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 September 30, 1996 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 filing requirements for the past 90 days. Yes X No ___ The number of shares outstanding of the issuer's common stock as of October 31, 1996: Common Stock, $1 par value - 26,916,800. Page 1 of 16
2 INDEX STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--September 30, 1996 and December 31, 1995 3 Condensed consolidated statements of income--Three months ended September 30, 1996 and 1995; Nine months ended September 30, 1996 and 1995 4 Condensed consolidated statements of cash flows--Nine months ended September 30, 1996 and 1995 5 Notes to condensed consolidated financial statements-- September 30, 1996 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 - 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> September 30, December 31, 1996 1995 ---- ---- (unaudited) (Note) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 4,227 $ 3,633 Short-term investments 47,413 43,477 Trade receivables, less allowances for doubtful accounts ($840 and $981) and discounts ($134 and $871) 18,378 19,864 Inventories: Finished products 8,652 6,039 Materials and products in process 37,817 36,253 -------- -------- 46,469 42,292 Deferred income taxes 7,091 7,231 Prepaid expenses and other assets 1,465 1,044 -------- -------- TOTAL CURRENT ASSETS 125,043 117,541 PROPERTY, PLANT AND EQUIPMENT 116,671 110,872 Less accumulated depreciation 72,599 66,742 -------- -------- 44,072 44,130 DEFERRED INCOME TAXES 4,748 4,338 INVESTMENT IN JOINT VENTURE 6,889 1,645 OTHER ASSETS 10,836 10,898 -------- -------- $191,588 $178,552 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable and accrued expenses $ 4,292 $ 3,993 Product safety modifications 1,356 1,439 Product liability 3,000 3,000 Employee compensation 8,884 7,888 Workers' compensation 6,504 6,262 Income taxes 1,155 3,017 -------- -------- TOTAL CURRENT LIABILITIES 25,191 25,599 PRODUCT LIABILITY ACCRUAL 20,244 19,218 CONTINGENT LIABILITIES--Note 6 -- -- STOCKHOLDERS' EQUITY--Note 5 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 and 26,910,800 26,917 26,911 Additional paid-in capital 2,514 2,380 Retained earnings 116,722 104,444 -------- -------- 146,153 133,735 -------- -------- $191,588 $178,552 ======== ======== </TABLE> Note: The balance sheet at December 31, 1995 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. - 3 -
4 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per-share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Firearms sales $32,814 $32,180 $120,481 $113,664 Castings sales 15,222 9,906 59,038 23,921 ------- ------- -------- -------- Net sales 48,036 42,086 179,519 137,585 Cost of products sold 34,941 34,586 120,273 98,352 ------- ------- -------- -------- 13,095 7,500 59,246 39,233 Expenses: Selling 3,036 3,333 9,824 9,257 General and administrative 1,473 1,276 4,377 3,469 ------- ------- -------- -------- 4,509 4,609 14,201 12,726 ------- ------- -------- -------- 8,586 2,891 45,045 26,507 Other income-net, principally interest 856 628 2,334 2,203 ------- ------- -------- -------- INCOME BEFORE INCOME TAXES 9,442 3,519 47,379 28,710 Income taxes 3,777 1,418 18,952 11,570 ------- ------- -------- -------- NET INCOME $ 5,665 $ 2,101 $ 28,427 $ 17,140 ======= ======= ======== ======== Net income per share $ 0.21 $ 0.08 $ 1.06 $ 0.64 ======= ======= ======== ======== Cash dividends per share $ 0.20 $ 0.18 $ 0.60 $ 0.53 ======= ======= ======== ======== </TABLE> See notes to condensed consolidated financial statements. - 4 -
5 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) <TABLE> <CAPTION> Nine Months Ended September 30, 1996 1995 ---- ---- <S> <C> <C> CASH PROVIDED BY OPERATING ACTIVITIES $ 31,721 $ 1,280 INVESTING ACTIVITIES Property, plant and equipment additions (5,799) (13,322) Purchases of short-term investments (135,246) (113,823) Proceeds from sales or maturities of short-term investments 131,310 137,357 Investment in joint venture (5,244) (2,160) --------- --------- Cash provided (used) by investing activities (14,979) 8,052 --------- --------- FINANCING ACTIVITIES Dividends paid (16,148) (14,126) --------- --------- Cash used by financing activities (16,148) (14,126) --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 594 (4,794) Cash and cash equivalents at beginning of period 3,633 7,719 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,227 $ 2,925 ========= ========= </TABLE> See notes to condensed consolidated financial statements. - 5 -
6 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 1996 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, 1996 are not necessarily indicative of the results to be expected for the full year ending December 31, 1996. 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, 1995. Certain amounts in the 1995 condensed consolidated statements of cash flows categories of cash provided by operating activities, property, plant and equipment and investment in joint venture have been reclassified to conform to the 1996 presentation. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES Organization: Sturm, Ruger & Company, Inc. ("the 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 manufacturer 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 - 6 -
7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. At September 30, 1996, inventory quantities used in the LIFO calculation were greater than quantities on hand at the end of 1995. 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, 1996 and 1995 were $21.1 million and $13.5 million, respectively. NOTE 5--NET INCOME PER COMMON SHARE AND SUBSEQUENT EVENTS Net income per common share is based upon the weighted average number of common shares outstanding during the period. The Company's stockholders approved an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of voting common stock, par value $1.00 per share, from 20,000,000 to 40,000,000 shares at a special meeting of stockholders on July 23, 1996. 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. The stock split results in a retroactively applied transfer of $13.5 million (par value of $1.00 per share) from retained earnings to Common Stock, which had the effect of decreasing retained earnings and increasing Common Stock by $13.5 million at December 31, 1995. NOTE 6--CONTINGENT LIABILITIES The Company is a defendant in approximately 17 lawsuits involving product liability claims and is aware of other product liability claims which allege defective product design. 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 accident 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 June 30, 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. - 7 -
8 ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated net sales of $48.0 million and $179.5 million were achieved by the Company for the three and nine months ended September 30, 1996 which represented increases of 14.1% and 30.5% from the respective 1995 consolidated net sales amounts of $42.1 million and $137.6 million. Firearms segment net sales increased by 2% and 6%, respectively, to $32.8 million and $120.5 million in the third quarter and nine months ended September 30, 1996 compared to $32.2 million and $113.7 million in the corresponding 1995 periods. Firearms unit shipments in the third quarter of 1996 were approximately the same as the third quarter of 1995. For the nine months ended September 30, 1996 firearms unit shipments increased 5.5% from the same 1995 period. Sales in units of the Company's pistol models, which had been subject to decreased consumer demand from the second quarter of 1995 to the first quarter of 1996, increased in the third quarter of 1996 as compared to the third quarter of 1995. For the nine months ended September 30, 1996 sales in units of pistols are greater than the corresponding 1995 nine month period. These increases in 1996 are principally the result of sales of the Company's new P95 pistol models and a sales promotion program that provides discounts of up to 10% on certain pistol models based on quantities purchased. The Company anticipates that consumer demand for pistols will remain relatively stable, at least through the fourth quarter of 1996. However, fourth quarter 1996 pistol sales in units may be less than fourth quarter 1995 pistol sales since the 1995 period included a favorable impact on unit shipments of a one-time special sales promotion program on certain pistol models that reduced the average selling price of such pistol models by 10% to 30%. Sales of the Company's firearm models in the industry product categories of rifles and revolvers, which are manufactured at the Company's Newport, New Hampshire, facility declined in the third quarter of 1996 as compared to the corresponding 1995 quarter and the first two quarters of 1996. This decrease is from a decline in overall market demand for most rifle and revolver models. For the nine months ended September 30, 1996 sales of rifles, shotguns, and revolvers are greater than the comparable nine months in 1995 due to sales of certain new firearm models, including the Model 96 lever action rifle and the 10/22T Target rifle which commenced shipments in the first quarter of 1996. The Company believes that overall consumer demand for firearms in the categories of rifles, revolvers, and shotguns has decreased and anticipates that overall firearms segment sales in the fourth quarter of 1996 may not exceed fourth quarter 1995 levels. Castings segment net sales increased by 53.7% and 146.8% to $15.2 million and $59.0 million in the three and nine months ended September 30, 1996 from $9.9 million and $23.9 million in the comparable 1995 periods. These increases were primarily achieved by Ruger Investment Casting ("RIC") producing and shipping higher quantities of Great Big Bertha titanium golf club heads for Callaway Golf, Inc. ("Callaway Golf"). Sales of Great Big Bertha titanium golf club heads in the third quarter of 1996 were affected by changes in production mix and the completion of 1996 model requirements for Callaway Golf which resulted in less shipments in the third quarter of 1996 than in either of the - 8 -
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED first two quarters of 1996. In August 1996 the Company received shipping instructions from Callaway Golf covering the 1997 golf club production program for titanium golf club heads. This order valued at approximately $65.7 million was part of the production anticipated in the existing contract between the two companies and is to run through October 1997. The sales price per unit of titanium golf club heads was reduced in this order from the amount the Company has previously received through most of the first three quarters of 1996. The Company anticipates that certain new process improvements and extensive production experience will reduce manufacturing costs and therefore, may partially offset the unfavorable impact on gross profit resulting from the reduced sales price per unit. At the present time the Company plans to produce at a level rate of production all the titanium golf club heads required to fill this order at its present manufacturing facility, RIC. Consolidated cost of products sold for the third quarter and first nine months of 1996 were $34.9 million and $120.3 million compared to $34.6 million and $98.4 million in the corresponding 1995 periods, respectively, representing increases of 1.0% and 22.3%, respectively. These increases were primarily attributable to increases in sales by both the castings and firearms segments. Third quarter and nine month 1995 cost of sales were also impacted by unfavorable firearms product sales mix, certain operating costs incurred by RIC to expand capacity for production of titanium golf club heads, inefficiencies from decreased firearm unit production of the Company's Prescott, Arizona facility, and increases in LIFO inventory costs. Gross profit as a percentage of net sales increased in the three and nine months ended September 30, 1996 to 27.3% and 33.0%, respectively, from 17.8% and 28.5% in the comparable 1995 periods. Efficiencies realized from increased production and sales of investment cast titanium golf club heads were the primary reasons for these increases. Selling, general and administrative expenses decreased by 2.2% to $4.5 million in the third quarter of 1996 as compared to $4.6 million in the third quarter of 1995. This decrease was primarily the result of the settlement of a sales commission contract with an outside sales representative in the 1995 period. For the nine months ended September 30, 1996, selling, general and administrative expenses increased by 11.6% to $14.2 million from $12.7 million in the corresponding nine months in 1995 primarily as the result of increased advertising costs and the addition of executive management to the Company in the later part of 1995 and first quarter of 1996. The effective income tax rate decreased in the 1996 periods to 40.0% from 40.3% in the respective 1995 periods due to lower state income taxes. As a result of the foregoing factors, consolidated net income for the three and nine months ended September 30, 1996 increased to $5.7 million and $28.4 million, respectively, from $2.1 million and $17.1 million for the three and nine months ended September 30, 1995 or by $3.6 million and 169.6% and $11.3 million and 65.9%, respectively. - 9 -
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED Financial Condition At September 30, 1996, the Company had cash, cash equivalents and short-term investments of $51.6 million, working capital of $99.9 million and a current ratio of 5.0 to 1. Cash provided by operating activities was $31.7 million and $1.3 million for the nine months ended September 30, 1996 and 1995, respectively. This change in cash flows is principally a result of an increase in net income and timing of replenishment of inventory quantities, receipt of accounts receivable balances, and payment of accounts payable balances. The Company follows an industry-wide practice of offering a "dating plan" to its customers on selected products, which allows the purchasing distributor to buy the products commencing generally 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 $4.5 million at September 30, 1996 as compared to $5.5 million at September 30, 1995. 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. The Company's production of "Great Big Bertha" titanium golf club heads for Callaway Golf requires certain titanium metal alloys. Presently the Company buys a majority of its titanium metal alloys under a short-term (approximately nine months) purchasing arrangement from one supplier. Although there are a limited number of companies that produce titanium metal alloys, management believes that other suppliers could provide the Company with the required titanium metal alloys. However, the purchase price charged by these alternative suppliers might be higher than the price the Company currently pays which could have an adverse effect on the Company's operations. The Company believes that it has adequate quantities of titanium metal alloys in inventory to provide time to locate another supplier without interruption of manufacturing operations. Capital expenditures during the nine months ended September 30, 1996 totaled $5.8 million and for the past two years averaged approximately $3.4 million per quarter. For 1996, the Company has budgeted to spend approximately $9.6 million on capital expenditures to upgrade and modernize the Newport Firearms and Uni-Cast divisions, increase the capacity of RIC and for normal Company-wide improvements to increase efficiencies. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations. Additional expenditures of $4.8 million were made by the Company during the nine months ended September 30, 1996 and have totaled $6.4 million to date toward the construction and outfitting of the Antelope Hills, LLC foundry. Antelope Hills, LLC is a joint venture between Callaway Golf and the Company to collaborate in the construction and operation of an investment casting foundry to produce titanium golf club heads. As part of the joint venture agreement, - 10 -
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED Callaway Golf has committed to purchase a quantity of titanium golf club heads with sales prices totaling a minimum of approximately $150 million in the years 1996 through 1998 from the combined Company and joint venture facilities. Financing of the approximately $18.0 million investment in the joint venture is anticipated to be made 50% by the Company using funds provided by operations and 50% from Callaway Golf. Antelope Hills, LLC foundry is scheduled to be operational and able to commence production in the fourth quarter of 1996. Due to uncertainty regarding Callaway Golf's production requirements, the joint venture is not expected to contribute to the Company's earnings in 1996. The Company's stockholders approved an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of voting common stock, par value $1.00 per share, from 20,000,000 to 40,000,000 shares at a special meeting of stockholders on July 23, 1996. 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. The stock split resulted in a retroactively applied transfer of $13.5 million (par value of $1.00 per share) from retained earnings to Common Stock, which had the effect of decreasing retained earnings and increasing Common Stock by $13.5 million at December 31, 1995. For the nine months ended September 30, 1996, dividends paid totaled $16.1 million. This amount reflects the regular quarterly dividend of $.20 per share paid on March 15, 1996, June 15, 1996, and September 16, 1996. On October 30, 1996 the Company declared a regular quarterly dividend of $.20 per share payable on December 15, 1996. 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 1996. 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. - 11 -
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED 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 currently-manufactured long guns have been 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 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. Thus far in 1996, the rate of inflationary cost was slightly higher than the same 1995 period. - 12 -
13 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. The statements contained herein regarding future anticipated demand for the Company's products, the effect of certain process improvements and production experience, and the results of the pending litigation against the Company are forward looking statements within the meaning of the Securities Exchange Act of 1934. Such statements are based on current expectations and are subject to certain qualifications, risks, and uncertainties such as material variations in the actual sales rates of firearms and titanium golf club heads, the failure to realize expected productivity improvements and new product acceptance, and adverse legislation or litigation results, any one or more 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 hereof and the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. - 13 -
14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS "Note 6--Contingent Liabilities" presented in Part I is incorporated herein by reference. There were no new cases instituted against the Company during the three months ended September 30, 1996, which involved significant demands for compensatory and/or punitive damages. During the three months ending September 30, 1996, no previously reported cases were settled. The Jordan case (Wisconsin) was withdrawn by plaintiff and dismissed with prejudice on July 12, 1996, without any payment by the Company. In the Hamilton case (New York), the U.S. Court of Appeals for the Second Circuit denied defendants' petition for a writ of mandamus on August 6, 1996. Defendants filed other dispositive motions in this case, which the court granted in part on October 25, but one count of alleged negligence against the Company and all other pistol and revolver manufacturers for oversupplying the legitimate "Firearms Market" remains. While management believes and assumes that it will ultimately prevail in this case given the virtually unanimous legal precedents in its favor (including recent New York trial court and appellate court cases), there can be no certainty in predicting the outcome of litigation or its ultimate effect upon the Company's financial results. In the United States of America case (NH), the Company contested a subpoena from the Occupational Safety and Health Administration (OSHA) in which that agency sought information from the Company in order to develop undefined "ergonomic standards" for the workplace. The Company believes that OSHA has no statutory authority to require such information. The U.S. District Court in New Hampshire initially rejected the Company's position, and the United States First Circuit Court of Appeals denied the Company's appeal. However, when the Company filed a writ of certiorari to the U.S. Supreme Court on August 15, 1996, the United States subsequently served notice on August 22, 1996 that it was withdrawing the matter against the Company with prejudice, and the matter is now closed. - 14 -
15 PART II. OTHER INFORMATION--CONTINUED ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of stockholders was held on July 23, 1996 for the purpose of the approval of an amendment to the Certificate of Incorporation of the Company to increase the authorized voting common stock, par value $1.00 per share, to 40,000,000 shares. The table below sets forth the results of votes taken at the special meeting: <TABLE> <CAPTION> Abstentions and Votes For Votes Against Broker Non-Votes --------- ------------- ---------------- <S> <C> <C> <C> 11,523,010 102,729 1,829,661 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None (b) The Company did not file any reports on Form 8-K during the three months ended September 30, 1996. - 15 -
16 STURM, RUGER & COMPANY, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 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 14, 1996 S/JOHN M. KINGSLEY, JR. ---------------------- ------------------------ John M. Kingsley, Jr. Principal Financial and Accounting Officer, Executive Vice President - 16 -