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 March 31, 1997 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) <TABLE> <CAPTION> Delaware 06-0633559 - ------------------------------------------------ ----------------------------------- <S> <C> (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) </TABLE> (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 April 30, 1997: Common Stock, $1 par value - 26,916,800. Page 1 of 14
2 INDEX STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--March 31, 1997 and December 31, 1996 3 Condensed consolidated statements of income--Three months ended March 31, 1997 and 1996 5 Condensed consolidated statements of cash flows--Three months ended March 31, 1997 and 1996 6 Notes to condensed consolidated financial statements--March 31, 1997 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 2
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> March 31, December 31, 1997 1996 ----------------- ------------------ (unaudited) (Note) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,005 $ 2,729 Short-term investments 42,596 30,652 Trade receivables, less allowances for doubtful accounts ($774 and $834) and discounts ($462 and $1,095) 19,156 21,074 Inventories: Finished products 11,423 11,895 Materials and products in process 36,173 43,173 ----------------- ------------------ 47,596 55,068 Deferred income taxes 7,393 7,949 Prepaid expenses and other assets 960 1,690 ----------------- ------------------ TOTAL CURRENT ASSETS 125,706 119,162 PROPERTY, PLANT AND EQUIPMENT 119,562 118,497 Less allowances for depreciation (76,420) (74,330) ----------------- ------------------ 43,142 44,167 DEFERRED INCOME TAXES 4,063 4,672 INVESTMENT IN JOINT VENTURE 10,640 10,586 OTHER ASSETS 11,284 11,303 ----------------- ------------------ $194,835 $189,890 ================= ================== </TABLE> 3
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> March 31, December 31, 1997 1996 ----------------- ------------------ (unaudited) (Note) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses $ 3,238 $ 4,628 Product safety modifications 1,271 1,302 Product liability 3,000 3,000 Employee compensation 8,744 8,312 Workers' compensation 6,142 6,108 Income taxes 4,130 595 ----------------- ------------------ TOTAL CURRENT LIABILITIES 26,525 23,945 PRODUCT LIABILITY ACCRUAL 19,218 19,218 CONTINGENT LIABILITIES --Note 6 - - 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 26,916,800 26,917 26,917 Additional paid-in capital 2,514 2,514 Retained earnings 119,661 117,296 ----------------- ------------------ 149,092 146,727 ----------------- ------------------ $194,835 $189,890 ================= ================== </TABLE> Note: The balance sheet at December 31, 1996 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
5 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data) <TABLE> <CAPTION> Three Months Ended March 31, 1997 1996 ---------------------------------------- <S> <C> <C> Firearms sales $42,152 $47,560 Castings sales 12,936 17,997 ----------------- ----------------- Net sales 55,088 65,557 Cost of products sold 38,352 43,089 ----------------- ----------------- 16,736 22,468 Expenses: Selling 3,159 3,166 General and administrative 876 1,554 ----------------- ----------------- 4,035 4,720 ----------------- ----------------- 12,701 17,748 Other income-net, principally interest 169 775 ----------------- ----------------- INCOME BEFORE INCOME TAXES 12,870 18,523 Income taxes 5,122 7,409 ----------------- ----------------- $ 7,748 $11,114 NET INCOME ================= ================= Net income per share $0.29 $0.41 ===== ===== Cash dividends per share $0.20 $0.20 ===== ===== </TABLE> See notes to condensed consolidated financial statements. 5
6 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) <TABLE> <CAPTION> Three Months Ended March 31, 1997 1996 --------------------------------------- <S> <C> <C> CASH PROVIDED BY OPERATING ACTIVITIES $ 23,722 $ 15,879 INVESTING ACTIVITIES Property, plant and equipment additions (1,065) (1,870) Purchases of short-term investments (43,313) (41,372) Proceeds from sales or maturities of short-term investments 31,369 35,819 Investment in joint venture (54) (1,861) ------------------ ------------------ Cash used in investing activities (13,063) (9,284) ------------------ ------------------ FINANCING ACTIVITIES Dividends paid (5,383) (5,382) ------------------ ------------------ Cash used by financing activities (5,383) (5,382) ------------------ ------------------ INCREASE IN CASH AND CASH EQUIVALENTS 5,276 1,213 Cash and cash equivalents at beginning of period 2,729 3,633 ------------------ ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,005 $ 4,846 ================== ================== </TABLE> See notes to condensed consolidated financial statements. 6
7 STURM RUGER & COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 1997 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 three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the full year ending December 31, 1997. 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, 1996. 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. A joint venture, Antelope Hills, LLC, of which the Company owns 50%, is accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated. NOTE 3--INVENTORIES 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 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. 7
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 three months ended March 31, 1997 and 1996 were $.4 million and $2.5 million, respectively. NOTE 5--NET INCOME PER COMMON SHARE Net income per common share is based upon the weighted average number of common shares outstanding during the period. On July 24, 1996, the Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend which was distributed on September 16, 1996 to stockholders of record on August 15, 1996. All share and per share amounts have been adjusted to reflect this split. NOTE 6--CONTINGENT LIABILITIES The Company is a defendant in approximately 16 lawsuits involving product liability claims which allege defective product design and is aware of other product liability claims. 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. In many of the lawsuits, punitive damages, as well as compensatory damages, are demanded. Aggregate claimed amounts presently exceed product liability accruals and, if applicable, insurance coverage. Management believes that, in every case, the allegations of defective product design are unfounded, and that the shooting and any results therefrom were due to negligence or misuse of the firearm by the claimant or a third party and that there should be no recovery against the Company. 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 difficult to forecast the outcome of these claims, in the opinion of management, after consultation with special and corporate counsel, the outcome of these claims will not 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 December 31, 1996 and the results of those lawsuits, where terminated, to the S.E.C. on its Form 10-K and Form 10-Q reports, to which reference is hereby made. 8
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated net sales of $55.1 million were achieved by the Company in the first quarter of 1997. This represents a decrease of $10.5 million or 16.0% from the first quarter of 1996 consolidated net sales of $65.6 million. Firearms segment net sales were $42.2 million in the first quarter of 1997 compared to $47.6 million in the corresponding 1996 period, a decrease of $5.4 million or 11.4%. Firearms unit shipments decreased 14.7% reflecting continuing reduced overall market demand, particularly in the industry product categories of revolvers and rifles, which are manufactured in the Newport, New Hampshire facility. These reductions were offset somewhat by stronger than expected sales during the quarter of pistols manufactured in the Company's Prescott, Arizona facility. Special incentive programs introduced previously are continuing for discounts of 10% of the sales price of certain pistol models. Additionally, new incentive programs for selected revolver models were introduced for the calendar year 1997, and a special 1% overall incentive program for customers exceeding specific sales targets based on prior year volumes was announced in December 1996 for the marketing year 1997. Shipments also began in limited quantities of certain new firearms models, including the new Ruger Bisley-Vaquero. The Company anticipates sales levels of pistols will exceed 1996 levels for the first 6 months of 1997, while the shipments of rifles and revolvers for the first half of 1997 will be less than the similar period in 1996. Casting segment net sales decreased by 28.1% from $18.0 million in the first quarter of 1996 to $12.9 million in the first quarter of 1997. This was due to decreased shipments of Great Big Bertha titanium golf club heads to Callaway Golf Company, Inc. ("Callaway Golf"). In March 1997, the Company announced that it had agreed to stretch out the delivery schedule of golf club heads pursuant to the August 1996 Callaway Golf order from completion in October 1997 to completion in September 1998. In return, the Company was released from the provision of its agreement with Callaway Golf which prohibited the Company from producing titanium golf club heads for any golf club customer other than Callaway Golf. The extension of the delivery times of the August 1996 order will shift some anticipated 1997 revenues into 1998, and therefore will affect 1997 castings sales and operating results. However, the Company feels that this agreement is beneficial as it allows the Company the flexibility to actively seek additional customers for titanium golf club heads while maintaining its current business with Callaway Golf. New business could utilize capacity available at Ruger Investment Casting ("RIC"). The Company is actively pursuing other titanium markets as well as other golf club casting business. The Company anticipates castings sales will remain at first quarter levels through the second quarter of 1997. Consolidated cost of products sold for the first quarter of 1997 was $38.4 million compared to $43.1 million for the first quarter of 1996, a decrease of $4.7 million or 11.0%. This was primarily attributable to decreased sales activities by both the firearms and investment casting segments as detailed above. Gross profit as a percentage of net sales decreased to 30.4% in the first quarter of 1997 from 34.3% in the comparable 1996 period. The decrease is due to the reduced overall volume of business in both the firearms and castings segments. Although variable costs were reduced during the period in 9
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED response to the changes in sales volumes, the impact of fixed costs associated with operating the Company facilities resulted in reduced gross profit margins from the like period in 1996. Selling, general & administrative expenses decreased by 14.5% to $4.0 million in the first quarter of 1997 from $4.7 million in the first quarter of 1996. This decrease reflects lower than anticipated employee benefit plan expenses as well as reduced professional services fees for the period. Other income decreased in the first quarter of 1997 compared to the corresponding 1996 period due to the elimination of royalty income related to the licensed use of the "Ruger Titanium"(R) trademark for titanium golf club head castings, as well as reduced earnings on Treasury bill investments. The effective income tax rate decreased to 39.8% in the first quarter from 40.0% in the comparable 1996 quarter due to lower state income taxes. As a result of the foregoing factors, consolidated net income for the first quarter of 1997 decreased to $7.7 million from $11.1 million for the first quarter of 1996 or by $3.4 million and 30.3%. Financial Condition At March 31, 1997, the Company had cash, cash equivalents and short-term investments of $50.6 million, working capital of $99.2 million and a current ratio of 4.7 to 1. Cash provided by operating activities was $23.7 million and $15.9 million for the three months ended March 31, 1997 and 1996 respectively. This change in cash flows is principally a result of reductions in inventories and trade receivables, offset by lower net income from operations. 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 March have to be made by April 30. Shipments made in subsequent months have to be paid for within 90 days. Dating plan receivable balances were $5.8 million at March 31, 1997 as compared to $7.4 million at March 31, 1996. 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 three months ended March 31, 1997 totaled $1.1 million. For the past two years capital expenditures averaged approximately $2.4 million per quarter. For 1997, the Company expects to spend approximately $8.0 million on capital expenditures to upgrade and modernize equipment at the Newport Firearms, Pine Tree Castings, and Ruger Investment Casting Divisions. Additional funds are committed for the introduction of new metal matrix composite infiltration processes at the Uni-Cast Division. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations. 10
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED During the quarter, the construction and outfitting of the foundry for Antelope Hills, LLC located in Prescott, Arizona was completed. Antelope Hills, LLC is a joint venture between Callaway Golf and the Company formed to construct and operate an investment casting foundry to produce titanium golf club heads. The Company's investment in this project amounted to approximately $10.6 million at March 31, 1997. Although no orders have been received for production quantities of club heads for this facility, negotiations between the Company and Callaway Golf continue. The Company does not expect any contribution to earnings from the joint venture during the second quarter of 1997. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which changes the methodology of calculating earnings per share. SFAS No. 128 requires the disclosure of diluted earnings per share regardless of its difference from basic earnings per share. The Company plans to adopt SFAS No. 128 in December 1997. Early adoption is not permitted. Had the Company adopted SFAS No. 128 as of March 31, 1997, the related per share disclosure for both basic and diluted earnings per share would have remained as previously reported for the quarters ended March 31, 1997 and March 31, 1996. For the three months ended March 31, 1997 dividends paid totaled $5.4 million. This amount reflects the regular quarterly dividend of $.20 per share paid on March 15, 1997. 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 1997. The purchase of firearms is subject to federal, state and local governmental regulations. The basic federal laws are the National Firearms Act and the Federal Firearms Act. 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, or to impose a mandatory waiting period prior to their purchase. Several states currently have laws in effect similar to the aforementioned legislation. The "Brady Law" mandates a nationwide 5-day waiting period prior to the purchase of a handgun. The Company believes that, because its customers are sportsmen, hunters, gun collectors and law enforcement agencies and since 26 states had previously enacted some form of a waiting period prior to purchase, the "Brady Law" has not had a significant effect on the Company's sales of firearms. 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." A separate provision of the Crime Bill prohibited production or sale of detachable magazines of over 10-round capacity manufactured after September 13, 1994, other than to law enforcement. Only two such magazines (9mm and .40 caliber) were 11
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED commercially sold by the Company, and production of substitute 10-round magazines in these calibers (approved by the BATF) began immediately. 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 has expended significant amounts of financial resources and management time in connection with product liability litigation. While it is difficult to forecast the outcome of litigation or the timing of costs, management believes, after consultation with counsel, that this litigation will not have a material adverse effect on the financial condition of the Company. The Company is not aware of any adverse trends in its litigation as a whole. 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. 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 and sales levels of pistols, rifles, and revolvers for the first half of 1997, anticipated castings sales and earnings contributions from the joint venture through the second quarter of 1997, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company, and the impact of future firearms control and environmental legislation, which would cause actual results to differ materially from these 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. 12
13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS "Note 6--Contingent Liabilities" presented in Part I is incorporated herein by reference. The following two cases were instituted against the Company during the three months ended March 31, 1997, which involved significant demands for compensatory and/or punitive damages: Sheila Southward, etc. et al. Plaintiffs vs. Anthony James Neely, in the Circuit Court of Cook County, Illinois County Department, Law Division on March 3, 1997. The complaint alleges that on or about April 15, 1994, a 9mm pistol held by Neely discharged, resulting in the fatal injury of Maritta Green. Plaintiff is seeking third party damages in an amount equal to the judgment amount (if any) obtained by Green's estate against him for negligently shooting Green. M. Keith Clark vs. Sturm, Ruger & Company, Inc., in the United States District Court of South Carolina, Spartanburg Division on February 26, 1997. The complaint alleges that on or about March 6, 1994, the plaintiff suffered injuries to his left calf and right thigh when his .44 magnum revolver discharged when it was allegedly dropped. Actual and punitive damages are demanded. During the three months ending March 31, 1997, one previously reported case was settled: Name Jurisdiction ---- ------------ Pierson Michigan This case was settled for an amount within the insurance limits and/or self-insured retention of the Company. 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 March 31, 1997. 13
14 STURM, RUGER & COMPANY, INC. FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STURM, RUGER & COMPANY, INC. ------------------------------ Date: May 13, 1997 /s/ ERLE G. BLANCHARD ------------------------------ Erle G. Blanchard Principal Financial and Accounting Officer, Vice President, Controller 14