1
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 June 30, 2001
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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 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 06490
(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 _____
The number of shares outstanding of the issuer's common stock as of
July 31, 2001: Common Stock, $1 par value - 26,910,720.
Page 1 of 17
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INDEX
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 2001 and December 31, 2000 3
Condensed consolidated statements of income--Three months ended June 30, 2001 and 2000, Six months ended
June 30, 2001 and 2000 5
Condensed consolidated statements of cash flows--Six months ended June 30, 2001 and 2000 6
Notes to condensed consolidated financial statements--June 30, 2001 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2001 2000
--------- ---------
(Unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents $ 3,734 $ 4,073
Short-term investments 55,603 65,875
Trade receivables, less allowances for
doubtful accounts ($1,245 and $1,252) and
discounts ($208 and $1,130) 12,846 14,354
Inventories:
Finished products 19,675 13,779
Materials and products in process 44,429 37,585
--------- ---------
64,104 51,364
Deferred income taxes 7,098 7,061
Prepaid expenses and other assets 2,653 5,728
--------- ---------
Total current assets 146,038 148,455
Property, plant and equipment 153,838 151,531
Less allowances for depreciation (112,026) (108,206)
--------- ---------
41,812 43,325
Deferred income taxes 1,302 1,076
Other assets 18,171 18,245
--------- ---------
$ 207,323 $ 211,101
========= =========
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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)
June 30, December 31,
2001 2000
--------- ---------
(unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and accrued expenses $ 6,136 $ 5,431
Product safety modifications 449 486
Product liability 3,000 3,000
Employee compensation 12,305 10,170
Workers' compensation 5,023 4,836
Income taxes 1,371 1,512
--------- ---------
Total current liabilities 28,284 25,435
Product liability accrual 11,468 13,308
Contingent liabilities -- Note 7 -- --
Stockholders' Equity
Common Stock, non-voting, par value $1:
Authorized shares 50,000; none issued -- --
Common Stock, par value $1: Authorized shares -
40,000,000; issued and outstanding 26,910,720 26,911 26,911
Additional paid-in capital 2,473 2,434
Retained earnings 138,299 143,125
Accumulated other comprehensive income (112) (112)
--------- ---------
167,571 172,358
--------- ---------
$ 207,323 $ 211,101
========= =========
Note:
----
The balance sheet at December 31, 2000 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.
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STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Firearms sales $ 29,543 $ 37,594 $ 65,380 $ 88,689
Castings sales 8,125 11,341 16,152 20,135
-------- -------- -------- --------
Net sales 37,668 48,935 81,532 108,824
Cost of products sold 30,449 36,376 62,346 77,813
-------- -------- -------- --------
7,219 12,559 19,186 31,011
Expenses:
Selling 3,439 3,274 7,705 6,922
General and administrative 1,706 1,531 3,675 2,949
-------- -------- -------- --------
5,145 4,805 11,380 9,871
-------- -------- -------- --------
2,074 7,754 7,806 21,140
Other income-net 895 1,992 1,962 3,451
-------- -------- -------- --------
Income before income taxes 2,969 9,746 9,768 24,591
Income taxes 1,164 3,821 3,829 9,640
-------- -------- -------- --------
Net income $ 1,805 $ 5,925 $ 5,939 $ 14,951
======== ======== ======== ========
Basic and diluted earnings per share $ 0.07 $ 0.22 $ 0.22 $ 0.56
======== ======== ======== ========
Cash dividends per share $ 0.20 $ 0.20 $ 0.40 $ 0.40
======== ======== ======== ========
See notes to condensed consolidated financial statements.
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STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Ended June 30,
2001 2000
-------- --------
Cash Provided by Operating Activities $ 2,460 $ 16,628
Investing Activities
Property, plant and equipment additions (2,307) (2,367)
Purchases of short-term investments (39,398) (79,082)
Proceeds from maturities of short-term investments 49,670 73,555
Net proceeds from sale of non-manufacturing real estate -- 1,978
Net proceeds from sale of Uni-Cast assets -- 382
-------- --------
Cash provided by (used by) investing activities 7,965 (5,534)
-------- --------
Financing Activities
Dividends paid (10,764) (10,764)
-------- --------
Cash used by financing activities (10,764) (10,764)
-------- --------
Increase in cash and cash equivalents (339) 330
Cash and cash equivalents at beginning of period 4,073 8,164
-------- --------
Cash and cash equivalents at end of period $ 3,734 $ 8,494
======== ========
See notes to condensed consolidated financial statements.
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STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2001
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the results
of the interim periods. Operating results for the six months ended June 30, 2001
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2001. 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, 2000.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Organization: Sturm, Ruger & Company, Inc. ("Company") is principally
engaged in the design, manufacture, and sale of firearms and investment
castings. The Company's design and manufacturing operations are located in the
United States. Substantially all sales are domestic. The Company's firearms are
sold through a select number of independent 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.
NOTE 3--INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method. An
actual valuation of inventory under the LIFO method can be made only at the end
of each year based on the inventory levels and costs existing at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
NOTE 4--INCOME TAXES
The Company's effective tax rate differs from the statutory tax rate
principally as a result of state income taxes. Total income tax payments during
the six months ended June 30, 2001 and 2000 were $0.7 million and $13.1 million,
respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
NOTE 5--BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share is based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflects the impact of options outstanding using the treasury stock
method, when applicable.
NOTE 6--COMPREHENSIVE INCOME
As there were no non-owner changes in equity during the first half of
2001 and 2000, total comprehensive income equals net income for the three and
six months ended June 30, 2001 and 2000, or $1.8 million and $5.9 million, and
$5.9 million and $15.0 million, respectively.
NOTE 7 - CONTINGENT LIABILITIES
As of June 30, 2001, the Company is a defendant in approximately 39
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into two categories:
(i) those that claim damages from the Company related to allegedly
defective product design which stem from a specific incident.
These lawsuits and claims are based principally on the theory
of "strict liability" but also may be based on negligence,
breach of warranty, and other legal theories, and
(ii) those brought by cities, municipalities, counties, individuals
(including certain putative class actions) and one state
Attorney General against numerous firearms manufacturers,
distributors and dealers seeking to recover damages allegedly
arising out of the misuse of firearms by third parties in the
commission of homicides, suicides and other shootings
involving juveniles and adults. The complaints by
municipalities seek damages, among other things, for the costs
of medical care, police and emergency services, public health
services, and the maintenance of courts, prisons, and other
services. In certain instances, the plaintiffs seek to recover
for decreases in property values and loss of business within
the city due to criminal violence. In addition, nuisance
abatement and/or injunctive relief is sought to change the
design, manufacture, marketing and distribution practices of
the various defendants. These suits allege, among other
claims, strict liability or negligence in the design of
products, public nuisance, negligent entrustment, negligent
distribution, deceptive or fraudulent advertising, violation
of consumer protection statutes and conspiracy or concert of
action theories. None of these cases allege a specific injury
to a specific individual as a result of the misuse or use of
any of the Company's products.
Management believes that, in every case, the allegations are unfounded,
and that the shootings and any results therefrom were due to negligence or
misuse of the firearms by third-parties or the claimant, and that there should
be no recovery against the Company. Defenses further exist to the suits brought
by cities, municipalities, counties, and the Attorney General based, among other
reasons, on established state law precluding recovery by municipalities for
essential government services, the remoteness of the claims, the types of
damages sought to be recovered, and limitations on the extraterritorial
authority which may be exerted by a city, municipality, county or state under
state and federal law, including State and Federal Constitutions.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a jury, Hamilton,
et. al. v. Accu-tek, et. al., resulted in a defense verdict in favor of the
Company on February 11, 1999. In that case, numerous firearms manufacturers and
distributors had been sued, alleging damages as a result of alleged negligent
sales practices and "industry-wide" liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of
the seven cases decided by the jury. The Court upheld the verdict of the jury
and dismissed each case as to the Company in its later opinion. The three
defendants found liable have filed a notice of appeal from the Court's decision.
On August 16, 2000, the U.S. 2nd Circuit Court of Appeals certified certain
questions involving the appeal to the Appellate Division of the New York State
Supreme Court for resolution. Oral argument on those certified questions was
heard in the New York Appellate Division on February 8, 2001. On April 26, 2001,
the Appellate Division of the New York State Supreme Court responded to the U.S.
2nd Circuit Court of Appeals' certified questions. The questions involved
whether firearms manufacturers have a legal duty to prevent criminal misuses of
their lawfully-sold products and whether any liability of the firearms
manufacturers should be apportioned by a market share theory. The New York State
Appellate Division answered both questions in the negative.
On October 7, 1999, a lawsuit brought against the Company and numerous
firearms manufacturers and distributors by the mayor of Cincinnati, City of
Cincinnati v. Beretta U.S.A. Corp., et. al., was dismissed. This was the first
dismissal of one of the lawsuits which have been filed by certain cities,
municipalities and counties. The Ohio Court of Appeals affirmed this decision on
August 11, 2000. Such lawsuits filed by the cities of Bridgeport, Miami,
Chicago, Camden County, Philadelphia, and Gary have been completely dismissed
and those filed by the cities of Atlanta and Wilmington have been partially
dismissed. The Cleveland suit has withstood an initial motion to dismiss in the
trial court, and in New Orleans the Court declared legislation passed to
prohibit such suits unconstitutional. However, on April 3, 2001, the Louisiana
Supreme Court reversed this decision, finding the statute to be constitutional,
and it dismissed the case. The Detroit/Wayne County case was also partially
dismissed, and the Michigan legislature has also passed legislation precluding
such suits, as have about twenty other states. The Boston case and the
California city claims (consolidated into one case) have been permitted to
proceed into the discovery phase. Appeals of all trial court decisions are
pending or will be filed when appropriate. Motions to dismiss other such
lawsuits are pending or will be filed when timely.
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.
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. As of March 18, 1982,
compensatory and punitive damage insurance coverage is provided, in States where
permitted, for losses exceeding $1.0 million of loss per occurrence or an
aggregate maximum loss of $4.0 million. For claims which the Company has been
notified in writing between July 10, 1988, through July 10, 1989, coverage is
provided for losses exceeding $2.5 million per claim or an aggregate maximum
loss of $9.0 million. For claims made between July 10, 1989, and July 10, 1992,
the aggregate maximum loss is $7.5 million. For claims made after July 10, 1992,
coverage is provided for losses exceeding $2.25 million per claim, or an
aggregate maximum loss of $6.5 million.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
For claims made after July 10, 1994, coverage is provided for losses
exceeding $2.0 million per claim, or an aggregate maximum loss of $6.0 million.
For claims made after July 10, 1997, coverage is provided for annual losses
exceeding $2.0 million per claim, or an aggregate maximum loss of $5.5 million
annually. For claims made after July 10, 2000, coverage is provided for annual
losses exceeding $5 million per claim, or an aggregate maximum loss of $10
million annually, except for certain new claims which might be brought by
governments or municipalities after July 10, 2000, which are excluded from
coverage.
On March 17, 2000, Smith & Wesson announced that it had reached a
settlement to conclude some of the municipal lawsuits with various governmental
entities. On March 30, 2000, the Office of the Connecticut Attorney General
began an investigation of certain alleged "anticompetitive practices in the
firearms industry." On April 17, 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. The Company has not engaged in any improper
conduct and has cooperated with these investigations.
The Company has reported all cases instituted against it through March
31, 2001 and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports, to which reference is hereby made.
NOTE 8--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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net Sales
Firearms $ 29,543 $ 37,594 $ 65,380 $ 88,689
Castings
Unaffiliated 8,125 11,341 16,152 20,135
Intersegment 7,073 7,240 18,215 15,069
--------- --------- --------- ---------
15,198 18,581 34,367 35,204
Eliminations (7,073) (7,240) (18,215) (15,069)
--------- --------- --------- ---------
37,668 $ 48,935 $ 81,532 $ 108,824
========= ========= ========= =========
Income Before Income Taxes
Firearms $ 2,609 $ 7,538 $ 7,698 $ 20,721
Castings (428) 508 307 1,078
Corporate 788 1,700 1,763 2,792
--------- --------- --------- ---------
$ 2,969 $ 9,746 $ 9,768 $ 24,591
========= ========= ========= =========
June 30, December 31,
2001 2000
-------- --------
Identifiable Assets
Firearms $ 90,135 $ 79,230
Castings 32,581 33,043
Corporate 84,607 98,828
-------- --------
$207,323 $211,101
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Consolidated net sales of $37.7 million and $81.5 million were achieved
by the Company for the three and six months ended June 30, 2001. This represents
a decrease of 23.0% and 25.1% from 2000 consolidated net sales of $48.9 million
and $108.8 million, respectively.
Firearms segment net sales decreased by $8.1 million, or 21.4%, in the
second quarter of 2001 to $29.5 million from $37.6 million in the second quarter
of the prior year. For the six months ended June 30, 2001, firearms segment net
sales decreased by $23.3 million, or 26.3% to $65.4 million, compared to the
corresponding 2000 period. Firearms unit shipments decreased 26.2% for the
three-month period and 33.1% for the six-month period ended June 30, 2001 from
the comparable 2000 periods. The unit decrease reflects a decline in overall
market demand. In 2001, the Company instituted a sales incentive program for its
distributors which allowed them to earn rebates of up to 3% if certain annual
overall sales targets were achieved. In May 2001, this program was modified to
allow for rebates of up to 5% if certain annual sales targets are achieved. This
program replaces a sales incentive program in 2000 which allowed rebates of up
to 15% if certain annual overall sales targets were achieved. The Company
anticipates that total firearm segment sales in 2001 may be below the level
achieved in 2000.
Casting segment net sales decreased by 28.4% and 19.8% to $8.1 million
and $16.2 million, respectively, for the three and six months ended June 30,
2001 from $11.3 million and $20.1 million in the comparable 2000 periods. The
decrease is attributable to the absence of aluminum casting sales as the Company
sold its Uni-Cast Division during the second quarter of 2000 and an apparent
weakened demand for both steel and titanium castings. The Company anticipates
that total casting segment sales in 2001 may be below the level achieved in
2000. The Company continues to actively pursue other casting business
opportunities.
Consolidated cost of products sold for the second quarter and the six
months ended June 30, 2001 were $30.4 million and $62.3 million compared to
$36.4 million and $77.8 million in the corresponding 2000 periods, representing
a decrease of 16.3% and 19.9%, respectively. This was primarily attributable to
lower firearms and castings sales, as discussed above.
Gross profit as a percentage of net sales was 23.5% for the six month
period ended June 30, 2001, as compared to 28.5% in the comparable 2000 period.
For the second quarter of 2001, gross profit as a percent of sales decreased to
19.2% from 25.7% in the second quarter of 2000. Margin erosion in both periods
was caused primarily by reduced sales levels in both segments.
Selling, general and administrative expenses were $5.1 million and
$11.4 million for the three and six months ended June 30, 2001, representing an
increase of $0.3 million and $1.5 million from the corresponding periods of
2000. These increases are due in part to start-up costs related to a voluntary
firearms lock exchange program.
Other income-net decreased by $1.1 million and $1.5 million in the three
and six months ended June 30, 2001 compared to the corresponding 2000 periods,
respectively. These decreases are primarily due to a gain on the sale of
non-manufacturing real estate in the second quarter of 2000 and decreased
earnings on short-term investments as a result of decreased principal and
declining interest rates during the first half of 2001.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
The effective income tax rate of 39.2% in the second quarter and six
months ended June 30, 2001 is unchanged from the corresponding periods in 2000.
As a result of the foregoing factors, consolidated net income decreased
$4.1 million, or 69.5%, from $5.9 million to $1.8 million for the three months
ended June 30, 2001 as compared to the second quarter of 2000 and decreased $9.1
million, or 60.3%, from $15.0 million to $5.9 million for the six months ended
June 30, 2001 as compared to the first half of 2000.
Financial Condition
At June 30, 2001, the Company had cash, cash equivalents and short-term
investments of $59.3 million, working capital of $117.8 million and a current
ratio of 5.2 to 1.
Cash provided by operating activities was $2.5 million and $16.6
million for the six months ended June 30, 2001 and 2000, respectively. The
decrease in cash provided is principally a result of the increase in inventories
during the first six months of 2001.
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 dating plan 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 have to be made by April 30. Generally, shipments made in subsequent
months have to be paid within approximately 90 days. Dating plan receivable
balances were $4.6 million at June 30, 2001 compared to $5.3 million at June 30,
2000. The Company has reserved the right to discontinue the dating plan at any
time and has been able to finance this dating plan from internally generated
funds provided by operating activities.
Capital expenditures during the six months ended June 30, 2001 totaled
$2.3 million. For the past two years capital expenditures averaged approximately
$1.5 million per quarter. In 2001, the Company expects to spend approximately
$5.0 million on capital expenditures to upgrade and modernize manufacturing
equipment primarily at the Newport Firearms, Ruger Investment Casting, and Pine
Tree Castings Divisions. The Company finances, and intends to continue to
finance, all of these activities with funds provided by operations.
For the six months ended June 30, 2001 dividends paid totaled $10.8
million. This amount reflects the regular quarterly dividend of $.20 per share
paid in March and June 2001. On July 31, 2001, the Company declared a regular
quarterly dividend of $.20 per share payable on September 15, 2001. Future
dividends depend on many factors, including internal estimates of future
performance 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 2001.
The purchase of firearms is subject to 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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 long guns were exempted by name as "legitimate
sporting firearms." The Company remains strongly opposed to laws which would
restrict the rights of law-abiding citizens to lawfully acquire firearms. The
Company believes that the private ownership of firearms is guaranteed by the
Second Amendment to the United States Constitution and that the widespread
private ownership of firearms in the United States will continue. However, there
can be no assurance that the regulation of firearms will not become more
restrictive in the future and that any such restriction would not have a
material adverse effect on the business of the Company.
The Company is a defendant in numerous lawsuits involving its products and is
aware of certain other such claims. The Company has expended significant amounts
of financial resources and management time in connection with product liability
litigation. Management believes that, in every case, the allegations are
unfounded, and that the shootings and any results therefrom were due to
negligence or misuse of the firearm 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 State Attorneys General
based, among other reasons, on established state law precluding recovery by
municipalities for essential government services, the remoteness of the claims,
the types of damages sought to be recovered, and limitations on the
extraterritorial authority which may be exerted by a city, municipality, county
or state under state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a jury, Hamilton,
et. al. v. Accu-tek, et. al., resulted in a defense verdict in favor of the
Company on February 11, 1999. In that case, numerous firearms manufacturers and
distributors had been sued, alleging damages as a result of alleged negligent
sales practices and "industry-wide" liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of
the seven cases decided by the jury. The Court upheld the verdict of the jury
and dismissed each case as to the Company in its later opinion. The three
defendants found liable have filed a notice of appeal from the Court's decision.
On August 16, 2000, the U.S. 2nd Circuit Court of Appeals certified certain
questions involving the appeal to the Appellate Division of the New York State
Supreme Court for resolution. Oral argument on those certified questions was
heard in the New York Appellate Division on February 8, 2001. On April 26, 2001,
the Appellate Division of the New York State Supreme Court responded to the U.S.
2nd Circuit Court of Appeals' certified questions. The questions involved
whether firearms manufacturers have a legal duty to prevent criminal misuses of
their lawfully-sold products and whether any liability of the firearms
manufacturers should be apportioned by a market share theory. The New York State
Appellate Division answered both questions in the negative.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
On October 7, 1999 a lawsuit brought against the Company and numerous
firearms manufacturers and distributors by the mayor of Cincinnati, City of
Cincinnati v. Beretta U.S.A. Corp., et. al., was dismissed. This was the first
dismissal of one of the lawsuits which have been filed by certain cities,
municipalities and counties. The Ohio Court of Appeals affirmed this decision on
August 11, 2000. Such lawsuits filed by the cities of Bridgeport, Miami,
Chicago, Camden County, Philadelphia, and Gary have been completely dismissed
and those filed by the cities of Atlanta and Wilmington have been partially
dismissed. The Cleveland suit has withstood an initial motion to dismiss in the
trial court, and in New Orleans the Court declared legislation passed to
prohibit such suits unconstitutional. However, on April 3, 2001, the Louisiana
Supreme Court reversed this decision, finding the statute to be constitutional,
and it dismissed the case. The Detroit/Wayne County case was also partially
dismissed, and the Michigan legislature has also passed legislation precluding
such suits, as have about twenty other states. The Boston case and the
California city claims (consolidated into one case) have been permitted to
proceed into the discovery phase. Appeals of all trial court decisions are
pending or will be filed when appropriate. Motions to dismiss other such
lawsuits are pending or will be filed when timely.
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.
In the normal course of its manufacturing operations, the Company is
subject to occasional governmental proceedings and orders pertaining to waste
disposal, air emissions and water discharges into the environment. The Company
believes that it is generally in compliance with applicable environmental
regulations and the outcome of such proceedings and orders will not have a
material adverse effect on its business.
The Company expects to realize its deferred tax assets through tax
deductions against future taxable income or carry back against taxes previously
paid.
The effect of inflation on the Company's operations is most immediately
felt in cost of products sold because the Company values its 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.
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, 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.
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15
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the legal proceedings against the Company is discussed in
Note 7 to the condensed consolidated financial statements included in this Form
10-Q report, which is incorporated herein by reference.
The Company has reported all cases instituted against it through March
31, 2001, and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports, to which reference is hereby made.
No cases were instituted against the Company during the three months
ended June 30, 2001, which involved significant demands for compensatory and/or
punitive damages.
During the three months ended June 30, 2001, no previously-reported
cases were settled.
On April 3, 2001, in the previously-reported New Orleans (LA) case, the
Louisiana Supreme Court reversed the trial court's decision, finding that
legislation prohibiting the city's lawsuit was constitutional, and dismissed the
case. Plaintiffs filed a motion for rehearing which was denied on April 24,
2001.
On April 25, 2001, in the previously-reported Halliday (MD) case, the
Maryland Court of Special Appeals affirmed en banc the trial court's dismissal
of all claims against the Company, holding that a firearms manufacturer has no
legal duty to manufacture "childproof" firearms. Plaintiffs are expected to
appeal this decision to the Maryland Court of Appeals.
On June 4, 2001, in the previously-reported Binkley (MI) case, the
Company was dismissed with prejudice.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of the Stockholders of the Company was
held on May 3, 2001. The table below sets forth the results of
the votes taken at the 2001 Annual Meeting:
1. Election of Directors Votes
Votes For Withheld
--------- --------
William B. Ruger 25,070,910 677,051
William B. Ruger, Jr. 25,082,670 665,291
Erle G. Blanchard 25,084,356 663,605
Stephen L. Sanetti 25,083,687 664,274
Richard T. Cunniff 25,503,673 244,288
Townsend Hornor 25,501,771 246,190
Paul X. Kelley 25,503,394 244,567
John M. Kingsley, Jr. 25,512,459 235,502
James E. Service 25,516,097 231,864
Stanley B. Terhune 25,492,468 255,493
2. Ratification of Ernst & Young LLP as Auditors for 2001
Votes For Votes Against Votes Withheld
--------- ------------- --------------
25,597,277 84,322 66,362
3. 2001 Stock Option Plan for Non-Employee Directors
Votes For Votes Against Votes Withheld
--------- ------------- --------------
22,831,591 2,073,006 843,364
4. Stockholder Proposal for a "Report on Gun Policies and Procedures"
Votes For Votes Against Votes Withheld Broker Non-Votes
--------- ------------- -------------- ----------------
1,017,720 17,706,503 1,533,503 5,490,023
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K -
The Company did not file any reports on Form 8-K during the three
months ended June 30, 2001.
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17
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STURM, RUGER & COMPANY, INC.
Date: August 6, 2001 S/ERLE G. BLANCHARD
-------------- --------------------------------------------
Erle G. Blanchard
Principal Financial Officer,
Vice Chairman, President, Chief Operating
Officer, Treasurer and Director
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