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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2004
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, $1 par
value, at April 30, 2004: 26,910,720.
Page 1 of 23
INDEX
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 2004 and December
31, 2003 3
Condensed consolidated statements of income--Three months ended
March 31, 2004 and 2003 5
Condensed consolidated statements of cash flows--Three months
ended March 31, 2004 and 2003 6
Notes to condensed consolidated financial statements--March 31, 2004 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 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
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,
2004 2003
--------- ------------
(unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents $ 2,861 $ 3,446
Short-term investments 48,091 50,026
Trade receivables, less allowances for
doubtful accounts ($373 and $441) and
discounts ($448 and $772) 16,851 13,284
Inventories:
Finished products 13,580 15,243
Materials and products in process 34,953 33,286
--------- ---------
48,533 48,529
Deferred income taxes 7,523 7,284
Prepaid expenses and other current assets 1,624 1,985
--------- ---------
Total current assets 125,483 124,554
Property, plant and equipment 156,839 155,689
Less allowances for depreciation (129,940) (128,525)
--------- ---------
26,899 27,164
Deferred income taxes 7,907 8,248
Other assets 9,989 10,047
--------- ---------
Total Assets $ 170,278 $ 170,013
========= =========
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,
2004 2003
--------- ------------
(unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and accrued expenses $ 5,004 $ 4,386
Product liability 4,000 4,000
Employee compensation and benefits 6,601 6,177
Workers' compensation 6,007 6,057
Income taxes 2,386 1,219
--------- ------------
Total current liabilities 23,998 21,839
Accrued pension liability 4,738 4,729
Deferred income taxes 7,645 7,140
Product liability accrual 1,760 2,665
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 111,363 112,866
Accumulated other comprehensive income (8,645) (8,645)
--------- ------------
Total Stockholders' Equity 132,137 133,640
--------- ------------
Total Liabilities and Stockholders' Equity $ 170,278 $ 170,013
========= ============
Note:
The balance sheet at December 31, 2003 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,
2004 2003
------------------------------
Net firearms sales $ 36,138 $ 36,483
Net castings sales 4,099 4,649
-------- --------
Total net sales 40,237 41,132
Cost of products sold 28,026 28,695
-------- --------
Gross profit 12,211 12,437
Expenses:
Selling 4,150 3,897
General and administrative 1,676 1,375
-------- --------
5,826 5,272
-------- --------
Operating profit 6,385 7,165
Other income-net 90 392
-------- --------
Income before income taxes 6,475 7,557
Income taxes 2,596 3,030
-------- --------
Net income $ 3,879 $ 4,527
Earnings per share ======== ========
Basic $ 0.14 $ 0.17
======== ========
Diluted $ 0.14 $ 0.17
======== ========
Cash dividends per share $ 0.20 $ 0.20
======== ========
Average shares outstanding
Basic 26,911 26,911
======== ========
Diluted 27,008 26,911
======== ========
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,
2004 2003
----------------------------
Cash Provided by Operating Activities $ 4,012 $ 7,894
Investing Activities
Property, plant and equipment additions (1,150) (1,424)
Purchases of short-term investments (32,460) (36,366)
Proceeds from sales or maturities of
short-term investments 34,395 34,741
--------- --------
Cash provided (used) by investing activities 785 (3,049)
--------- --------
Financing Activities
Dividends paid (5,382) (5,382)
--------- --------
Cash used by financing activities (5,382) (5,382)
--------- --------
Decrease in cash and cash equivalents (585) (537)
Cash and cash equivalents at beginning of period 3,446 3,598
--------- --------
Cash and cash equivalents at end of period $ 2,861 $ 3,061
========= ========
See notes to condensed consolidated financial statements.
6
STURM RUGER & COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2004
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,
2004 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2004. 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, 2003.
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.
Stock Options: 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
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
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, 2004 2003
- ------------------------------------------------- ------- -------
Net Income:
As reported $ 3,879 $ 4,527
Add: Recognized stock-based employee
compensation, net of tax -- --
Deduct: Employee compensation expense
determined under fair value method, net of tax (12) (97)
------- -------
Pro forma $ 3,867 $ 4,430
======= =======
Earnings per Share (Basic and Diluted):
As reported $ 0.14 $ 0.17
Pro forma $ 0.14 $ 0.16
======= =======
The fair value of stock-based compensation expense was computed using the
Black-Scholes option-pricing model with the following weighted average
assumptions in 2001: dividend yield of 8.0%, expected volatility of 34.3%, risk
free rate of return of 2.0%, and expected lives of 5 years. The estimated fair
value of options granted is subject to the assumptions made and if the
assumptions changed, the estimated fair value amounts could be significantly
different.
Recent Accounting Pronouncements: The Company is not aware of any recent
accounting pronouncements that are expected to have a material effect on its
financial position or financial results.
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, 2004 and 2003 were $0.8 million and $0.1
million, respectively.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 5--PENSION PLANS
The Company sponsors two defined benefit pension plans which cover
substantially all employees. A third defined benefit plan is non-qualified and
covers certain executive officers of the Company. The estimated cost of these
plans is summarized below:
Three Months Ended March 31,
2004 2003
----------------------------
Service cost $ 376 $ 372
Interest cost 753 745
Expected return on plan assets (805) (797)
Amortization of prior service cost 145 144
Recognized actuarial gains 191 189
------- ------
Net periodic pension cost $ 660 $ 653
======= ======
NOTE 6--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
27,008,000 and 26,911,000 for the three months ended March 31, 2004 and 2003,
respectively.
NOTE 7--COMPREHENSIVE INCOME
As there were no non-owner changes in equity during the first quarter of
2004 and 2003, total comprehensive income equals net income, or $3.9 million and
$4.5 million, respectively.
NOTE 8--CONTINGENT LIABILITIES
As of March 31, 2004, the Company was a defendant in approximately 20
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
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(ii) those brought by cities, municipalities, counties, associations, and
individuals 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, and counties 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. In subsequent
proceedings involving other defendants, the New York Court of Appeals as a
matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a manufacturer's lawfully made
products; and 2) liability of firearms manufacturers could not be apportioned
under a market share theory. More recently, the New York Court of Appeals on
October 21, 2003 declined to hear the appeal from the decision of the New York
Supreme Court, Appellate Division, affirming the dismissal of New York Attorney
General Eliot Spitzer's public nuisance suit against the Company and other
manufacturers and distributors of firearms. In its decision, the Appellate
Division relied heavily on Hamilton in concluding that it was "legally
inappropriate," "impractical," "unrealistic" and "unfair" to attempt to hold
firearms manufacturers responsible under theories of public nuisance for the
criminal acts of others.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
Of the lawsuits brought by municipalities or a state Attorney General,
fifteen have been dismissed with no appeal pending. Thirteen 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; Cincinnati - voluntarily withdrawn after a unanimous
vote of the city council; Detroit - dismissed by Michigan Court of Appeals, no
appeal; Wayne County - dismissed by Michigan Court of Appeals, no appeal; New
York State - Court of Appeals denied plaintiff's petition for leave to appeal
the Intermediate Appellate Court's dismissal, no further appeal; and Newark -
Superior Court of New Jersey Law Division for Essex County dismissed the case
with prejudice.
Camden City was dismissed on July 7, 2003 due to the bankruptcy of one of
the parties. No further action has been taken by the city. On November 13, 2003,
plaintiffs in the Jersey City case voluntarily dismissed the matter. It is
unknown whether plaintiffs will re-file.
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. The Chicago dismissal was reversed in part on appeal,
and an appeal to the Illinois Supreme Court is pending. On October 20, 2003, the
St. Louis Circuit Court dismissed the St. Louis case, and the city has filed a
notice of appeal.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by
the trial court, but the Indiana Supreme Court reversed this dismissal and
remanded the case for discovery proceedings on December 23, 2003. Cleveland and
New York City are open cases and could proceed to trial. In the NAACP case, on
May 14, 2003, an advisory jury returned a verdict rejecting the NAACP's claims.
On July 21, 2003, Judge Jack B. Weinstein entered an order dismissing the NAACP
lawsuit, but this order contained lengthy dicta which defendants believe are
contrary to law and fact. Appeals by both sides have been filed, but plaintiffs
have withdrawn their appeal.
Legislation has been passed in approximately 34 states precluding suits of
the type brought by the municipalities mentioned above, and similar federal
legislation has been introduced in the U.S. Congress. It passed the U.S. House
by a 2-to-1 bipartisan majority and had over 54 co-sponsors in the U.S. Senate.
It was considered by the U.S. Senate in February 2004, but failed to gain final
passage after it was encumbered with numerous non-germane amendments. It is
uncertain when it may be reconsidered by the U.S. Senate.
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, for losses exceeding $2.0 million per claim,
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
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, 2000 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. The U.S. Federal
Trade Commission announced that it was terminating this investigation without
further action on August 22, 2003.
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
cannot be made. However, in the product liability cases in which a dollar amount
of damages is claimed, the amount of damages claimed, which totaled $433 million
at March 31, 2004, 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 cannot 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
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
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.
The Company has reported all cases instituted against it through December
31, 2003 and the results of those cases, where terminated, to the Securities and
Exchange Commission 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 2004 and 2003, 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.
NOTE 10--OPERATING SEGMENT INFORMATION
The Company has two reportable operating segments: firearms and investment
castings. The firearms segment manufactures and sells rifles, pistols,
revolvers, and shotguns principally to a select number of licensed 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, 2004 2003
- ---------------------------- -------- --------
Net Sales
Firearms $ 36,138 $ 36,483
Castings
Unaffiliated 4,099 4,649
Intersegment 595 5,340
--------- --------
4,694 9,989
Eliminations (595) (5,340)
--------- --------
$ 40,237 $ 41,132
========= ========
Income Before Income Taxes
Firearms $ 6,913 $ 7,616
Castings (504) (382)
Corporate 66 323
--------- --------
$ 6,475 $ 7,557
========= ========
March 31, December 31,
Identifiable Assets 2004 2003
--------- ------------
Firearms $ 73,757 $ 72,600
Castings 18,502 17,939
Corporate 78,019 79,474
--------- ------------
$ 170,278 $ 170,013
========= ============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company Overview
Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the
design, manufacture, and sale of firearms and precision investment castings. The
Company's design and manufacturing operations are located in the United States.
Substantially all sales are domestic.
The Company is the only U.S. firearms manufacturer which offers products
in all four industry product categories - rifles, shotguns, pistols, and
revolvers. The Company's firearms are sold through a select number of
independent wholesale distributors principally to commercial sporting market.
Investment castings manufactured are of titanium and steel alloys.
Investment castings are sold either directly to or through manufacturers'
representatives to companies in a wide variety of industries.
The Company measures its performance only against its own historical
results because the Company is unable to compare its performance to other
companies or specific current industry trends in a timely manner. Many of the
Company's competitors are private companies not subject to public information
reporting requirements, and most industry-wide data is generally not available
on a current basis.
The Company does not consider its overall firearms business to be
predictably seasonal; however, sales of certain models of firearms are usually
lower in the third quarter of the year.
Results of Operations
Consolidated net sales of $40.2 million were achieved by the Company in
the first quarter of 2004. This represents a decrease of $0.9 million or 2.2%
from the first quarter of 2003 consolidated net sales of $41.1 million.
Firearms segment net sales were $36.1 million in the first quarter of 2004
compared to $36.5 million in the corresponding 2003 period, a decrease of $0.4
million or 1.1%. Firearms unit shipments increased 0.7%. Shipments increased in
the pistol, revolver and shotgun major product categories, with only rifles
failing to match unit sales in the comparable 2003 period. Shipments of rimfire
bolt-action and lever action rifles were particularly strong in the first
quarter of 2003, driven by the popularity of the then-new .17 HMR caliber
ammunition. The Company continues a sales incentive program instituted in 2003
for its distributors which allows them to earn rebates of up to 1.5% if certain
annual overall sales targets are achieved. In March 2004 the Company announced a
sales incentive program for certain autoloading rimfire rifles sold from March
to April 2004.
Castings segment net sales decreased $0.5 million or 10.9% from $4.6
million in the first quarter of 2003 to $4.1 million in the first quarter of
2004 primarily as a result of lower unit volume. Shipments of titanium golf club
heads to Karsten Manufacturing Corporation decreased by $0.9 million from the
first quarter of 2003. There are no future shipments expected to Karsten
Manufacturing. The Company plans to continue to pursue other casting business
opportunities.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
Consolidated cost of products sold for the first quarter of 2004 was $28.0
million compared to $28.7 million for the first quarter of 2003, a decrease of
$0.7 million or 2.4%. This was primarily attributable to decreased product
liability costs and the decline in sales of both segments.
Gross profit as a percentage of net sales increased to 30.3% in the first
quarter of 2004 from 30.2% in the comparable 2003 period. This improvement is
primarily attributable to reduced product liability costs.
Selling, general and administrative expenses increased to $5.8 million in
the first quarter of 2004 from $5.3 million in the first quarter of 2003
primarily due to promotional expenses related to the aforementioned sales
incentive program for certain autoloading rimfire rifles and other various
expenses.
Other income-net decreased to $0.1 million in the first quarter of 2004
from $0.4 million in the first quarter of 2003 due to increased maintenance
expenses associated with nonmanufacturing properties and reduced earnings on
short-term investments as a result of declining interest rates.
The effective income tax rate of 40.1% in the first quarter of 2004
remained consistent with the income tax rate in the corresponding 2003 period.
As a result of the foregoing factors, consolidated net income decreased
$0.6 million to $3.9 million for the first quarter of 2004 from $4.5 million in
the first quarter of 2003.
Financial Condition
OPERATIONS
At March 31, 2004, the Company had cash, cash equivalents and short-term
investments of $51.0 million, working capital of $101.5 million and a current
ratio of 5.2 to 1, compared to $53.4 million, $102.7 million, and 5.7 to 1,
respectively, at December 31, 2003.
Cash provided by operating activities was $4.0 million and $7.9 million in
the first quarter of 2004 and 2003, respectively. This change in cash flows is
primarily the result of an increase in accounts receivable in the first quarter
of 2004, the utilization of a prepaid tax asset during the first quarter of
2003, and fluctuations in various other 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 a maximum of 120 days. Dating plan receivable
balances were $6.9 million at March 31, 2004 compared to $6.7 million at March
31, 2003. 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.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
The Company purchases its various raw materials from a number of
suppliers. There is, however, a limited supply of these materials in the
marketplace at any given time which can cause the purchase prices to vary based
upon numerous market factors. The Company believes that it has adequate
quantities of raw materials in inventory to provide ample time to locate and
obtain additional items at a reasonable cost without interruption of its
manufacturing operations. However, if market conditions result in a significant
prolonged inflation of certain prices, the Company's results could be materially
adversely affected.
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 the former
Uni-Cast division. In July 2002, the Company established an additional
collateralized line of credit for the purchaser and, as of March 31, 2004, the
total amount due from the purchaser was $1.8 million. The Company purchases
aluminum castings used in the manufacture of certain models of pistols
exclusively from Uni-Cast.
INVESTING AND FINANCING
Capital expenditures during the three months ended March 31, 2004 totaled
$1.2 million. For the past two years capital expenditures have averaged
approximately $1.0 million per quarter. In 2004, 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, 2004 dividends paid totaled $5.4
million. This amount reflects the regular quarterly dividend of $.20 per share
paid on March 15, 2004. Future dividends will depend on many factors, including
internal estimates of future performance, then-current cash and short-term
investments, and the Company's need for funds.
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 2004.
Firearms Legislation
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.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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." Unless reauthorized by Congress, this law will
"sunset" on September 14, 2004. 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.
Firearms Litigation
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. In subsequent
proceedings involving other defendants, the New York Court of Appeals as a
matter of law confirmed that 1) no legal duty existed under the circumstances to
prevent or investigate criminal misuses of a manufacturer's lawfully made
products; and 2) liability of firearms manufacturers could not be apportioned
under a market share theory. More recently, the New York Court of Appeals on
October 21, 2003 declined to hear the appeal from the decision of the New York
Supreme Court, Appellate Division, affirming the dismissal of New York Attorney
General Eliot Spitzer's public nuisance suit against the Company and other
manufacturers and distributors of firearms. In its decision, the Appellate
Division relied heavily on Hamilton in concluding that it was "legally
inappropriate," "impractical," "unrealistic" and "unfair" to attempt to hold
firearms manufacturers responsible under theories of public nuisance for the
criminal acts of others.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
Of the lawsuits brought by municipalities or a state Attorney General,
fifteen have been dismissed with no appeal pending. Thirteen 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; Cincinnati - voluntarily withdrawn after a unanimous
vote of the city council; Detroit - dismissed by Michigan Court of Appeals, no
appeal; Wayne County - dismissed by Michigan Court of Appeals, no appeal; New
York State - Court of Appeals denied plaintiff's petition for leave to appeal
the Intermediate Appellate Court's dismissal, no further appeal; and Newark -
Superior Court of New Jersey Law Division for Essex County dismissed the case
with prejudice.
Camden City was dismissed on July 7, 2003 due to the bankruptcy of one of
the parties. No further action has been taken by the city. On November 13, 2003,
plaintiffs in the Jersey City case voluntarily dismissed the matter. It is
unknown whether plaintiffs will re-file.
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. The Chicago dismissal was reversed in part on appeal,
and an appeal to the Illinois Supreme Court is pending. On October 20, 2003, the
St. Louis Circuit Court dismissed the St. Louis case, and the city has filed a
notice of appeal.
The Indiana Court of Appeals affirmed the dismissal of the Gary case by
the trial court, but the Indiana Supreme Court reversed this dismissal and
remanded the case for discovery proceedings on December 23, 2003. Cleveland and
New York City are open cases and could proceed to trial. In the NAACP case, on
May 14, 2003, an advisory jury returned a verdict rejecting the NAACP's claims.
On July 21, 2003, Judge Jack B. Weinstein entered an order dismissing the NAACP
lawsuit, but this order contained lengthy dicta which defendants believe are
contrary to law and fact. Appeals by both sides have been filed, but plaintiffs
have withdrawn their appeal.
Legislation has been passed in approximately 34 states precluding suits of
the type brought by the municipalities mentioned above, and similar federal
legislation has been introduced in the U.S. Congress. It passed the U.S. House
by a 2-to-1 bipartisan majority and had over 54 co-sponsors in the U.S. Senate.
It was considered by the U.S. Senate in February 2004, but failed to gain final
passage after it was encumbered with numerous non-germane amendments. It is
uncertain when it may be reconsidered by the U.S. Senate.
Other Operational Matters
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 the financial position or results of operations of
the Company.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
The valuation of the future defined benefit pension obligations at
December 31, 2003 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 $0.5 million in 2003.
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.
Adjustments to Critical Accounting Policies
The Company has not made any adjustments to its critical accounting
estimates and assumptions described in the Company's Annual Report on Form 10-K
filed on March 12, 2004, or the judgment affecting the application of those
estimates and assumptions.
Recent Accounting Pronouncements
The Company is not aware of any recent accounting pronouncements that are
expected to have a material effect on its financial position or financial
results.
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, state attorneys 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.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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
Evaluation
The Company's management, with the participation of the Company's Chief
Executive Officer and Treasurer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report.
Conclusions
Based on that evaluation, the Company's Chief Executive Officer and
Treasurer and Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective.
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the Company's most recent quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
20
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, 2003, and the results of those cases, where terminated, to the Securities
and Exchange Commission on its previous Form 10-K and 10-Q reports, to which
reference is hereby made.
One case was formally instituted against the Company during the three
months ended March 31, 2004, which involved significant demands for compensatory
and/or punitive damages and in which the Company has been served with process.
Michelle Beasley v. Company (AL) in the Circuit Court for Walker County.
The complaint was served on March 10, 2004 and alleges that the plaintiff was
injured when a Ruger New Model single action revolver allegedly discharged after
it was picked up. Plaintiff seeks compensatory and exemplary damages.
During the three months ended March 31, 2004, no previously reported cases
were settled.
On March 9, 2004, in the previously reported Diamond (FL) case, the
plaintiff voluntarily dismissed the action when he learned that his claim was
barred by a Florida statute of repose. Plaintiff has until December 20, 2006 to
reinstate the action, although the Company considers this highly unlikely.
On March 10, 2004, the previously reported Newark (NJ) case was finally
dismissed with prejudice. The plaintiffs' deadline of March 1, 2004 to file an
application to reinstate the previous dismissal of their complaint by the trial
court was not met.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
21
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 furnished the following report on Form 8-K during the
three months ended March 31, 2004:
On February 9, 2004, the Company furnished a Current Report on
Form 8-K in connection with the public release of its
financial results for the fourth quarter and year ended
December 31, 2003.
22
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2004
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 4, 2004 S/THOMAS A. DINEEN
--------------------------------------
Thomas A. Dineen
Principal Financial Officer,
Treasurer and Chief Financial Officer
23