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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, 2005
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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 1-10435
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
April 30, 2005: Common Stock, $1 par value - 26,910,720.
INDEX
STURM, RUGER & COMPANY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed balance sheets--March 31, 2005 and
December 31, 2004 3
Condensed statements of income--Three months ended
March 31, 2005 and 2004 5
Condensed statements of cash flows--Three months ended
March 31, 2005 and 2004 6
Notes to condensed financial statements--March 31, 2005 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. Unregistered Sales of Equity Securities and Use of Proceeds 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 22
SIGNATURES 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, December 31,
2005 2004
---- ----
(Unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents $ 3,841 $ 4,841
Short-term investments 30,890 28,430
Trade receivables, less allowances for
doubtful accounts ($373 and $373) and
discounts ($345 and $555) 18,988 16,082
Inventories:
Finished products 11,295 13,289
Materials and products in process 37,428 36,230
--------- ---------
48,723 49,519
Deferred income taxes 6,813 6,445
Prepaid expenses and other current assets 2,815 4,383
--------- ---------
Total current assets 112,070 109,700
Property, plant and equipment 160,298 160,434
Less allowances for depreciation (133,574) (132,860)
--------- ---------
26,724 27,574
Deferred income taxes 1,165 1,178
Other assets 8,626 8,489
--------- ---------
Total Assets $ 148,585 $ 146,941
========= =========
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, December 31,
2005 2004
---- ----
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and accrued expenses $ 4,013 $ 5,281
Product liability 1,902 1,968
Employee compensation 6,200 5,868
Workers' compensation 5,451 5,387
Income taxes 2,349 768
--------- ---------
Total current liabilities 19,915 19,272
Accrued pension liability 6,379 6,337
Product liability accrual 1,133 1,164
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 - 26,910,700 26,911 26,911
Additional paid-in capital 2,508 2,508
Retained earnings 102,014 101,024
Accumulated other comprehensive income(loss) (10,275) (10,275)
--------- ---------
Total Stockholders' Equity 121,158 120,168
--------- ---------
Total Liabilities and Stockholders' Equity $ 148,585 $ 146,941
========= =========
Note:
The balance sheet at December 31, 2004 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 financial statements.
4
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended March 31,
2005 2004
---- ----
Net firearms sales $ 39,100 $ 36,138
Net castings sales 5,160 4,099
-------- --------
Total net sales 44,260 40,237
Cost of products sold 32,412 28,026
-------- --------
Gross profit 11,848 12,211
Expenses:
Selling 4,061 4,150
General and administrative 1,628 1,676
-------- --------
5,689 5,826
-------- --------
Operating profit 6,159 6,385
Other income (loss)-net (14) 90
-------- --------
Income before income taxes 6,145 6,475
Income taxes 2,464 2,596
-------- --------
Net income $ 3,681 $ 3,879
======== ========
Earnings per share
Basic $ 0.14 $ 0.14
======== ========
Diluted $ 0.14 $ 0.14
======== ========
Cash dividends per share $ 0.10 $ 0.20
======== ========
Average shares outstanding
Basic 26,911 26,911
======== ========
Diluted 26,911 27,008
======== ========
See notes to condensed financial statements.
5
STURM, RUGER & COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Three Months Ended March 31,
2005 2004
---- ----
Cash Provided by Operating Activities $ 4,700 $ 4,012
Investing Activities
Property, plant and equipment additions (550) (1,150)
Purchases of short-term investments (35,801) (32,460)
Proceeds from maturities of short-term investments 33,342 34,395
-------- --------
Cash provided (used) by investing activities (3,009) 785
-------- --------
Financing Activities
Dividends paid (2,691) (5,382)
-------- --------
Cash used by financing activities (2,691) (5,382)
-------- --------
Decrease in cash and cash equivalents (1,000) (585)
Cash and cash equivalents at beginning of period 4,841 3,446
-------- --------
Cash and cash equivalents at end of period $ 3,841 $ 2,861
======== ========
See notes to condensed financial statements.
6
STURM, RUGER & COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2005
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed 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
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, 2005 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2005. These financial statements have been prepared on a
basis that is substantially consistent with the accounting principles applied in
our Annual Report on Form 10-K for the year ended December 31, 2004.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Organization: Sturm, Ruger & Company, Inc. (the "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 condensed financial statements have
been prepared from the Company's books and records and include all of the
Company's accounts. All significant intercompany accounts and transactions have
been eliminated. Certain prior year balances may 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 Standards ("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 FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
Three Months Ended March 31, 2005 2004
- ---------------------------- ---- ----
Net Income:
As reported $ 3,681 $ 3,879
Add: Recognized stock-based employee compensation, net of tax -- --
Deduct: Employee compensation expense determined under fair value
method, net of tax (5) (12)
------- -------
Pro forma $ 3,676 $ 3,867
======== =======
Basic Earnings per Share:
As reported $ 0.14 $ 0.14
Pro forma $ 0.14 $ 0.14
======== =======
Diluted Earnings per Share:
As reported $ 0.14 $ 0.14
Pro forma $ 0.14 $ 0.14
======== =======
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. There have been no stock options granted since 2001.
Recent Accounting Pronouncements: In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS 151, "Inventory Costs -- an
amendment of ARB No. 43, Chapter 4" which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material.
SFAS 151 requires that these costs be recognized as current period charges
regardless of whether they are abnormal. In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of manufacturing be based
on the normal capacity of the production facilities. SFAS 151 is effective for
fiscal years beginning after June 15, 2005. The Company has not completed its
evaluation of the impact that the adoption of this statement will have on its
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment",
which requires that the cost resulting from all share-based payment transactions
be recognized in the financial statements. This Statement requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award. SFAS 123R is effective
for interim or annual reporting periods beginning after June 15, 2005. The
Company does not expect the adoption of this statement to have a material effect
on its financial position or results of operations.
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.
8
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 4 - INCOME TAXES
The Company's 2005 effective tax rate differs from the statutory tax
rate due to state income taxes and the newly enacted tax deduction for qualified
production activities provided under the American Jobs Creation Act of 2004.
This deduction is available to the Company for the first time in 2005. The
Company's 2004 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, 2005 and 2004 were $0.1 million and $0.8
million, respectively.
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, 2005 2004
- ---------------------------- ---- ----
Service cost $ 346 $ 376
Interest cost 706 753
Expected return on plan assets (829) (805)
Amortization of prior service cost 71 145
Recognized actuarial gains 195 191
----- -----
Net periodic pension cost $ 489 $ 660
===== =====
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 for the
three months ended March 31, 2005 and 2004 of 26,911,000 and 27,008,000,
respectively.
NOTE 7 - COMPREHENSIVE INCOME
As there were no non-owner changes in equity during the first three
months of 2005 and 2004, total comprehensive income equals net income for the
three months ended March 31, 2005 and 2004 of $3.7 million and $3.9 million,
respectively.
NOTE 8 - CONTINGENT LIABILITIES
As of March 31, 2005, the Company is a defendant in approximately six
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into two categories:
9
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
(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, 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.
Of the lawsuits brought by municipalities or a state Attorney General,
twenty have been 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;
10
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
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;
Newark - Superior Court of New Jersey Law Division for Essex County dismissed
the case with prejudice; City of Camden - dismissed on July 7, 2003, not
reopened; Jersey City - voluntarily dismissed and not re-filed; St. Louis -
Missouri Supreme Court denied plaintiffs' motion to appeal Missouri Appellate
Court's affirmance of dismissal; Chicago - Illinois Supreme Court denied
plaintiffs' petition for rehearing; and Los Angeles City, Los Angeles County,
and San Francisco - Appellate Court affirmed summary judgment in favor of
defendants, no further appeal.
The dismissal of the Washington, D.C. lawsuit was sustained on appeal,
but individual plaintiffs were permitted to proceed to discovery and attempt to
identify the manufacturers of the firearms used in their shootings as "machine
guns" under the city's "strict liability" law. On October 19, 2004, the D.C.
Court of Appeals vacated the court's judgment, which dismissed the city's claim
against firearms manufacturers but let stand certain individuals' claims against
the manufacturers of firearms allegedly used in criminal assaults against
plaintiffs under the Washington, D.C. "Strict Liability Act," subject to proof
of causation. On April 21, 2005, the Court of Appeals, in an en banc rehearing,
dismissed all common law negligence and "public nuisance" claims against all
defendants, but again permitted plaintiffs to proceed to discovery to determine
whether any of defendants' products could be identified under the D.C. "Strict
Liability Act." It is uncertain if any further appeal will be pursued by any
party to this lawsuit.
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 the New York City case is presently scheduled
to begin trial in September, 2005.
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
were filed, but plaintiffs withdrew their appeal. On August 3, 2004, the United
States Court of Appeals for the Second Circuit granted the NAACP's motion to
dismiss the defendants' appeal of Judge Weinstein's order denying defendants'
motion to strike his dicta made in his order dismissing the NAACP's case, and
the defendants' motion for summary disposition was denied as moot. The ruling of
the Second Circuit effectively confirmed the decision in favor of defendants and
brought this matter to a conclusion.
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 House by a
2-to-1 bipartisan majority and had over 54 co-sponsors in the Senate. It was
considered by the Senate in February 2004, but failed to gain final passage
after it was encumbered with numerous non-germane amendments. It was
reintroduced in early 2005, and Senate hearings were held in March 2005. It is
uncertain when it will be voted upon by either the Senate Judiciary Committee or
the full Senate.
11
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
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, 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.
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 $13.6
million at March 31, 2005, 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's management monitors the status of known claims and the
product liability accrual, which includes amounts for asserted and unasserted
claims. While it is not possible to forecast the outcome of litigation or the
timing of costs, in the opinion of management, after consultation with special
and corporate counsel, it is not probable and is unlikely that litigation,
including punitive damage claims, will have a material adverse effect on the
financial position of the Company, but may have a material impact on the
Company's financial results for a particular period.
The Company has reported all cases instituted against it through
December 31, 2004 and the results of those cases, where terminated, to the
S.E.C. on its previous Form 10-K and 10-Q reports, to which reference is hereby
made.
NOTE 9 - RELATED PARTY TRANSACTIONS
For the three months ended March 31, 2005 and 2004, the Company paid
Newport Mills, of which William B. Ruger, Jr., Chairman and Chief Executive
Officer of the Company, is the sole proprietor, $60,750 for storage rental and
office space.
12
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 10 - OPERATING SEGMENT INFORMATION
The Company has two reportable segments: firearms and investment
castings. The firearms segment manufactures and sells rifles, pistols,
revolvers, and shotguns principally to a select number of independent wholesale
distributors primarily located in the United States. The investment castings
segment consists of two operating divisions which manufacture and sell titanium
and steel investment castings. Selected operating segment financial information
follows (in thousands):
Three months ended March 31, 2005 2004
- ---------------------------- ---- ----
Net Sales
Firearms $ 39,100 $ 36,138
Castings
Unaffiliated 5,160 4,099
Intersegment 5,664 4,062
-------- --------
10,824 8,161
Eliminations (5,664) (4,062)
-------- --------
$ 44,260 $ 40,237
======== ========
Income(loss) before income taxes
Firearms $ 6,379 $ 6,913
Castings (333) (504)
Corporate 99 66
-------- --------
6,145 $ 6,475
======== ========
March 31, December 31,
2005 2004
---- ----
Identifiable Assets
Firearms $ 79,193 $ 77,049
Castings 20,371 19,581
Corporate 49,021 50,311
-------- --------
$148,585 $146,941
======== ========
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 the 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.
Because many of the Company's competitors are not subject to public
filing requirements and industry-wide data is generally not available in a
timely manner, the Company is unable to compare its performance to other
companies or specific current industry trends. Instead, the Company measures
itself against its own historical results.
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
The Company achieved consolidated net sales of $44.3 million for the
first quarter of 2005. This represents an increase of $4.1 million or 10.0% from
the first quarter of 2004 consolidated net sales of $40.2 million.
Firearms segment net sales of $39.1 million in the first quarter of
2005 were $3.0 million, or 8.2% greater than the first quarter of 2004. Firearms
unit shipments increased 2% for the three month period ended March 31, 2005,
from the comparable 2004 period as demand for pistols improved. A modest price
increase and a change in mix from lower priced products to higher priced
products resulted in the larger increase in sales versus unit shipments. In
2005, the Company continued a sales incentive program begun in 2004 for its
distributors which allows them to earn rebates of up to 1.5% if certain annual
overall sales targets are achieved. This program replaced a similar sales
incentive program in 2004.
Casting segment net sales increased by $1.1 million or 25.9% to $5.2
million in the three months ended March 31, 2005 from $4.1 million in the first
quarter of 2004. Increased sales were primarily generated from existing
customers in a variety of industries.
Consolidated cost of products sold for the first quarter of 2005 was
$32.4 million compared to $28.0 million in the first quarter of 2004. The
increase is attributable to increased firearms and castings sales, increased
unitary overhead expenses resulting from a reduction in firearms production
volume and increased product liability costs.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
For the quarter ended March 31, 2005, gross profit as a percent of net
sales decreased to 26.8% from 30.3% in the comparable quarter of 2004. Margin
deterioration was caused by less efficient firearms production due to lower
rates of production, discounts offered on certain discontinued firearm models,
and increased product liability expenses.
Selling, general and administrative expenses decreased $0.1 million to
$5.7 million for the quarter ended March 31, 2005 compared with the prior year
period.
Total other income decreased by $0.1 million in the quarter ended March
31, 2005 compared to the corresponding 2004 period as increased interest income
was offset by non-manufacturing costs related to a New Hampshire facility
acquired in 2003.
The effective income tax rate was 40.1% in the quarters ended March 31,
2005 and 2004, respectively.
As a result of the foregoing factors, consolidated net income for the
quarter ended March 31, 2005 decreased to $3.7 million from $3.9 million for the
quarter ended March 31, 2004.
Financial Condition
OPERATIONS
At March 31, 2005, the Company had cash, cash equivalents and
short-term investments of $34.7 million, working capital of $92.2 million and a
current ratio of 5.6 to 1.
Cash provided by operating activities was $4.7 million for quarter
ended March 31, 2005, an increase of $0.7 million compared with the
corresponding period of 2004. The increase in cash provided by operations is
attributable to fluctuations in various operating accounts.
Until November 30, 2004, the Company followed a common industry
practice of offering a "dating plan" to its firearms customers on selected
products, which allowed the customer to buy the products commencing in December,
the start of the Company's marketing year, and pay for them on extended terms.
Discounts were offered for early payment. The dating plan provided a revolving
payment plan under which payments for all shipments made during the period
December through February were made by April 30. Shipments made in subsequent
months were paid for within a maximum of 120 days. On December 1, 2004, the
Company modified the payment terms on these selected products whereby payment is
now due 45 days after shipment. Discounts are offered for early payment. Dating
plan receivable balances were $5.4 million at March 31, 2005 compared to $6.9
million at March 31, 2004.
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.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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 July 2002, the Company established an additional collateralized line of
credit for the purchaser and, as of March 31, 2005, the total amount due from
the purchaser was $1.3 million, which was paid in April 2005. 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 quarter ended March 31, 2005 totaled
$0.6 million. For the past two years capital expenditures averaged approximately
$1.1 million per quarter. In 2005, the Company expects to spend approximately $8
million on capital expenditures to upgrade and modernize manufacturing equipment
primarily at the Newport Firearms Division. The Company finances, and intends to
continue to finance, all of these activities with funds provided by operations
and available cash and short-term investments.
For the quarter ended March 31, 2005 dividends paid totaled $2.7
million. This amount reflects a quarterly dividend of $.10 per share paid in
March 2005. On May 3, 2005, the Company declared a quarterly dividend of $.10
per share payable on June 15, 2005. Future dividends 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 significant external financing through 2005.
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.
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." This
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
ban expired by operation of law on September 13, 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.
Of the lawsuits brought by municipalities or a state Attorney General,
twenty have been 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
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
dismissal, no further appeal; Newark - Superior Court of New Jersey Law Division
for Essex County dismissed the case with prejudice; City of Camden - dismissed
on July 7, 2003, not reopened; Jersey City - voluntarily dismissed and not
re-filed; St. Louis - Missouri Supreme Court denied plaintiffs' motion to appeal
Missouri Appellate Court's affirmance of dismissal; Chicago - Illinois Supreme
Court denied plaintiffs' petition for rehearing; and Los Angeles City, Los
Angeles County, and San Francisco - Appellate Court affirmed summary judgment in
favor of defendants, no further appeal.
The dismissal of the Washington, D.C. lawsuit was sustained on appeal,
but individual plaintiffs were permitted to proceed to discovery and attempt to
identify the manufacturers of the firearms used in their shootings as "machine
guns" under the city's "strict liability" law. On October 19, 2004, the D.C.
Court of Appeals vacated the court's judgment, which dismissed the city's claim
against firearms manufacturers but let stand certain individuals' claims against
the manufacturers of firearms allegedly used in criminal assaults against
plaintiffs under the Washington, D.C. "Strict Liability Act," subject to proof
of causation. On April 21, 2005, the Court of Appeals, in an en banc rehearing,
dismissed all common law negligence and "public nuisance" claims against all
defendants, but again permitted plaintiffs to proceed to discovery to determine
whether any of defendants' products could be identified under the D.C. "Strict
Liability Act." It is uncertain if any further appeal will be pursued by any
party to this lawsuit.
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 the New York City case is presently scheduled
to begin trial in September, 2005.
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
were filed, but plaintiffs withdrew their appeal. On August 3, 2004, the United
States Court of Appeals for the Second Circuit granted the NAACP's motion to
dismiss the defendants' appeal of Judge Weinstein's order denying defendants'
motion to strike his dicta made in his order dismissing the NAACP's case, and
the defendants' motion for summary disposition was denied as moot. The ruling of
the Second Circuit effectively confirmed the decision in favor of defendants and
brought this matter to a conclusion.
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 House by a
2-to-1 bipartisan majority and had over 54 co-sponsors in the Senate. It was
considered by the Senate in February 2004, but failed to gain final passage
after it was encumbered with numerous non-germane amendments. It was
reintroduced in early 2005, and Senate hearings were held in March 2005. It is
uncertain when it will be voted upon by either the Senate Judiciary Committee or
the full 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, 2004 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 a cumulative other comprehensive loss of $10.3
million at December 31, 2004.
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, 2005, or the judgment affecting the application of those
estimates and assumptions.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 151, "Inventory Costs -- an amendment of ARB No. 43, Chapter 4"
which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material. SFAS 151 requires that these costs
be recognized as current period charges regardless of whether they are abnormal.
In addition, SFAS 151 requires that allocation of fixed production overheads to
the costs of manufacturing be based on the normal capacity of the production
facilities. SFAS 151 is effective for fiscal years beginning after June 15,
2005. The Company has not completed its evaluation of the impact that the
adoption of this statement will have on its financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment",
which requires that the cost resulting from all share-based payment transactions
be recognized in the financial statements. This Statement requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award. SFAS 123R is effective
for interim or annual reporting periods beginning after June 15, 2005. The
Company does not expect the adoption of this statement to have a material effect
on its financial position or results of operations.
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,
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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.
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 of the Notes to Condensed Financial Statements under Item 1 of this Form
10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through
December 31, 2004, 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.
One case was formally instituted against the Company during the three
months ended March 31, 2005, which involved significant demands for compensatory
and/or punitive damages and in which the Company has been served with process:
Leabo v. Company (AZ) in the United States District Court, District of
Arizona. The complaint, which was served on March 30, 2005, alleges that a Ruger
"old model" single action revolver fell and discharged, resulting in injury to
the plaintiff's hand. Plaintiff seeks general and punitive damages.
During the three months ending March 31, 2005, no previously reported cases were
settled.
On January 24, 2005, in the previously reported City of Chicago case,
the Illinois Supreme Court denied plaintiffs' petition for rehearing of the
dismissal of all the city's claims including "public nuisance" against the
Company and other members of the firearms industry. No further appeal was filed.
On February 10, 2005, in the previously reported Los Angeles City, Los
Angeles County, and San Francisco cases, the First Appellate District, District
One, in the Court of Appeals of the State of California unanimously affirmed the
trial court's dismissal of all claims, including that of "public nuisance,"
against the Company and other members of the firearms industry. No further
appeal was filed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
(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
22
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2005
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 3, 2005 S/ THOMAS A. DINEEN
----------- -------------------------------------
Thomas A. Dineen
Principal Financial Officer,
Treasurer and Chief Financial Officer
23