 $ 7,253
==============================================================================================================
Basic Earnings per Share:
As reported $ 0.04 $ 0.11 $ 0.21 $ 0.28
Pro forma $ 0.03 $ 0.10 $ 0.20 $ 0.27
==============================================================================================================
Diluted Earnings per Share:
As reported $ 0.04 $ 0.11 $ 0.21 $ 0.27
Pro forma $ 0.03 $ 0.10 $ 0.20 $ 0.27
==============================================================================================================
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 six months ended June 30, 2003 and 2002 were $1.1 million and $5.1 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 for the
three and six months ended June 30, 2003 and 2002 of 26,911,000 and 27,106,000,
and 26,911,000 and 27,056,000, respectively.
NOTE 6 -- COMPREHENSIVE INCOME
8
As there were no non-owner changes in equity during the first half of
2003 and 2002, total comprehensive income equals net income for the three and
six months ended June 30, 2003 and 2002, or $1.0 million and $2.9 million, and
$5.6 million and $7.4 million, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 7 - CONTINGENT LIABILITIES
As of June 30, 2003, the Company is a defendant in approximately 24
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 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 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. Most of these cases
do not 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 constitutional
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
9
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
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,
fourteen have been dismissed. Nine 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; Wilmington - dismissed by trial court, no appeal; Boston -
voluntary dismissal with prejudice by the City at the close of fact discovery;
and Cincinnati - voluntarily withdrawn after a unanimous vote of the city
council.
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.
Washington, D.C. is on appeal from its complete dismissal. On March 7, 2003, the
consolidated California Cities case involving nine cities and three counties was
dismissed as to all manufacturer defendants, and plaintiffs appealed on June 9,
2003. On June 24, 2003, the New York State Supreme Court, Appellate Division,
affirmed the dismissal of the New York case; plaintiffs have appealed. The
Chicago dismissal was reversed in part on appeal, and an appeal to the Illinois
Supreme Court is pending. Detroit/Wayne County is also on appeal from partial
dismissal.
Cleveland and New York City are stayed. Camden City and St. Louis have
pending motions to dismiss at the trial level. 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. Newark and Jersey City are proceeding with pretrial discovery. Camden
City was dismissed pending the unrelated bankruptcy proceeding of one of the
Company's co-defendants.
On May 14, 2003, an advisory jury in the NAACP case returned a verdict
rejecting the NAACP's claims. On July 21, 2003, an order of dismissal was
entered. It is unknown at present if plaintiffs will appeal.
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.
10
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
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.
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 June 30, 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 March
31, 2003 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 8--RELATED PARTY TRANSACTIONS
11
For the three and six months ended June 30, 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 and $121,500, and
$40,500 and $101,250, respectively, for storage rental and office space.
NOTE 9--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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
operating divisions which manufacture and sell titanium and steel investment
castings. Selected operating segment financial information follows (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------
Net Sales
Firearms $ 27,155 $ 33,427 $ 63,639 $ 76,156
Castings
Unaffiliated 4,645 6,357 9,294 12,068
Intersegment 4,274 4,639 9,614 9,300
- -------------------------------------------------------------------------------------------------
8,919 10,996 18,908 21,368
Eliminations (4,274) (4,639) (9,614) (9,300)
- -------------------------------------------------------------------------------------------------
$ 31,800 $ 39,784 $ 72,933 $ 88,224
=================================================================================================
Income Before Income Taxes
Firearms $ 2,697 $ 6,947 $ 10,313 $ 16,065
Castings (1,092) (2,319) (1,474) (4,341)
Corporate 123 334 446 692
- -------------------------------------------------------------------------------------------------
$ 1,728 $ 4,962 $ 9,285 $ 12,416
=================================================================================================
June 30, December 31,
2003 2002
-------------------------
Identifiable Assets
Firearms $ 82,104 $ 79,301
Castings 18,771 19,394
Corporate 78,154 85,263
- -------------------------------------------------------------------------------------------------
$ 179,029 $ 183,958
=================================================================================================
NOTE 10 - SUBSEQUENT EVENT
On August 5, 2003, the Company sold certain non-manufacturing real estate for
approximately $11 million. This transaction is expected to result in a net gain
of approximately $3 million.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Consolidated net sales of $31.8 million and $72.9 million were achieved
by the Company for the three and six months ended June 30, 2003. This represents
a decrease of 20.1% and 17.3% from 2002 consolidated net sales of $39.8 million
and $88.2 million, respectively.
Firearms segment net sales decreased by $6.2 million, or 18.8%, in the
second quarter of 2003 to $27.2 million from $33.4 million in the second quarter
of the prior year. For the six months ended June 30, 2003, firearms segment net
sales decreased by $12.5 million, or 16.4% to $63.6 million, compared to the
corresponding 2002 period. Firearms unit shipments decreased 16.7% for the
three-month period ended June 30, 2003 and 14.8% for the six-month period ended
June 30, 2003 from the comparable 2002 periods. Shipments decreased in all of
the four major product categories; however, lever action rifles continue to
experience sales growth due to the popularity of the .17 HMR caliber model
introduced in 2003. Shipments of centerfire pistols increased in the second
quarter of 2003 compared to the second quarter of 2003 in response to a
consumer-driven sales incentive program announced in April 2003 for centerfire
pistols sold from May to September 2003. Additionally 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.
Casting segment net sales decreased by 26.9% and 23.0% to $4.6 million
and $9.3 million, respectively, for the three and six months ended June 30, 2003
from $6.4 million and $12.1 million in the comparable 2002 periods. The decrease
in castings sales in 2003 is primarily due to weakened demand for titanium
castings. Shipments of titanium golf clubheads to Karsten Manufacturing
Corporation decreased $3.8 million for the six months ended June 30, 2003
compared to the corresponding 2002 period. There are no future shipments
expected to Karsten Manufacturing Corporation in 2003. The Company continues to
actively pursue other casting business opportunities.
Consolidated cost of products sold for the three and the six months
ended June 30, 2003 were $25.3 million and $54.0 million compared to $29.8
million and $66.0 million in the corresponding 2002 periods, representing a
decrease of 15.2% and 18.2%, respectively. The respective decreases are
primarily attributable to decreased sales in both firearms and castings and to
reduced production costs in the castings segment, and are partially offset by
increases in product liability costs.
Gross profit as a percentage of net sales was 26.0% for the six month
period ended June 30, 2003 as compared to 25.2% in the comparable 2002 period.
For the second quarter of 2003, gross profit as a percent of sales fell to 20.5%
from 25.0% in the second quarter of 2002. Margin improvement for the six month
period ended June 30, 2003 was caused by a decline in production costs in the
castings segment, partially offset by increased product liability expenses. The
decrease in margin for the three month period ended June 30, 2003 as compared to
the three month period ended June 30, 2002 was primarily attributable to
increased product liability expenses and an accrual related to the pistol sales
incentive program in effect from May through September 2003.
Selling, general and administrative expenses were $5.0 million and
$10.3 million for the three and six months ended June 30, 2003, representing
decreases of $0.4 million from each of the corresponding periods of 2002. The
decrease for both the three and six months ended June 30, 2003 is primarily
attributable to a decrease in personnel related expenses.
Other income-net decreased by $0.2 million, respectively, in the three
and six months ended June 30, 2003 compared to the corresponding 2002 periods.
These decreases are due to decreased earnings on short-term investments
resulting from lower yields on these investments, as well as from a decrease in
the total short-term investments held during the periods.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
The effective income tax rate of 40.1% in the three months and six
months ended June 30, 2003 decreased from 41.5% in the three months ended June
30, 2002, and remains unchanged from the six months ended June 30, 2002. The
rate in the second quarter of 2002 reflected a cumulative tax adjustment
recorded to increase the tax rate from 39.2% through the first quarter of 2002
to 40.1% year to date at June 30, 2002.
As a result of the foregoing factors, consolidated net income decreased
$1.9 million, or 64.4%, from $2.9 million for the three months ended June 30,
2002 to $1.0 million for the three months ended June 30, 2003, and decreased
$1.8 million, or 25.2%, from $7.4 million for the six months ended June 30, 2002
to $5.6 million for the six months ended June 30, 2003.
Financial Condition
At June 30, 2003, the Company had cash, cash equivalents and short-term
investments of $48.2 million, working capital of $104.4 million and a current
ratio of 5.6 to 1.
Cash provided by operating activities was $8.0 million and $14.5
million for the six months ended June 30, 2003 and 2002, respectively. The
decrease in cash provided is principally a result of the increase in inventories
during the first six months of 2003 compared to the decrease in inventories
during the first half of 2002.
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 $2.7 million at June 30, 2003 compared to $4.2 million at June 30,
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 six months ended June 30, 2003 totaled
$2.5 million. For the past two years capital expenditures averaged approximately
$0.9 million per quarter. In 2003, the Company expects to spend approximately $6
million on capital expenditures to upgrade and modernize manufacturing equipment
primarily at the Newport Firearms, Ruger Investment Casting, and Pine Tree
Castings Divisions. The Company finances, and intends to continue to finance,
all of these activities with funds provided by operations.
For the six months ended June 30, 2003 dividends paid totaled $10.8
million. This amount reflects the regular quarterly dividend of $.20 per share
paid in March and June 2003. On July 24, 2003, the Company declared a regular
quarterly dividend of $.20 per share payable on September 15, 2003. Future
dividends 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 June 30, 2003, the total amount due from the purchaser
was $2.1 million. The Company purchases aluminum castings used in the
manufacture of certain models of pistols exclusively from Uni-Cast.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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.
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 constitutional
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
15
the New York State Supreme Court for resolution. On April 26, 2001, the
Appellate Division of the New York State
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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,
fourteen have been dismissed. Nine 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; Wilmington - dismissed by trial court, no appeal; Boston -
voluntary dismissal with prejudice by the City at the close of fact discovery;
and Cincinnati - voluntarily withdrawn after a unanimous vote of the city
council.
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.
Washington, D.C. is on appeal from its complete dismissal. On March 7, 2003, the
consolidated California Cities case involving nine cities and three counties was
dismissed as to all manufacturer defendants, and plaintiffs appealed on June 9,
2003. On June 24, 2003, the New York State Supreme Court, Appellate Division,
affirmed the dismissal of the New York case; plaintiffs have appealed. The
Chicago dismissal was reversed in part on appeal, and an appeal to the Illinois
Supreme Court is pending. Detroit/Wayne County is also on appeal from partial
dismissal.
Cleveland and New York City are stayed. Camden City and St. Louis have
pending motions to dismiss at the trial level. 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. Newark and Jersey City are proceeding with pretrial discovery. Camden
City was dismissed pending the unrelated bankruptcy proceeding of one of the
Company's co-defendants.
On May 14, 2003, an advisory jury in the NAACP case returned a verdict
rejecting the NAACP's claims. On July 21, 2003, an order of dismissal was
entered. It is unknown at present if plaintiffs will appeal.
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.
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.
16
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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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
independent 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.
Recent Accounting Standards
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.
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.
17
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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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.
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
At the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Treasurer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule
13a-15(e) promulgated under the Securities and Exchange Act of 1934. Based upon
that evaluation, the Chief Executive Officer and Treasurer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective in ensuring that material information related to the Company is made
known to the Chief Executive Officer and Treasurer and Chief Financial Officer
by others within the Company during the period in which this report was being
prepared. During the second quarter of 2003, there
18
were no changes in the Company's internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed at
Note 7 to this Form 10-Q report, which is incorporated herein by reference.
ITEM 1. LEGAL PROCEEDINGS -- CONTINUED
The Company has reported all cases instituted against it through March
31, 2003, 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 June 30, 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 June 30, 2003, one previously reported
case was settled:
Case Name Jurisdiction
--------- ------------
Dantin Louisiana
The settlement amount was within the limits of its self-insurance
coverage or self-insurance retention.
On April 30, 2003, the Cincinnati (OH) lawsuit was voluntarily
withdrawn after a unanimous vote of the city council.
On May 14, 2003, the jury in the NAACP (NY) lawsuit rejected the
NAACP's claims as to all defendants, finding each of them not liable by a
verdict of at least 10-2 or by reporting that they were unable to reach a
verdict due to a deadlock of 9-3 in favor of all remaining defendants. The
jury's decision was advisory and the matter remained pending before the Eastern
District of New York (Judge J. Weinstein) for further rulings as of June 30,
2003. On July 21, 2003, an order of dismissal of all counts in the case was
entered. It is unknown at present if plaintiffs will appeal.
On June 24, 2003, the Appellate Division, First Department, of the New
York State Supreme Court affirmed the complete dismissal of all claims including
that of "public nuisance" made by the New York State Attorney General in the New
York State (NY) case. It is unknown at this time whether plaintiffs will appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2003 Annual Meeting of the Stockholders of the Company was held on
May 6, 2003. The table below sets forth the results of the votes taken
at the 2003 Annual Meeting:
19
Votes
1. Election of Directors Votes For Withheld
William B. Ruger, Jr. 24,181,747 1,323,610
Stephen L. Sanetti 24,140,146 1,365,211
Richard T. Cunniff 25,258,161 247,196
Townsend Hornor 25,192,812 312,545
Paul X. Kelley 25,268,054 237,303
John M. Kingsley, Jr. 25,311,888 193,469
James E. Service 25,311,310 194,047
2. Ratification of KPMG LLP as Auditors for 2003
Votes For Votes Against Votes Withheld
25,308,566 162,282 34,509
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification Pursuant to Rule 13a-14(a) as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification Pursuant to Rule 13a-14(a) as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 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 filed the following reports on Form 8-K during the
three months ended June 30, 2003:
On April 22, 2003, the Company filed a Current Report on
Form 8-K regarding an update to stockholders and other
interested parties on financial results for the first
quarter ended March 31, 2003.
On April 30, 2003, the Company filed a Current Report on
Form 8-K regarding the retirement of Erle G. Blanchard as
Vice Chairman, President, Chief Operating Officer, Treasurer
and Director as of April 30, 2003.
On May 6, 2003, the Company filed a Current Report on Form
8-K announcing the appointment of Stephen L. Sanetti as its
President and Chief Operating Officer effective immediately.
On June 20, 2003, the Company filed a Current Report on Form
8-K regarding an update to stockholders and other interested
parties on preliminary estimates for the second quarter
ending June 30, 2003.
20
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 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: August 6, 2003 /S/ THOMAS A. DINEEN
--------------------------------------
Thomas A. Dineen
Principal Financial Officer,
Treasurer and Chief Financial Officer
21