<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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.
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(Exact name of registrant as specified in its charter)
Delaware 06-0633559
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Lacey Place, Southport, Connecticut 06490
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(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, 1999: Common Stock, $1 par value - 26,910,720.
Page 1 of 22
<PAGE> 2
INDEX
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
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<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 30, 1999 and
December 31, 1998 3
Condensed consolidated statements of income--Three months ended September
30, 1999 and 1998; Nine months ended September 30, 1999 and 1998 5
Condensed consolidated statements of cash flows--Nine months ended
September 30, 1999 and 1998 6
Notes to condensed consolidated financial statements--September 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 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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</TABLE>
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, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $6,364 $ 4,680
Short-term investments 70,499 43,247
Trade receivables, less allowances for
doubtful accounts ($1,367 and $1,299) and
discounts ($353 and $1,888) 24,221 23,046
Inventories:
Finished products 10,660 13,402
Materials and products in process 27,410 34,150
------------------ ------------------
38,070 47,552
Deferred income taxes 10,807 7,999
Prepaid expenses and other assets 1,465 1,091
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TOTAL CURRENT ASSETS 151,426 127,615
Property, plant and equipment 147,958 144,918
Less allowances for depreciation (100,486) (93,833)
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47,472 51,085
Deferred income taxes 3,521 3,400
Other assets 14,579 14,634
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$216,998 $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>
September 30, December 31,
1999 1998
------------------- -----------------
(unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable and accrued expenses $ 12,744 $ 3,936
Product safety modifications 662 752
Product liability 3,000 3,000
Employee compensation 12,188 11,181
Workers' compensation 4,611 4,173
Income taxes 4,964 2,178
------------------- -----------------
TOTAL CURRENT LIABILITIES 38,169 25,220
Product liability accrual 17,512 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 - 26,910,720 26,911 26,911
Additional paid-in capital 2,434 2,434
Retained earnings 132,162 125,409
Accumulated other comprehensive income (190) (190)
------------------- -----------------
161,317 154,564
------------------- -----------------
$216,998 $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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
Firearms sales $42,651 $28,812 $139,518 $107,598
Castings sales 12,793 14,561 41,835 54,293
----------------- ----------------- ---------------- ----------------
Net sales 55,444 43,373 181,353 161,891
Cost of products sold 39,826 35,440 131,024 120,316
----------------- ----------------- ---------------- ----------------
15,618 7,933 50,329 41,575
Expenses:
Selling 3,344 3,223 9,823 9,997
General and administrative 1,534 1,386 4,627 4,543
----------------- ----------------- ---------------- ----------------
4,878 4,609 14,450 14,540
----------------- ----------------- ---------------- ----------------
10,740 3,324 35,879 27,035
Other income-net 993 802 2,610 3,257
----------------- ----------------- ---------------- ----------------
Income before income taxes 11,733 4,126 38,489 30,292
Income taxes 4,752 1,672 15,588 12,269
----------------- ----------------- ---------------- ----------------
Net income $ 6,981 $ 2,454 $ 22,901 $ 18,023
================= ================= ================ ================
Basic and diluted earnings per share $0.26 $0.09 $0.85 $0.67
===== ===== ===== =====
Cash dividends per share $0.20 $0.20 $0.60 $0.60
===== ===== ===== =====
</TABLE>
See notes to condensed consolidated financial statements.
5
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STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---------------------------------------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES $ 47,955 $ 21,002
INVESTING ACTIVITIES
Property, plant and equipment additions (3,040) (4,608)
Purchases of short-term investments (133,603) (95,275)
Proceeds from sales or maturities of
short-term investments 106,351 94,685
Net proceeds from sale of land 169 1,077
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Cash used in investing activities (30,123) (4,121)
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FINANCING ACTIVITIES
Dividends paid (16,148) (16,146)
Repurchase of common stock - (210)
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Cash used in financing activities (16,148) (16,356)
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Increase in cash and cash equivalents 1,684 525
Cash and cash equivalents at beginning of period 4,680 4,488
------------------ ------------------
Cash and cash equivalents at end of period $ 6,364 $ 5,013
================== ==================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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 nine months ended September
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 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. Although a reduction in inventory
levels is expected to remain through year-end, the effect of a liquidation
cannot be quantified at the present time. 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 nine months ended September 30, 1999 and 1998 were $15.7 million and $15.1
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 nine
months of 1999 and 1998, total comprehensive income equals net income for the
three and nine months ended September 30, 1999 and 1998, or $7.0 million and
$2.5 million, and $22.9 million and $18.0 million, respectively.
NOTE 7--CONTINGENT LIABILITIES
The Company is a defendant in approximately 36 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.
On October 7, 1999 a lawsuit brought against the Company and numerous
firearms manufacturers and distributors by the mayor of Cincinnati, City of
Cincinnati v. Beretta U.S.A. Corp., et. al., was dismissed. This was the first
dismissal of one of the lawsuits which have been filed by certain cities,
municipalities and counties. Motions to dismiss other such lawsuits are pending.
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
September 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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
Firearms $42,651 $28,812 $139,518 $ 107,598
Castings
Unaffiliated 12,793 14,561 41,835 54,293
Intersegment 5,116 6,324 19,156 19,939
- ----------------------------------------------------------------------------------------------------------------------------
17,909 20,885 60,991 74,232
Eliminations (5,116) (6,324) (19,156) (19,939)
- ----------------------------------------------------------------------------------------------------------------------------
$55,444 $43,373 $181,353 $161,891
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes
Firearms $10,163 $6,142 $34,337 $23,668
Castings 1,011 (2,342) 2,814 4,901
Corporate 559 326 1,338 1,723
- ----------------------------------------------------------------------------------------------------------------------------
$11,733 $4,126 $38,489 $30,292
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------------------------------
<S> <C> <C>
Identifiable Assets
Firearms $74,969 $79,633
Castings 37,584 43,760
Corporate 104,445 73,341
------------------------------------------
$216,998 $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 $55.4 million and $181.4 million were
achieved by the Company for the three and nine months ended September 30, 1999,
respectively. This represents increases of 27.8% and 12.0% from the respective
1998 consolidated net sales of $43.4 million and $161.9 million.
Firearms segment net sales increased by $13.9 million or 48.0% in the
third quarter of 1999 to $42.7 million from $28.8 million in the third quarter
of the prior year. For the nine months ended September 30, 1999, firearms
segment net sales increased by $31.9 million or 29.7% to $139.5 million,
compared to the corresponding 1998 period. Firearms unit shipments increased
29.4% for the three-month period and 23.7% for the nine-month period ended
September 30, 1999 from the comparable 1998 periods. The unit increase reflects
continued strong overall market demand. For the nine months ended September 30,
1999, shipments of all major industry product categories increased from the
comparable 1998 period. A heightened level of demand for most existing products
and the introduction of the Company's Fiftieth Anniversary commemorative models
have contributed to the overall increase in firearms unit sales. Demand for
pistols and revolvers, which achieved unit growth of 48.5% and 23.3%,
respectively, over 1998 levels was especially strong. In 1999, the Company
instituted a new sales incentive program for its distributors that 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.
Casting segment net sales decreased by 12.1% to $12.8 million in the
three months ended September 30, 1999 from $14.6 million in the third quarter of
1998. For the nine months ended September 30, 1999, casting segment net sales
decreased $12.5 million or 22.9% to $41.8 million. The reduction in casting
segment sales for the three and nine months ended September 30, 1999 from the
comparable 1998 periods was attributable to a decrease in golf club heads
shipped to Callaway Golf Company, Inc. ("Callaway Golf"). The Company's current
long-term contract with Callaway Golf will be completed during the fourth
quarter of 1999. No additional long-term supply contract with Callaway Golf is
anticipated. The Company anticipates that fourth quarter investment casting
sales may be below the level achieved in 1998, and 2000 investment casting sales
may be below the level achieved in 1999.
Consolidated cost of products sold for the third quarter of 1999 and
the nine months ended September 30, 1999 was $39.8 million and $131.0 million
compared to $35.4 million and $120.3 million in the corresponding 1998 periods,
respectively, representing an increase of 12.4% and 8.9%, respectively. This was
primarily attributable to increased sales activities by the firearms segment
partially offset by reduced casting segment sales during the third quarter and
the nine months ended September 30, 1999.
Gross profit as a percentage of net sales increased to 28.2% and 27.8%
in the three and nine month periods ended September 30, 1999, respectively, from
18.3% and 25.7% in the corresponding periods of 1998. This improvement is due to
increased sales volumes in the firearms segment and pricing increases for
selected models effective December 1, 1998 and July 1, 1999. In addition, the
level of gross profit achieved in 1998 was adversely affected by a special
promotion in September 1998 that allowed for an 11% discount on certain of the
Company's rifles as well as significant costs associated with new customers and
products in the investment casting segment.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
Selling, general & administrative expenses increased slightly to $4.9
million in the third quarter of 1999 from $4.6 million in the third quarter of
1998 and remained constant at $14.5 million in the nine month periods ended
September 30, 1999 and 1998.
Other income-net increased by $0.2 million in the three months ended
September 30, 1999 compared to the third quarter of 1998 and decreased $0.6
million in the nine months ended September 30, 1999 compared to the
corresponding 1998 period. The increase in the quarter ended September 30, 1999
reflects increased earnings on Treasury bill investments resulting from
increased principal. For the nine months ended September 30, 1999, the decrease
reflects a gain on the sale of non-manufacturing real estate in the second
quarter of 1998.
.
The effective income tax rate of 40.5% in the third quarter and nine
months ended September 30, 1999 is unchanged from corresponding 1998 periods.
As a result of the foregoing factors, consolidated net income for the
three and nine months ended September 30, 1999 increased to $7.0 million and
$22.9 million, respectively, from $2.5 million and $18.0 million for the three
and nine months ended September 30, 1998, respectively, representing increases
of $4.5 million or 184.5% and $4.9 million or 27.1%, respectively.
Financial Condition
- -------------------
At September 30, 1999, the Company had cash, cash equivalents and
short-term investments of $76.9 million, working capital of $113.3 million and a
current ratio of 4.0 to 1.
Cash provided by operating activities was $48.0 million and $21.0
million for the nine months ended September 30, 1999 and 1998, respectively.
This change in cash flows is principally a result of increased net income,
reductions in inventories, and increases in trade accounts payable and accrued
expenses in 1999.
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 for within approximately 90 days. 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, 1999
totaled $3.0 million. For the past two years capital expenditures averaged
approximately $1.3 million per quarter. For the fourth quarter of 1999, the
Company expects to spend approximately $2 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 nine months ended September 30, 1999 dividends paid totaled
$16.1 million. This amount reflects the regular quarterly dividend of $.20 per
share paid in March, June and September 1999. On October 26, 1999,
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CONTINUED
the Company declared a regular quarterly dividend of $.20 per share payable on
December 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.
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.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CONTINUED
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.
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. After conversion, these files have been placed in
active service and are in use. Additional testing, most of which relates to the
financial and accounting functions of the Company, is scheduled for the fourth
quarter 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 formal contingency plan in
the event it does not complete all phases of the Year 2000 program. Although the
structure of a contingency plan would be dependent on many factors, under most
scenarios, the plan would, to a large extent, be comprised of manual
work-arounds.
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.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CONTINUED
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.
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 Form 10-Q report, which is incorporated
herein by reference.
The Company has reported all cases instituted against it through June
30, 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 September 30, 1999, which involved significant demands for
compensatory and/or punitive damages:
15
<PAGE> 16
LEGAL PROCEEDINGS -- CONTINUED
Bobby S. Williams, et. al. v. Sturm, Ruger & Company, Inc. et. al. in
the District Court of the Parish of Ascension, Louisiana. The complaint, which
was served on September 22, 1999, alleges that on or about August 3, 1998, the
defendant was injured when he allegedly dropped a revolver manufactured by the
Company. Damages and other costs to be determined by the Court are demanded.
Camden County Board of Freeholders v. Beretta U.S.A. Corp., et. al. in
the District Court of Camden County, New Jersey. The complaint, which was served
on September 2, 1999, alleges that handgun manufacturers have created a public
nuisance because of allegedly negligent marketing and distribution practices
regarding their products. The complaint also alleges design defects in firearms
because adolescents and children can obtain and misuse guns. Compensatory,
punitive, and treble damages, as well as injunctive relief, are demanded.
Christopher T. Martin v. Philip A. Toren, individually, et. al. in the
Circuit Court in Palm Beach County, Florida. The complaint, which was served on
September 14, 1999, alleges that on or about September 14, 1999, the plaintiff
was injured while he was handling a loaded pistol handed to him by the owner of
the pistol, resulting in injuries to the plaintiff. Damages in excess of
$15,000.00 are demanded.
City of Atlanta v. Smith & Wesson, et. al. in the State Court of Fulton
County, Georgia. The complaint was made known to the Company on February 5,
1999, but was not served until August 11, 1999. The complaint alleges that all
defendants' guns are unreasonably dangerous because they can be fired by
unauthorized users, including children, criminals, and mentally unstable
persons. Compensatory and punitive damages in an amount to be determined by the
Court are demanded.
City of Camden v. Beretta U.S.A.Corp., et. al. in the Superior Court in
Camden County, New Jersey. The complaint was made known to the Company on June
1, 1999, but was not served as a lawsuit until September 1, 1999. The complaint
alleges that the defendants have created a public nuisance because of negligent
marketing and distribution practices which allegedly allow guns to be purchased
and used by criminals, juveniles, and other prohibited persons in the
commissions of crimes. Complaint also alleges a design defect because
unauthorized users, including children and adolescents can obtain and misuse
guns. Compensatory, punitive, and special damages to be determined by the Court,
as well as injunctive relief, are demanded.
City of Gary, Indiana, by its Mayor, Scott L. King v. Smith & Wesson
Corp., et. al. in Superior Court in Lake, Indiana. The complaint, which was
served on September 7, 1999, alleges that the defendants have created a public
nuisance due to their negligent marketing and distribution practices, which
allegedly enables guns to be purchased by juveniles, criminals, and other
prohibited persons. The complaint also alleges design defects in firearms due to
allegedly inadequate warnings and lack of safety devices. Compensatory,
punitive, general and special damages, as well as preliminary and permanent
injunctive relief, are demanded.
City of San Francisco, et. al. v. Arcadia Machine & Tool,, Inc. et. al.
in the Superior Court of San Francisco, California. The complaint was made known
to the Company on May 25, 1999, but was not served until July 28, 1999. The
complaint alleges that firearms manufacturers, distributors, and trade
associations have created a public nuisance and have contributed to minors,
criminals, and other unauthorized users obtaining handguns. The complaint also
alleges a violation of the California Business and Professions Code in that the
defendants have allegedly failed to incorporate reasonable safety features which
would allegedly prevent minors, criminals, or other unauthorized users from
using the guns. Injunctive and declaratory relief is demanded.
16
<PAGE> 17
LEGAL PROCEEDINGS -- CONTINUED
Mayor Sharpe James, and the City of Newark, New Jersey v. Arcadia
Machine & Tools, et. al. in the Superior Court of New Jersey in Essex County,
New Jersey. The complaint was made known to the Company on June 10, 1999, but
was not served until July 23, 1999. The complaint alleges that firearms
manufacturers and their agents have allegedly failed to implement safety
features which would allegedly prevent unauthorized or unintended users from
using the guns. The complaint also alleges that gun manufacturers and their
agents have allegedly created a public nuisance by making it easy for juveniles,
felons, and other unauthorized users to obtain guns through illegal markets.
Punitive and exemplary damages to be determined by the Court are demanded.
Melissa M. Halliday, et. al. v. Sturm, Ruger & Company, Inc., et. al.
in the Circuit Court in Baltimore, Maryland. The complaint, which was served on
July 22, 1999, alleges that the plaintiff's decedent was playing with a loaded
pistol which accidentally fired, resulting in fatal injuries to plaintiff's
decedent. Compensatory damages in amount of $4,000,000.00 are demanded against
defendants. $10,000,000.00 in punitive damages are demanded against the Company.
People of the State of California ex. rel. the County of Los Angeles,
et. al. v. Arcadia Machine Tool, et. al. in the Superior Court in Los Angeles,
California. The complaint, which was served on July 29, 1999, alleges a
violation of the California Business and Professions Code in that handgun
manufacturers, distributors, retailers and trade associations have created a
public nuisance and have contributed to the juveniles, criminals, and
unauthorized users obtaining handguns. The complaint also alleges that handgun
manufacturers have failed to incorporate reasonable safety features which
allegedly would prevent felons, minors or other unauthorized users from using
handguns. Preliminary damages to be determined by the Court are demanded, as
well as permanent injunctive relief.
People of the State of California, by and through attorneys for the
cities of Los Angeles, Campton, Inglewood, and West Hollywood, et. al. v.
Arcadia Machine & Tool, et. al. in the Superior Court of the State of
California. The complaint was made known to the Company on May 25, 1999, but was
not served until July 28, 1999. The complaint alleges that handgun
manufacturers, distributors, retailers and trade association have allegedly
created a public nuisance by allegedly contributing to juveniles and criminals
obtaining handguns. The complaint also alleges a violation to the California
Business and Professions Code in that handgun manufacturers, distributors,
retailers, and trade associations have allegedly failed to implement safety
features which would allegedly prevent unauthorized users from using guns.
Injunctive and declaratory relief are demanded.
During the three months ending September 30, 1999, no previously
reported cases were settled.
Summary judgment in favor of the Company on all counts was granted in
the previously-reported case of Allen v. Company (NY). It is uncertain whether
plaintiffs will appeal this dismissal.
Litigation of the previously-reported cases of Gerena (NY) and Prosper
(NY) has been stayed by Judge Weinstein pending the appeal by the three
remaining defendants on the previously-reported Hamilton case (NY), in which the
Company was adjudged not to be liable.
17
<PAGE> 18
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 September 30, 1999.
18
<PAGE> 19
STURM, RUGER & COMPANY, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 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: November 5, 1999 S/ERLE G. BLANCHARD
---------------- ---------------------------------
Erle G. Blanchard
Principal Financial and
Accounting Officer,
Vice President, Controller
19
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