SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 October 31, 2002: Common Stock, $1 par value - 26,910,720.
Page 1 of 25
INDEX
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 30, 2002 and
December 31, 2001 3
Condensed consolidated statements of income--Three months ended
September 30, 2002 and 2001; Nine months ended September 30,
2002 and 2001 5
Condensed consolidated statements of cash flows--Nine months ended
September 30, 2002 and 2001 6
Notes to condensed consolidated financial statements--September 30, 2002 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, December 31,
2002 2001
--------- ---------
(Unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents $ 3,644 $ 3,838
Short-term investments 58,715 63,957
Trade receivables, less allowances for
doubtful accounts ($484 and $1,061) and
discounts ($373 and $1,145) 18,630 15,121
Inventories:
Finished products 14,478 12,333
Materials and products in process 32,386 37,460
--------- ---------
46,864 49,793
Deferred income taxes 7,712 7,922
Prepaid expenses and other current assets 2,306 1,566
--------- ---------
Total current assets 137,871 142,197
Property, plant and equipment 153,337 151,487
Less allowances for depreciation (120,063) (114,535)
--------- ---------
33,274 36,952
Deferred income taxes 2,797 3,567
Other assets 22,193 21,662
--------- ---------
$ 196,135 $ 204,378
========= =========
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, December 31,
2002 2001
--------- ---------
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and accrued expenses $ 7,219 $ 6,893
Product liability 4,000 4,000
Employee compensation 11,181 10,705
Workers' compensation 4,634 4,620
Income taxes 1,105 704
--------- ---------
Total current liabilities 28,139 26,922
Deferred income taxes 4,677 4,654
Product liability accrual 6,311 8,462
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 - 26,910,700 26,911 26,911
Additional paid-in capital 2,509 2,492
Retained earnings 127,744 135,093
Accumulated other comprehensive income (156) (156)
--------- ---------
157,008 164,340
--------- ---------
$ 196,135 $ 204,378
========= =========
Note:
The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
4
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------
Firearms sales $ 32,210 $ 35,609 $108,366 $100,989
Castings sales 5,830 5,529 17,898 21,681
-------- -------- -------- --------
Net sales 38,040 41,138 126,264 122,670
Cost of products sold 31,115 32,946 97,114 95,292
-------- -------- -------- --------
Gross profit 6,925 8,192 29,150 27,378
Expenses:
Selling 3,696 3,076 11,111 10,781
General and administrative 1,504 1,326 4,720 5,001
-------- -------- -------- --------
5,200 4,402 15,831 15,782
-------- -------- -------- --------
1,725 3,790 13,319 11,596
Other income-net 545 624 1,367 2,586
-------- -------- -------- --------
Income before income taxes 2,270 4,414 14,686 14,182
Income taxes 910 1,730 5,889 5,559
-------- -------- -------- --------
Net income $ 1,360 $ 2,684 $ 8,797 $ 8,623
======== ======== ======== ========
Earnings per share
Basic $ 0.05 $ 0.10 $ 0.33 $ 0.32
======== ======== ======== ========
Diluted $ 0.05 $ 0.10 $ 0.33 $ 0.32
======== ======== ======== ========
Cash dividends per share $ 0.20 $ 0.20 $ 0.60 $ 0.60
======== ======== ======== ========
Average shares outstanding
Basic 26,911 26,911 26,911 26,911
======== ======== ======== ========
Diluted 27,093 26,911 27,062 26,911
======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Nine Months Ended September 30,
2002 2001
--------- ---------
Cash Provided By Operating Activities $ 12,560 $ 4,298
Investing Activities
Property, plant and equipment additions (1,850) (3,116)
Purchases of short-term investments (112,060) (112,131)
Proceeds from maturities of short-term investments 117,302 126,115
--------- ---------
Cash provided by investing activities 3,392 10,868
--------- ---------
Financing Activities
Dividends paid (16,146) (16,146)
--------- ---------
Cash used in financing activities (16,146) (16,146)
--------- ---------
Decrease in cash and cash equivalents (194) (980)
Cash and cash equivalents at beginning of period 3,838 4,073
--------- ---------
Cash and cash equivalents at end of period $ 3,644 $ 3,093
========= =========
See notes to condensed consolidated financial statements.
6
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2002
NOTE 1--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the results
of the interim periods. Operating results for the nine months ended September
30, 2002 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2002. 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,
2001.
NOTE 2--Significant Accounting Policies
Organization: Sturm, Ruger & Company, Inc. ("Company") is principally
engaged in the design, manufacture, and sale of firearms and investment
castings. The Company's design and manufacturing operations are located in the
United States. Substantially all sales are domestic. The Company's firearms are
sold through a select number of independent wholesale distributors to the
sporting and law enforcement markets. Investment castings are sold either
directly to or through manufacturers' representatives to companies in a wide
variety of industries.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. Certain
prior year balances have been reclassified to conform with current year
presentation.
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. During 2002, inventory
quantities have been reduced. This reduction may result in a liquidation of LIFO
inventory quantities carried at lower costs prevailing in prior years as
compared with the current cost of purchases. Although a reduction in inventory
levels is expected to remain through year-end, the effect of a liquidation
cannot be quantified at the
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
present time. If a liquidation does occur in 2002, management believes that the
impact would not be material to the financial statements.
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 nine months ended September 30, 2002 and 2001 were $5.1 million and $1.7
million, respectively.
NOTE 5-- Basic and Diluted Earnings Per Share
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflect
the impact of options outstanding using the treasury stock method, when
applicable. This resulted in diluted weighted-average shares outstanding for the
three and nine months ended September 30, 2002 and 2001 of 27,093,000 and
26,911,000, and 27,062,000 and 26,911,000, respectively.
NOTE 6--Comprehensive Income
As there were no non-owner changes in equity during the first nine
months of 2002 and 2001, total comprehensive income equals net income for the
three and nine months ended September 30, 2002 and 2001, or $1.4 million and
$2.7 million, and $8.8 million and $8.6 million, respectively.
NOTE 7--Contingent Liabilities
As of September 30, 2002, the Company is a defendant in approximately 28
lawsuits involving its products and is aware of certain other such claims. These
lawsuits and claims fall into two categories:
(i) those that claim damages from the Company related to allegedly
defective product design which stem from a specific incident. These
lawsuits and claims are based principally on the theory of "strict
liability" but also may be based on negligence, breach of warranty,
and other legal theories, and
(ii) those brought by cities, municipalities, counties, associations,
individuals and one state Attorney General against numerous firearms
manufacturers, distributors and dealers seeking to recover damages
allegedly arising out of the misuse of firearms by third parties in
the commission of homicides, suicides and other shootings involving
juveniles and adults. The complaints by municipalities seek damages,
among other things, for the costs 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
8
injury to a specific individual as a result of the misuse or use of
any of the Company's products.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
In many of these cases punitive damages, as well as compensatory
damages, are demanded. Management believes that, in every case, the allegations
are unfounded, and that the shootings and any results therefrom were due to
negligence or misuse of the firearms by third-parties or the claimant, and that
there should be no recovery against the Company. Defenses further exist to the
suits brought by cities, municipalities, counties, and the Attorney General
based, among other reasons, on established state law precluding recovery by
municipalities for essential government services, the remoteness of the claims,
the types of damages sought to be recovered, and limitations on the
extraterritorial authority which may be exerted by a city, municipality, county
or state under state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a jury, Hamilton,
et. al. v. Accu-tek, et. al., resulted in a defense verdict in favor of the
Company on February 11, 1999. In that case, numerous firearms manufacturers and
distributors had been sued, alleging damages as a result of alleged negligent
sales practices and "industry-wide" liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of
the seven cases decided by the jury. The Court upheld the verdict of the jury
and dismissed each case as to the Company in its later opinion. The three
defendants found liable filed a notice of appeal from the Court's decision. On
August 16, 2000, the U.S. 2nd Circuit Court of Appeals certified certain
questions to the Appellate Division of the New York State Supreme Court for
resolution. On April 26, 2001, the Appellate Division of the New York State
Supreme Court responded to the U.S. 2nd Circuit Court of Appeals' certified
questions. The questions involved whether firearms manufacturers have a legal
duty to prevent criminal misuses of their lawfully-sold products and whether any
liability of the firearms manufacturers should be apportioned by a market share
theory. The New York State Appellate Division answered both questions in the
negative. On August 30, 2001, the United States Court of Appeals for the 2nd
Circuit vacated and remanded the case with instructions for the trial court to
enter a final judgment of dismissal. The trial court finally dismissed the case
on its merits on September 17, 2001.
Of the lawsuits brought by municipalities or a state Attorney General, 10
have been dismissed as a matter of law. Six of those cases are concluded
(Atlanta - dismissal by intermediate Appellate Court, no further appeal;
Bridgeport - dismissal affirmed by Connecticut Supreme Court; County of Camden -
dismissal affirmed by 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; and Philadelphia - Third Circuit Court of Appeals affirmed
dismissal, no further appeal). On June 12, 2002, the Ohio Supreme Court voted
4-3 to reverse the dismissals of the Cincinnati case by the trial and appellate
courts and remanded the case to the trial court for discovery proceedings. On
September 20, 2002, the Indiana Court of Appeals affirmed the dismissal of the
Gary case by the trial court and plaintiffs have filed a request for appeal to
the Indiana Supreme Court. The remainder (Chicago and New York State) are on
appeal from their complete dismissal. An 11th case, Boston, was voluntarily
dismissed with prejudice by the City at the close of fact discovery and is now
concluded.
Of the remaining cases in which the Company has been served with process,
two (Detroit/Wayne County and Newark) are on appeal from partial dismissal, two
(Cleveland and New York City) are stayed, three (Camden City, St. Louis and
Washington, DC) have pending motions to dismiss at the trial level, one
(Wilmington) has a pending motion for summary judgment, one (the consolidated
California case) is proceeding with discovery following dismissal of certain
damage claims, and one (Jersey City) was filed on the same day that the Boston
suit was dismissed but has not seen any significant activity.
9
Legislation has been passed in approximately 30 states precluding suits of
the type brought by the municipalities mentioned above.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
Aggregate claimed amounts presently exceed product liability accruals and
applicable insurance coverage. For claims made after July 10, 1994, compensatory
and punitive damage insurance coverage is provided, in states where permitted,
coverage is provided for losses exceeding $2.0 million per claim, or an
aggregate maximum loss of $6.0 million. For claims made after July 10, 1997,
coverage is provided for annual losses exceeding $2.0 million per claim, or an
aggregate maximum loss of $5.5 million annually. For claims made after July 10,
2000, coverage is provided for annual losses exceeding $5.0 million per claim,
or an aggregate maximum loss of $10.0 million annually, except for certain new
claims which might be brought by governments or municipalities after July 10,
2000, which are excluded from coverage.
On March 17, 2000, Smith & Wesson announced that it had reached a
settlement to conclude some of the municipal lawsuits with various governmental
entities. On March 30, 2000, the Office of the Connecticut Attorney General
began an investigation of certain alleged "anticompetitive practices in the
firearms industry." On April 17, 2000 the State of Maryland's Attorney General
also made similar inquiries as to the Company. On August 9, 2000, the U.S.
Federal Trade Commission also filed such a civil investigative demand regarding
the Smith & Wesson settlement. During April 2002, after the city of Boston
voluntarily withdrew its case with prejudice as to all remaining defendants,
Boston moved jointly with Smith & Wesson to dissolve their consent decree
settlement, which motion the court accepted. The Company has not engaged in any
improper conduct and has cooperated with these investigations.
Provision is made for product liability claims based upon many factors
related to the severity of the alleged injury and potential liability exposure,
based upon prior claim experience. Because our experience in defending these
lawsuits and claims is that unfavorable outcomes are typically not probable or
estimable, only in rare cases is an accrual established for such costs. In most
cases, an accrual is established only for estimated legal defense costs. Product
liability accruals are periodically reviewed to reflect then-current estimates
of possible liabilities and expenses incurred to date and reasonably anticipated
in the future. Threatened product liability claims are reflected in our product
liability accrual on the same basis as actual claims; i.e., an accrual is made
for reasonably anticipated possible liability and claims-handling expenses on an
ongoing basis.
A range of reasonably possible loss relating to unfavorable outcomes can
not be made. However, in the product liability cases in which a dollar amount of
damages is claimed, the amount of damages claimed, which totaled $837 million at
September 30, 2002, is set forth as an indication of possible maximum liability
that the Company might be required to incur in these cases (regardless of the
likelihood or reasonable probability of any or all of this amount being awarded
to claimants) as a result of adverse judgments that are sustained on appeal.
Product liability claim payments are made when appropriate if, as, and
when claimants and the Company reach agreement upon an amount to finally resolve
all claims. Legal costs are paid as the lawsuits and claims develop, the timing
of which may vary greatly from case to case. A time schedule can not be
determined in advance with any reliability concerning when payments will be made
in any given case.
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 June 30,
2002 and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports, to which reference is hereby made.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net Sales
Firearms $ 32,210 $ 35,609 $ 108,366 $ 100,989
Castings
Unaffiliated 5,830 5,529 17,898 21,681
Intersegment 3,968 5,240 13,268 23,455
--------- --------- --------- ---------
9,798 10,769 31,166 45,136
Eliminations (3,968) (5,240) (13,268) (23,455)
--------- --------- --------- ---------
$ 38,040 $ 41,138 $ 126,264 $ 122,670
========= ========= ========= =========
Income Before Income Taxes
Firearms $ 3,856 $ 4,764 $ 19,921 $ 12,462
Castings (2,059) (894) (6,400) (587)
Corporate 473 544 1,165 2,307
--------- --------- --------- ---------
$ 2,270 $ 4,414 $ 14,686 $ 14,182
========= ========= ========= =========
September 30, December 31,
2002 2001
--------- ----------
Identifiable Assets
Firearms $ 78,393 $ 78,774
Castings 23,217 27,351
Corporate 94,525 98,253
--------- ----------
$ 196,135 $ 204,378
========= ==========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The Company achieved consolidated net sales of $38.0 million and $126.3
million for the three and nine months ended September 30, 2002, respectively.
This represents a decrease of 7.5% from third quarter sales in 2001 of $41.1
million and an increase of 2.9% from net sales of $122.7 million for the nine
months ended September 30, 2001.
Firearms segment net sales decreased by $3.4 million or 9.5% in the
third quarter of 2002 to $32.2 million from $35.6 million in the third quarter
of the prior year. For the nine months ended September 30, 2002, firearms
segment net sales increased by $7.4 million or 7.3% to $108.4 million, compared
to the corresponding 2001 period. Firearms unit shipments decreased 14.5% for
the three month period and increased 5.2% for the nine month period ended
September 30, 2002 from the comparable 2001 periods. The unit decrease for the
quarter ended September 30, 2002 reflects an overall softness in demand compared
with unusually strong demand in the third quarter of 2001. The increase for the
nine month period ended September 30, 2002 reflects increased demand during the
first half of 2002 for pistols, rifles, and single action revolvers. In 2002,
the Company instituted a sales incentive program for its distributors which
allows them to earn rebates of up to 1.5% if certain annual overall sales
targets are achieved. This program replaces a similar sales incentive program in
2001 which allowed rebates of up to 5% if certain annual overall sales targets
were achieved. On August 1, 2002, a consumer-driven sales incentive program for
certain hunting rifles and revolvers commenced.
Casting segment net sales increased by $0.3 million or 5.4% to $5.8
million in the three months ended September 30, 2002 from $5.5 million in the
third quarter of 2001. For the nine months ended September 30, 2002, casting
segment net sales decreased $3.8 million or 17.4% to $17.9 million. The
reduction in casting segment sales for the nine months ended September 30, 2002
from the comparable 2001 period was due to an apparent weakened demand for both
steel and titanium castings. The Company anticipates that total casting segment
sales in 2002 may be below the level achieved in 2001. The Company continues to
actively pursue other casting business opportunities.
Consolidated cost of products sold for the third quarter of 2002 and
the nine months ended September 30, 2002 was $31.1 million and $97.1 million
compared to $32.9 million and $95.3 million in the corresponding 2001 periods,
respectively, representing a decrease of 5.6% for the quarter and an increase of
1.9% for the nine month period. The decrease for the quarter reflects the
decrease in firearms sales, partially offset by the increase in castings sales.
Conversely, the increase for the nine month period was primarily attributable to
increased firearms sales, partially offset by a decline in casting segment
sales.
For the third quarter of 2002, gross profit as a percent of net sales
decreased to 18.2% from 19.9% in the third quarter of 2001. Gross profit as a
percentage of net sales increased to 23.1% for the nine month period ended
September 30, 2002 from 22.3% for the nine month period ended September 30,
2001. Margin erosion in the quarter ended September 30, 2002 was primarily
caused by reduced firearms sales and the deterioration of castings margins. The
improvement for the nine month period ended September 30, 2002 is attributable
to increased firearm sales and the reversal of an overaccrual related to a
pistol rebate program that ended December 31, 2001, partially offset by the
deterioration of castings margins caused in part by declining castings sales.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
Selling, general and administrative expenses increased $0.8 million to
$5.2 million for the quarter ended September 30, 2002 compared with the prior
year period principally reflecting increased national advertising expenditures.
Selling, general and administrative expenses remained consistent for the nine
months ended September 30, 2002 and 2001.
Other income-net decreased by $0.1 million and $1.2 million in the
quarter and nine months ended September 30, 2002, respectively, compared to the
corresponding 2001 periods. The decrease for both periods in 2002 is due to
decreased earnings on short-term investments as a result of declining interest
rates and reduced principal.
The effective income tax rate of 40.1% in the third quarter and nine
months ended September 30, 2002 increased slightly from the income tax rate of
39.2% in the corresponding periods in 2001.
As a result of the foregoing factors, consolidated net income for the
three and nine months ended September 30, 2002 decreased to $1.4 million and
increased to $8.8 million, respectively, from $2.7 million and $8.6 million for
the three and nine months ended September 30, 2001, respectively.
Financial Condition
At September 30, 2002, the Company had cash, cash equivalents and
short-term investments of $62.4 million, working capital of $109.7 million and a
current ratio of 4.9 to 1.
Cash provided by operating activities was $12.6 million and $4.3
million for the nine months ended September 30, 2002 and 2001, respectively. The
increase in cash provided in 2002 is principally a result of the increase in
inventories in 2001 compared to the decrease in inventories in 2002.
The Company follows an industry-wide practice of offering a "dating
plan" to its firearms customers on selected products, which allows the
purchasing distributor to buy the products commencing in December, the start of
the Company's marketing year, and pay for them on extended terms. Discounts are
offered for early payment. The dating plan provides a revolving payment plan
under which payments for all shipments made during the period December through
February must be made by April 30. Generally, shipments made in subsequent
months must be paid within approximately 90 days. Dating plan receivable
balances were $9.3 million at September 30, 2002 compared to $8.3 million at
September 30, 2001. 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 nine months ended September 30, 2002
totaled $1.8 million. For the past two years capital expenditures averaged
approximately $1.1 million per quarter. For the fourth quarter of 2002, the
Company expects to spend approximately $2 million on capital expenditures to
upgrade and modernize manufacturing equipment. The Company finances, and intends
to continue to finance, all of these activities with funds provided by
operations.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CONTINUED
For the nine months ended September 30, 2002 dividends paid totaled
$16.1 million. This amount reflects the regular quarterly dividend of $.20 per
share paid in March, June and September 2002. On October 24, 2002 the Company
declared a regular quarterly dividend of $.20 per share payable on December 15,
2002. 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 2002.
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.
During July 2002, the Company established an additional collateralized line of
credit for the purchaser and, as of September 30, 2002, the total amount due
from the purchaser was $2.2 million. The Company purchases aluminum castings
used in the manufacture of certain models of pistols exclusively from Uni-Cast.
The sale, purchase, ownership, and use of firearms are subject to
thousands of federal, state and local governmental regulations. The basic
federal laws are the National Firearms Act, the Federal Firearms Act, and the
Gun Control Act of 1968. These laws generally prohibit the private ownership of
fully automatic weapons and place certain restrictions on the interstate sale of
firearms unless certain licenses are obtained. The Company does not manufacture
fully automatic weapons, other than for the law enforcement market, and holds
all necessary licenses under these federal laws. From time to time,
congressional committees review proposed bills relating to the regulation of
firearms. These proposed bills generally seek either to restrict or ban the sale
and, in some cases, the ownership of various types of firearms. Several states
currently have laws in effect similar to the aforementioned legislation.
Until November 30, 1998, the "Brady Law" mandated a nationwide five-day
waiting period and background check prior to the purchase of a handgun. As of
November 30, 1998, the National Instant Check System, which applies to both
handguns and long guns, replaced the five-day waiting period. The Company
believes that the "Brady Law" has not had a significant effect on the Company's
sales of firearms, nor does it anticipate any impact on sales in the future. The
"Crime Bill" took effect on September 13, 1994, but none of the Company's
products were banned as so-called "assault weapons." To the contrary, all the
Company's then-manufactured commercially-sold long guns were exempted by name as
"legitimate sporting firearms." The Company remains strongly opposed to laws
which would restrict the rights of law-abiding citizens to lawfully acquire
firearms. The Company believes that the lawful private ownership of firearms is
guaranteed by the Second Amendment to the United States Constitution (a position
adopted by the U.S. Court of Appeals for the 5th Circuit in the case of U.S. v.
Emerson on October 16, 2001) 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
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CONTINUED
unfounded, and that the shootings and any results therefrom were due to
negligence or misuse of the firearms by third-parties or the claimant, and that
there should be no recovery against the Company. Defenses further exist to the
suits brought by cities, municipalities, counties, and a state attorney general
based, among other reasons, on established state law precluding recovery by
municipalities for essential government services, the remoteness of the claims,
the types of damages sought to be recovered, and limitations on the
extraterritorial authority which may be exerted by a city, municipality, county
or state under state and federal law, including State and Federal Constitutions.
The only case against the Company alleging liability for criminal
shootings by third-parties to ever be permitted to go before a jury, Hamilton,
et. al. v. Accu-tek, et. al., resulted in a defense verdict in favor of the
Company on February 11, 1999. In that case, numerous firearms manufacturers and
distributors had been sued, alleging damages as a result of alleged negligent
sales practices and "industry-wide" liability. The Company and its marketing and
distribution practices were exonerated from any claims of negligence in each of
the seven cases decided by the jury. The Court upheld the verdict of the jury
and dismissed each case as to the Company in its later opinion. The three
defendants found liable filed a notice of appeal from the Court's decision. On
August 16, 2000, the U.S. 2nd Circuit Court of Appeals certified certain
questions to the Appellate Division of the New York State Supreme Court for
resolution. On April 26, 2001, the Appellate Division of the New York State
Supreme Court responded to the U.S. 2nd Circuit Court of Appeals' certified
questions. The questions involved whether firearms manufacturers have a legal
duty to prevent criminal misuses of their lawfully-sold products and whether any
liability of the firearms manufacturers should be apportioned by a market share
theory. The New York State Appellate Division answered both questions in the
negative. On August 30, 2001, the United States Court of Appeals for the 2nd
Circuit vacated and remanded the case with instructions for the trial court to
enter a final judgment of dismissal. The trial court finally dismissed the case
on its merits on September 17, 2001.
Of the lawsuits brought by municipalities or a state Attorney General, 10
have been dismissed as a matter of law. Six of those cases are concluded
(Atlanta - dismissal by intermediate Appellate Court, no further appeal;
Bridgeport - dismissal affirmed by Connecticut Supreme Court; County of Camden -
dismissal affirmed by 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; and Philadelphia - Third Circuit Court of Appeals affirmed
dismissal, no further appeal). On June 12, 2002, the Ohio Supreme Court voted
4-3 to reverse the dismissals of the Cincinnati case by the trial and appellate
courts and remanded the case to the trial court for discovery proceedings. On
September 20, 2002, the Indiana Court of Appeals affirmed the dismissal of the
Gary case by the trial court and plaintiffs have filed a request for appeal to
the Indiana Supreme Court. The remainder (Chicago and New York State) are on
appeal from their complete dismissal. An 11th case, Boston, was voluntarily
dismissed with prejudice by the City at the close of fact discovery and is now
concluded.
Of the remaining cases in which the Company has been served with process,
two (Detroit/Wayne County and Newark) are on appeal from partial dismissal, two
(Cleveland and New York City) are stayed, three (Camden City, St. Louis and
Washington, DC) have pending motions to dismiss at the trial level, one
(Wilmington) has a pending motion for summary judgment, and one (the
consolidated California case) is proceeding with discovery following dismissal
of certain damage claims.
Legislation has been passed in approximately 30 states precluding suits
of the type brought by the municipalities mentioned above.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CONTINUED
The Company's management reviews every lawsuit and claim at the outset
and is in contact with independent and corporate counsel on an ongoing basis.
The provision for product liability claims is based upon many factors, which
vary for each case. These factors include the type of claim, nature and extent
of injuries, historical settlement ranges, jurisdiction where filed, and advice
of counsel. An accrual is established for each lawsuit and claim, when
appropriate, based on the nature of each such lawsuit or claim.
Amounts are charged to product liability expense in the period in which
the Company becomes aware that a claim or, in some instances a threat of claim,
has been made when potential losses or costs of defense can be reasonably
estimated. Such amounts are determined based on the Company's experience in
defending similar claims. Occasionally, charges are made for claims made in
prior periods because the cumulative actual costs incurred for that claim, or
reasonably expected to be incurred in the future, exceed amounts already
provided. Likewise credits may be taken if cumulative actual costs incurred for
that claim, or reasonably expected to be incurred in the future, are less than
amounts previously provided.
While it is not possible to forecast the outcome of litigation or the
timing of costs, in the opinion of management, after consultation with
independent and corporate counsel, it is not probable and is unlikely that
litigation, including punitive damage claims, will have a material adverse
effect on the financial position of the Company, but may have a material impact
on the Company's financial results for a particular period.
In the normal course of its manufacturing operations, the Company is
subject to occasional governmental proceedings and orders pertaining to waste
disposal, air emissions and water discharges into the environment. The Company
believes that it is generally in compliance with applicable environmental
regulations and the outcome of such proceedings and orders will not have a
material adverse effect on its business.
The 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.
Subsequent to the passage of the Sarbanes-Oxley Act of 2002, the Company
extended approximately $35,000 of credit to an officer of the Company. This
extension of credit may have been in violation of the Sarbanes-Oxley Act of
2002. In recognition of this potential violation, this officer subsequently
repaid this balance to the Company.
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
16
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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CONTINUED
the Company including lawsuits filed by mayors, a state attorney general and
other governmental entities and membership organizations, and the impact of
future firearms control and environmental legislation, any one or more of which
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date made. The Company undertakes no obligation to
publish revised forward-looking statements to reflect events or circumstances
after the date such forward-looking statements are made or to reflect the
occurrence of subsequent unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this interest rate
market risk exposure to be material to its financial condition or results of
operations. The Company invests primarily in United States Treasury instruments
with short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Under its
current policies, the Company does not use derivative financial instruments,
derivative commodity instruments or other financial instruments to manage its
exposure to changes in interest rates or commodity prices.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and President, Chief Operating
Officer and Treasurer have both concluded, based on their evaluation within 90
days of the filing date of this report, that the Company's disclosure controls
and procedures are adequately designed to ensure that the information the
Company is required to disclose in its reports filed or submitted by the Company
under the Securities Exchange Act of 1934, as amended, has been recorded,
processed, summarized and reported on a timely basis. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls and there have been no corrective
actions taken with regard to significant deficiencies and material weaknesses
subsequent to the date of such evaluation by the officers.
17
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 June
30, 2002, and the results of those cases, where terminated, to the S.E.C. on its
previous Form 10-K and 10-Q reports, to which reference is hereby made.
One previously-reported case was formally instituted against the Company
during the three months ended September 30, 2002, which involved significant
demands for compensatory and/or punitive damages and in which the Company has
been served with process;
City of Jersey City v. Company, et. al. (NJ) in the Superior Court of New
Jersey Law Division, Hudson County. The Company learned of this complaint on
March 27, 2002, but was not served until September 19, 2002. The complaint
alleges that the defendants have created a public nuisance to the City of Jersey
City because of their allegedly negligent marketing and distribution practices.
Plaintiffs seek injunctive relief, compensatory and punitive damages, plus other
costs to be determined by the Court.
During the three months ending September 30, 2002, no previously-reported
cases were settled.
On September 20, 2002, the Indiana Court of Appeals affirmed the
dismissal of the previously-reported City of Gary (IN) lawsuit on all counts as
to all manufacturers. A request for leave to appeal has been filed with the
Indiana Supreme Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company filed a Current Report on Form 8-K relating to the death
of William B. Ruger, Company Founder and Chairman Emeritus, on July
10, 2002.
18
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
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: November 4, 2002 S/ERLE G. BLANCHARD
------------------------------------------------
Erle G. Blanchard
Principal Financial and Accounting Officer,
President, Chief Operating Officer and Treasurer
19
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William B. Ruger, Jr., Chief Executive Officer of Sturm, Ruger & Company,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sturm, Ruger &
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have;
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to me
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on the required evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
20
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 4, 2002
S/WILLIAM B. RUGER, JR.
-----------------------
William B. Ruger, Jr.
Chief Executive Officer
See also the certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, which are also attached to this report as Exhibits 99.1 and 99.2.
21
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Erle G. Blanchard, President, Chief Operating Officer and Treasurer of Sturm,
Ruger & Company, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sturm, Ruger &
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have;
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to me by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c. presented in this quarterly report my conclusions about
the effectiveness of the disclosure controls and
procedures based on the required evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
22
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 4, 2002
S/ERLE G. BLANCHARD
----------------------------------
Erle G. Blanchard
President, Chief Operating Officer
and Treasurer
See also the certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, which are also attached to this report as Exhibits 99.1 and 99.2.
23