<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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, 1999: Common Stock, $1 par value - 26,910,720.
Page 1 of 20
<PAGE> 2
INDEX
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 1999 and
December 31, 1998 3
Condensed consolidated statements of income--Three months ended
June 30, 1999 and 1998; Six months ended June 30, 1999 and 1998 5
Condensed consolidated statements of cash flows--Six months
ended June 30, 1999 and 1998 6
Notes to condensed consolidated financial statements--June 30, 1999 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 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,503 $ 4,680
Short-term investments 70,001 43,247
Trade receivables, less allowances for
Doubtful accounts ($1,331 and $1,299) and
Discounts ($530 and $1,888) 23,496 23,046
Inventories:
Finished products 10,752 13,402
Materials and products in process 27,646 34,150
--------- ---------
38,398 47,552
Deferred income taxes 10,264 7,999
Prepaid expenses and other assets 499 1,091
--------- ---------
TOTAL CURRENT ASSETS 148,161 127,615
Property, plant and equipment 146,657 144,918
Less allowances for depreciation (98,279) (93,833)
--------- ---------
48,378 51,085
Deferred income taxes 3,756 3,400
Other assets 14,612 14,634
--------- ---------
$ 214,907 $ 196,734
========= =========
</TABLE>
3
<PAGE> 4
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)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable and accrued expenses $ 10,061 $ 3,936
Product safety modifications 667 752
Product liability 3,000 3,000
Employee compensation 14,430 11,181
Workers' compensation 4,497 4,173
Income taxes 5,090 2,178
--------- ---------
TOTAL CURRENT LIABILITIES 37,745 25,220
Product liability accrual 17,442 16,950
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 shares - 26,910,720 26,911 26,911
Additional paid-in capital 2,434 2,434
Retained earnings 130,565 125,409
Accumulated other comprehensive income (190) (190)
--------- ---------
159,720 154,564
--------- ---------
$ 214,907 $ 196,734
========= =========
</TABLE>
Note:
The balance sheet at December 31, 1998 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
<PAGE> 5
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Firearms sales $ 49,429 $ 41,773 $ 96,867 $ 78,786
Castings sales 13,589 18,224 29,042 39,732
-------- -------- -------- --------
Net sales 63,018 59,997 125,909 118,518
Cost of products sold 46,581 42,679 91,198 84,876
-------- -------- -------- --------
16,437 17,318 34,711 33,642
Expenses:
Selling 3,259 3,468 6,479 6,774
General and administrative 1,444 1,419 3,093 3,156
-------- -------- -------- --------
4,703 4,887 9,572 9,930
-------- -------- -------- --------
11,734 12,431 25,139 23,712
Other income-net 933 1,698 1,617 2,454
-------- -------- -------- --------
Income before income taxes 12,667 14,129 26,756 26,166
Income taxes 5,130 5,722 10,836 10,597
-------- -------- -------- --------
Net income $ 7,537 $ 8,407 $ 15,920 $ 15,569
======== ======== ======== ========
Basic and diluted earnings per share $ 0.28 $ 0.31 $ 0.59 $ 0.58
Cash dividends per share $ 0.20 $ 0.20 $ 0.40 $ 0.40
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
-------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES $ 39,911 $ 24,153
INVESTING ACTIVITIES:
Property, plant and equipment additions (1,739) (2,841)
Purchases of short-term investments (95,758) (77,544)
Proceeds from sales or maturities of
short-term investments 69,004 67,772
Net proceeds from sale of land 169 1,077
-------- --------
Cash used by investing activities (28,324) (11,536)
-------- --------
FINANCING ACTIVITIES:
Dividends paid (10,764) (10,766)
Repurchase of Common Stock -- (210)
-------- --------
Cash used by financing activities (10,764) (10,976)
-------- --------
Increase in cash and cash equivalents 823 1,641
Cash and cash equivalents at beginning of period 4,680 4,488
-------- --------
Cash and cash equivalents at end of period $ 5,503 $ 6,129
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the results
of the interim periods. Operating results for the six months ended June 30, 1999
are not necessarily indicative of the results to be expected for the full year
ending December 31, 1999. 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, 1998.
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 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. During 1999, 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. If a liquidation does occur in
1999, management believes that the impact would not be material to the financial
statements.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
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, 1999 and 1998 were $8.7 million and $12.5 million,
respectively.
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. On May 13, 1999,
shareholders approved the 1998 Stock Incentive Plan under which employees may be
granted options to purchase shares of the Company's authorized but unissued
stock. 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
1999 and 1998, total comprehensive income equals net income for the three and
six months ended June 30, 1999 and 1998, or $7.5 million and $8.4 million, and
$15.9 million and $15.6 million, respectively.
NOTE 7 - CONTINGENT LIABILITIES
The Company is a defendant in approximately 26 lawsuits involving its
products and is aware of certain other such claims. These lawsuits and claims
fall within 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, and
individuals (including certain putative class actions) 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, manufacturing, 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, assault, 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.
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
Punitive damages, as well as compensatory damages, are demanded in many
of the lawsuits and claims. Aggregate claimed amounts presently exceed product
liability accruals and applicable insurance coverage. As of March 18, 1982,
compensatory and punitive damage insurance coverage is provided, in States where
permitted, for losses exceeding $1 million of loss per occurrence or an
aggregate maximum loss of $4 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 million. For claims made between July 10, 1989, and July 10, 1991,
the aggregate maximum loss is $7.5 million. For claims made after July 10, 1992
coverage is provided for losses exceeding $2,250,000 per claim, or an aggregate
maximum loss $6,500,000. For claims made after July 10, 1994, coverage is
provided for losses exceeding $2,000,000 per claim, or an aggregate maximum loss
of $6,000,000. For claims made after July 10, 1997, coverage is provided for
losses exceeding $2,000,000 per claim, or an aggregate maximum loss of
$5,500,000.
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 and counties based, among other reasons, on established
state law precluding recovery by municipalities for the 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 or county 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 to 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 May 26, 1999 opinion. The three
defendants found liable have filed a notice of appeal from the court's decision.
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
results of operations or financial condition of the Company.
The Company has reported all lawsuits instituted against it through
June 30, 1999 and the results of those lawsuits, where terminated, to the S.E.C.
in this Form 10-Q and prior Form 10-K and Form 10-Q reports to which reference
is hereby made.
9
<PAGE> 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 three operating divisions which manufacture and sell
titanium, ferrous, and aluminum investment castings. Selected operating segment
financial information follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
Firearms $49,429 $41,773 $ 96,867 $ 78,786
Castings
Unaffiliated 13,589 18,224 29,042 39,732
Intersegment 7,044 8,395 14,040 13,615
- ---------------------------------------------------------------------------------------------------------------------------
20,633 26,619 43,082 53,347
Eliminations (7,044) (8,395) (14,040) (13,615)
- ---------------------------------------------------------------------------------------------------------------------------
$63,018 $59,997 $125,909 $118,518
===========================================================================================================================
Income Before Income Taxes
Firearms $11,689 $10,308 $24,174 $17,526
Castings 421 2,640 1,803 7,243
Corporate 557 1,181 779 1,397
- ---------------------------------------------------------------------------------------------------------------------------
$12,667 $14,129 $26,756 $26,166
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------------
Identifiable Assets
<S> <C> <C>
Firearms $ 73,418 $79,633
Castings 39,828 43,760
Corporate 101,661 73,341
------------------------------
$214,907 $196,734
------------------------------
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Consolidated net sales of $63.0 million and $125.9 million were
achieved by the Company for the three and six months ended June 30, 1999. This
represents an increase of 5.0% and 6.2% from the respective 1998 consolidated
net sales amounts of $60.0 million and $118.5 million.
Firearms segment net sales increased by $7.6 million, or 18.3%, in the
second quarter to $49.4 million from $41.8 million in the second quarter of the
prior year. For the six months ended June 30, 1999, firearms segment net sales
increased by $18.1 million, or 22.9% to $96.9 million, compared to the
corresponding 1998 period. Firearms unit shipments increased 20.4% for the
three-month period and 21.6% for the six-month period ended June 30, 1999 from
the comparable 1998 periods. The unit increase reflects continued strong overall
market demand. In the second quarter of 1999, shipments of the industry product
categories of rifles and revolvers increased 33.0% and 16.8%, respectively. A
heightened level of demand for most existing models and the introduction of the
Company's Fiftieth Anniversary commemorative pistol, the MK-450, have
contributed to the overall increase in firearms unit sales. Shipments in the
second quarter may have been favorably impacted by a pricing increase in
selected models effective July 1, 1999, that was announced in May. In 1999, the
Company instituted a new sales incentive program for its distributors which
allows them to earn rebates of up to 15% if certain annual overall sales targets
are achieved. This program replaces programs offered in previous years which
rewarded distributors for meeting overall annual sales targets as well as sales
targets within specific product lines. The Company anticipates that second half
unit sales will exceed those achieved in the second half of 1998 but that total
firearms shipments for the second half of 1999 may be below those of the first
half.
Casting segment net sales decreased by 25.4% and 26.9% to $13.6 million
and $29.0 million, respectively, in the three and six months ended June 30, 1999
from $18.2 million and $39.7 million in the comparable 1998 periods. This was
principally due to reduced shipments of titanium golf club heads to Callaway
Golf Company, Inc. which decreased 31.5% and 39.2% for the three and six months
ended June 30, 1999, respectively. Shipments to other golf companies for the
first six months of 1999, which were approximately twice those of the comparable
1998 period, partially offset this decrease. The Company anticipates that total
casting segment sales in 1999 may be below the level achieved in 1998. The
Company continues to actively pursue other golf club casting business as well as
other titanium markets.
Consolidated cost of products sold for the second quarter and the six
months ended June 30, 1999 were $46.6 million and $91.2 million compared to
$42.7 million and $84.9 million in the corresponding 1998 periods representing
an increase of 9.1% and 7.4%, respectively. This was primarily attributable to
increased sales activities by the firearms segment partially offset by reduced
casting segment sales during the second quarter and the six months ended June
30, 1999.
Gross profit as a percentage of net sales was 27.6% for the six month
period ended June 30, 1999, as compared to 28.4% in the comparable 1998 period.
For the second quarter of 1999, gross profit as a percent of sales decreased to
26.1% from 28.9% in the second quarter of 1998. Margin erosion in the quarter
was caused by lower casting sales and increased product liability expenses
related to the lawsuits brought by cities, municipalities, counties, and
individuals during the quarter, partially offset by the favorable disposition of
the Hamilton, et. al. v. Accu-tek, et. al. lawsuit.
Selling, general and administrative expenses decreased by $0.2 million
or 3.8% to $4.7 million and by $0.4 million or 3.6% to $9.6 million, in the
three and six months ended June 30, 1999, respectively. Selling, general and
administrative expense as a percentage of sales in the three and six months
ended June 30, 1999 of 7.5% and 7.6%, respectively, is below the 9.1% ratio for
the year ended December 31, 1998.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
Other income-net decreased by $0.8 million in both the three and six
months ended June 30, 1999 compared to the corresponding 1998 periods primarily
due to a gain on the sale of non-manufacturing real estate in the second quarter
of 1998.
The effective income tax rate remained 40.5% in both the second quarter
and six months ended June 30, 1999, unchanged from the corresponding 1998
periods.
As a result of the foregoing factors, consolidated net income decreased
$0.9 million or 7.6% from $8.4 million to $7.5 million for the three months
ended June 30, 1999 and increased $0.2 million or 2.3% from $15.6 million to
$15.9 million for the six months ended June 30, 1999.
Financial Condition
At June 30, 1999, the Company had cash, cash equivalents and short-term
investments of $75.5 million, working capital of $110.4 million and a current
ratio of 3.9 to 1.
Cash provided by operating activities was $39.9 million and $24.2
million for the six months ended June 30, 1999 and 1998, respectively. The
increase in cash provided is principally a result of a larger reduction in
inventories and larger increases in accounts payable and accrued expenses in the
first six months of 1999 than in the comparable 1998 period.
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. Shipments made in subsequent months have
to be paid within approximately 90 days. Dating plan receivable balances were
$8.0 million at June 30, 1999 compared to $6.6 million at June 30, 1998. 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, 1999 totaled
$1.7 million. For the past two years capital expenditures averaged approximately
$1.2 million per quarter. For 1999, the Company expects to spend approximately
$6.4 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, 1999 dividends paid totaled $10.8
million. This amount reflects the regular quarterly dividend of $.20 per share
paid in March and June 1999. On July 15, 1999, the Company declared a regular
quarterly dividend of $.20 per share payable on September 15, 1999. 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 1999.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CONTINUED
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 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
unduly restrict the rights of law-abiding citizens to acquire firearms for
legitimate purposes. 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 and counties based, among other reasons,
on established state law precluding recovery by municipalities for the 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 or county under state and federal law, including
State and Federal Constitutions.
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 results of
operations or financial condition of the Company.
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.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CONTINUED
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.
Some of the Company's computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculation causing disruptions of operations, including a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. This is commonly referred to as the "Year 2000" issue.
The Company has completed its assessment of the Year 2000 issue as it
relates to both information technology systems and non-information technology
applications. With respect to information technology systems, numerous programs
and files on the Company's mainframe computer system have been identified as
candidates for conversion. The conversion of these programs and files has been
substantially completed. Some of these files have been placed in active service
and are currently in use. Others, most of which relate to the financial and
accounting functions of the Company, may be tested during the second half of
1999. If program failures result or any other unforeseen problems or issues
arise with the identified programs or if it is determined that additional
programs require remediation, additional personnel from outside the Company may
be needed to complete the Year 2000 remediation in a timely manner. The
availability of such personnel is unknown.
Currently, the Company has not established a contingency plan in the
event it does not complete all phases of the Year 2000 program. The Company
plans to evaluate the status of completion in the fourth quarter of 1999 to
determine whether such a plan is necessary.
The Company has not completed its assessment of Year 2000 issues
related to third parties, as approximately one third of third party responses
have not yet been received. Thus far, the Company is unaware of any significant
issues related to third parties with which it has a material relationship. As
the Company is relying on the truthfulness and completeness of third party
information and certification, there can be no assurance that the systems of
other companies will be converted on time or that any such failure to convert by
another company would not have an adverse effect on the Company.
Results of the efforts underway and the Company's current assessments
continue to indicate that the impact of the Year 2000 remediation relating to
information technology, non-information technology and third parties will be
immaterial to the Company's future operating results and cash flows. However,
the Company will continue to closely monitor and disclose the impact of Year
2000 issues throughout 1999.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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 (including those from titanium golf club components), the need for
external financing for operations or capital expenditures, the impact of Year
2000 issues, the results of pending litigation against the Company, 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, and the Company undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date such forward-looking statements are made or to
reflect the occurrence of 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 Bills 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-"CONTINGENT LIABILITIES" to this 10-Q report, which is incorporated
herein by reference.
The Company has reported all cases instituted against it through March
31, 1999, 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.
The following cases were instituted against the Company during the
three months ended June 30, 1999, which involved significant demands for
compensatory and/or punitive damages:
Alex Penelas, Mayor of Miami-Dade County v. Arms Technology, Inc., et.
al. in the Circuit Court in Miami-Dade County, Florida. The complaint was filed
on January 27, 1999; however, the Company was not served until June 17, 1999
when it was served with an amended complaint. That complaint asserts claims in
negligence, strict liability, negligent entrustment, and public nuisance against
a number of firearms manufacturers and trade associations for the costs of
governmental services and decrease of property values arising out of the
criminal, suicidal and accidental misuse of firearms. The suit also seeks
imposition of a "Constructive Trust" and the entry of an injunction.
15
<PAGE> 16
LEGAL PROCEEDINGS -- CONTINUED
Mayor Michael R. White, and the City of Cleveland v. Hi-Point Firearms,
et. al. in the Court of Common Pleas in Cuyahoga County, Ohio. The complaint,
which was filed on April 12, 1999, alleges that handgun manufacturers,
distributors, and trade associations have failed to provide adequate warnings
with the firearms, and have failed to incorporate safety devices which would
prevent unauthorized users from firing the guns. The complaint also alleges
unjust enrichment, nuisance abatement, and public nuisance claims. Actual and
punitive damages, plus other costs against each defendant, are demanded, as is
injunctive relief.
Edward H. McNamara, Wayne County Executive, et. al. v. Arms Technology,
Inc., et. al. in the Circuit Court for the County of Wayne in Michigan. The
complaint, which was filed on April 26, 1999, alleges that firearms
manufacturers, distributors, and dealers are negligent and have created a public
nuisance allegedly by making firearms easily available to juveniles, criminals,
and other unauthorized firearms users. Compensatory damages in excess of $200
million and exemplary damages in excess of $200 million allocated against each
defendant are demanded as well as equitable relief.
Dennis W. Archer, Mayor of the City of Detroit, et. al. v. Arms
Technology, Inc., et. al. in the Circuit Court for the County of Wayne in
Michigan. The complaint, which was filed on April 26, 1999, alleges that
firearms manufacturers, distributors, and dealers are negligent and have created
a public nuisance by allegedly making firearms easily available to unauthorized
firearms users. Compensatory and exemplary damages plus other fees and costs
allocated against each defendant and injunctive relief are demanded.
City of Cincinnati v. Beretta U.S.A. Corp., et. al. in the Court of
Common Pleas in Hamilton County, Ohio. The complaint, which was filed on May 4,
1999, alleges that firearms manufacturers have failed to utilize safety devices
which would prevent unauthorized users from firing guns. The complaint also
alleges gun manufacturers, distributors, and dealers have marketed guns without
sufficient control resulting in an illegal gun market which supplies guns to
juveniles and felons, thereby creating a public nuisance. Deceptive advertising,
fraud/ concealment, negligent misrepresentation and unjust enrichment are also
alleged. Allocated compensatory, exemplary and punitive damages, plus other
costs against each defendant, are demanded as well as injunctive relief.
City of Boston, The Boston Public Health Commission v. Smith & Wesson
Corp., et. al. in the Superior Court in Massachusetts. The complaint, which was
filed on June 3, 1999, alleges counts of public nuisance, negligent distribution
and marketing, breach of warranty and unjust enrichment against a number of
firearm manufacturers and trade associations allegedly arising out of the use of
firearms by juveniles, criminals and other prohibited persons in the commission
of crimes. Compensatory, punitive, and special damages plus other fees and costs
against each defendant, are demanded as is injunctive relief.
City of St. Louis, Missouri v. Henry J. Cernicek, et. al. in the
Circuit Court of the City of St. Louis, Missouri. The complaint, which was filed
on May 13, 1999, alleges that firearms manufacturers, distributors, dealers,
sellers, agents and trade associations have failed to utilize safety devices
which would prevent unauthorized users from firing guns and causing a "public
nuisance." The complaint also alleges negligence in design and warnings, civil
conspiracy and unjust enrichment. Allocated compensatory and punitive damages,
plus other fees against each defendant, are demanded as well as an order to
"abate" the nuisance.
16
<PAGE> 17
LEGAL PROCEEDINGS -- CONTINUED
Anthony Ceriale, Special Administrator of the Estate of Michael
Ceriale, Deceased v. Smith & Wesson Corp., et. al. in the Circuit Court of Cook
County, Illinois. The complaint, which was filed on May 26, 1999, alleges that
Chicago Police Officer Michael Ceriale was shot with a non-Ruger handgun by a
gang member while conducting a narcotics surveillance. The complaint, brought as
a putative class action against a number of manufacturers and distributors,
alleges firearms manufacturers have created a public nuisance resulting in
illegal possession and use by unauthorized persons. Damages plus other costs and
fees against one or more handgun manufacturers are demanded.
Thomas Smith and Nancy Smith v. Sturm, Ruger & Co., Inc. in the
Superior Court in Maine. The complaint, which was filed on April 20, 1999,
alleges that Thomas Smith was shot in the head while handling a Ruger revolver
and died. General and punitive damages are demanded.
Tricia Keene, Individually, and Tricia Keene as Next of Friend for the
Estate of Brandon Preston v. Sturm, Ruger & Co., Inc. in the District Court of
Jefferson County in Texas. The complaint, which was filed on April 29, 1999,
alleges that Tricia Keene's son was fatally injured while at the home of David
and Shirley LeBlanc when the LeBlanc's minor child discharged a firearm.
Exemplary, punitive, and compensatory damages are demanded.
During the three months ending June 30, 1999, one previously reported
case was settled:
Case Name Jurisdiction
--------- ------------
Webb Minnesota
The settlement amount was within the Company's limits of its
self-insurance coverage.
The only case against the Company alleging liability for criminal
shootings by third parties to ever be permitted to go to 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 May 26, 1999 opinion. The three
defendants found liable have filed a notice of appeal from the court's decision.
17
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of the Stockholders of the Company was
held on May 13, 1999. The table below sets forth the results
of the votes taken at the 1999 Annual Meeting:
1. Election of Directors
---------------------
<TABLE>
<CAPTION>
Votes
Votes For Withheld
--------- --------
<S> <C> <C>
William B. Ruger 24,907,823 179,260
William B. Ruger, Jr 24,931,048 156,035
Stephen L. Sanetti 24,933,739 153,344
Richard T. Cunniff 24,962,774 124,309
Townsend Hornor 24,963,225 123,858
Paul X. Kelley 24,967,958 119,125
John M. Kingsley, Jr 24,932,356 154,727
James E. Service 24,972,904 114,179
Stanley B. Terhune 24,771,303 315,780
</TABLE>
2. Approval of 1998 Stock Incentive Plan
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld
--------- ------------- --------------
<S> <C> <C>
16,454,950 4,405,790 748,595
</TABLE>
3. Ratification of Ernst & Young LLP as Auditors for 1999
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld
--------- ------------- --------------
<S> <C> <C>
25,012,221 40,873 33,989
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit 27 - Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
three months ended June 30, 1999.
18
<PAGE> 19
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1999
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, 1999 /s/ERLE G. BLANCHARD V.P.
-------------- ---------------------------------------
Erle G. Blanchard
Principal Financial and
Accounting Officer,
Vice President, Controller
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,503
<SECURITIES> 70,001
<RECEIVABLES> 25,357
<ALLOWANCES> 1,861
<INVENTORY> 38,398
<CURRENT-ASSETS> 148,161
<PP&E> 146,657
<DEPRECIATION> 98,279
<TOTAL-ASSETS> 214,907
<CURRENT-LIABILITIES> 37,745
<BONDS> 0
0
0
<COMMON> 26,911
<OTHER-SE> 132,809
<TOTAL-LIABILITY-AND-EQUITY> 214,907
<SALES> 125,909
<TOTAL-REVENUES> 125,909
<CGS> 91,198
<TOTAL-COSTS> 91,198
<OTHER-EXPENSES> 9,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,756
<INCOME-TAX> 10,836
<INCOME-CONTINUING> 15,920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,920
<EPS-BASIC> 0.59
<EPS-DILUTED> 0.59
</TABLE>
