-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, THaBrgTRPYbjBBfa8tQJUx5CnjYMb3CFeUB7B1AkE4RROA8IQkTekklBXurt7q4F wzdpXO2AVwYr6ZmP7TZuCw== 0000950123-97-002707.txt : 19970329 0000950123-97-002707.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950123-97-002707 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STURM RUGER & CO INC CENTRAL INDEX KEY: 0000095029 STANDARD INDUSTRIAL CLASSIFICATION: ORDNANCE & ACCESSORIES, (NO VEHICLES/GUIDED MISSILES) [3480] IRS NUMBER: 060633559 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10435 FILM NUMBER: 97567305 BUSINESS ADDRESS: STREET 1: 1 LACEY PLACE CITY: SOUTHPORT STATE: CT ZIP: 06490 BUSINESS PHONE: 2032597843 MAIL ADDRESS: STREET 2: 1 LACEY PLACE CITY: SOUTHPORT STATE: CT ZIP: 06490 10-K 1 STURM, RUGER & COMPANY, INC. ANNUAL REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 1997: Common Stock, $1 par value - $322,904,714 The number of shares outstanding of the issuer's common stock as of March 14, 1997: Common Stock, $1 par value - 26,916,800 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 1996 are incorporated by reference into Parts I, II and IV of this Report. Portions of the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 20, 1997 are incorporated by reference into Part III of this Report. Page 1 of 49 2 PART I ITEM 1--BUSINESS The Company is principally engaged in the design, manufacture, and sale of firearms and precision metal investment castings. The Company is the only U.S. firearms manufacturer which offers products in all four industry categories (rifles, shotguns, pistols, and revolvers) and believes that it is the largest U.S. firearms manufacturer, based on data reported in the Bureau of Alcohol, Tobacco and Firearms' 1995 Annual Firearms Manufacturing and Exportation Report ("BATF Data"). The Company, which has been profitable every year since 1950, believes it has a preeminent reputation among sportsmen, hunters, and gun collectors for technical innovation and quality construction, based on reports in industry and business publications. The Company has been in business since 1949 and was incorporated in its present form under the laws of Delaware in 1969. The Company's firearms, which are sold under the "Ruger" name and trademark, consist of single-shot, autoloading, bolt action and lever action rifles in a broad range of hunting calibers; shotguns in three gauges; .22 caliber rimfire autoloading pistols and centerfire autoloading pistols in various calibers; and single-action and double-action revolvers in various calibers. The Company manufactures a wide range of high quality products and does not manufacture inexpensive concealable firearms, sometimes known as "Saturday Night Specials," "Junk Guns," or any firearm included on the list of "assault weapons" which was part of anti-crime legislation enacted by Congress in 1994. Many of the firearms introduced by the Company over the years have become "classics" which have retained their popularity for decades and are sought by collectors. These firearms include the single-action Single-Six, Blackhawk, and Bearcat revolvers, the double-action Redhawk revolvers, the 10/22, M-77, and Number One Single-Shot rifles, and the Red Label over-and-under shotguns. The Company has supplemented these "classics" with the introduction of new models and variations of existing models. In 1987, the Company introduced the P85, a 9mm centerfire autoloading pistol, and the GP100 and Super Redhawk revolvers. In 1988 and 1989, it introduced a new line of small frame double-action revolvers, the SP101. The Company augmented its line of centerfire autoloading pistols in 1990, 1991, and 1992 by offering new versions of the 9mm model and two new calibers, .40 S&W and .45 ACP. In 1992 and 1993, the Company introduced the Ruger 22/45 pistol, the Vaquero single-action revolver, the 77/22 Varmint bolt-action rifle, the P89, P90, and P93 centerfire autoloading pistols, and the Spurless SP101 double-action revolver. New variations of several of the Company's most popular models were introduced in 1994 and 1995 including the P94 centerfire autoloading pistol in 9mm and .40 S&W calibers which further strengthened the Company's P-Series pistol line, the 77/22 bolt-action rifle in .22 Hornet caliber, and a Woodside model of the Company's over-and-under shotgun. In 1996, the Company introduced the P95 pistol with an Isoplast polymer grip frame, the MK-4B .22 caliber target pistol, the Model 96 Lever Action rifle, and the 10/22 T Target rifle. All of these products have exhibited strong sales and consumer interest since their introduction. The Company plans to introduce in 1997 the all new Ruger Carbine, an autoloading rifle which uses pistol ammunition, the Ruger M-77 Mark II stainless rifle with a laminated wooden stock, the Ruger 10/22 "All-Weather" rifle featuring a stainless steel barrel and synthetic stock, the Ruger 22/45 P-4 Target Pistol with a heavy barrel, and the Ruger Bisley-Vaquero which features a Bisley target style hammer, grip, and trigger. The Company is also engaged in the manufacture of titanium, ferrous, and aluminum investment castings for a wide variety of markets including sporting goods, commercial, and military. In 1996 and 1995, the Company's foremost investment castings product was titanium "Great Big Bertha" golf club heads for Callaway Golf Company, Inc. ("Callaway Golf"). In 1995, the Company entered into a joint venture agreement with Callaway Golf to construct and operate a foundry for the production of golf club heads investment cast in titanium. The joint venture, named Antelope Hills, LLC is owned 50% by the Company and 50% by Callaway Golf. Construction of the Antelope Hills foundry is substantially complete and production could commence in 1997. -2- 3 ITEM 1--BUSINESS (CONTINUED) For the years ended December 31, 1996, 1995, and 1994, net sales attributable to the Company's firearms operations were approximately 66.7%, 80.9%, and 91.7%, respectively, of total net sales. The balance of the Company's net sales for the aforementioned periods was attributable to its investment castings operations. Further information regarding industry segment data is incorporated by reference to pages 20 and 21 of the Company's 1996 Annual Report to Stockholders. PRODUCTS--FIREARMS The Company presently manufactures 26 different types of firearm products in four industry categories: rifles, shotguns, pistols, and revolvers. Most are available in several models based upon caliber, finish, barrel length, and other features. RIFLES--A rifle is a long gun with spiral grooves cut into the interior of the barrel to give the bullet a stabilizing spin after it leaves the barrel. The Company presently manufactures nine different types of rifles: the M77 Mark II, the M77 Mark II Magnum, the 77/22, the 10/22, the Model 96, the Mini-14, the Mini Thirty, the Ruger Carbine, and the No. 1 Single-Shot. Sales of rifles by the Company accounted for approximately $77.0 million, $76.5 million, and $68.6 million of revenues for the years 1996, 1995, and 1994, respectively. SHOTGUNS--A shotgun is a long gun with a smooth barrel interior which fires lead or steel pellets. The Company presently manufactures two different types of over-and-under shotguns: the Red Label available in 12, 20, and 28 gauge, and the Woodside available in 12 gauge. Most of the Red Label models are available in special Sporting Clays and English Field versions. Sales of shotguns by the Company accounted for approximately $7.6 million, $4.7 million, and $5.1 million of revenues for the years 1996, 1995, and 1994, respectively. PISTOLS--A pistol is a handgun in which the ammunition chamber is an integral part of the barrel and which is fed ammunition from a magazine contained in the grip. The Company presently manufactures three different types of pistols, the Ruger Mark II .22 caliber in Standard, Competition, and Target models, the Ruger 22/45, and the P-series centerfire autoloading pistols in various calibers, configurations, and finishes. Sales of pistols by the Company accounted for approximately $30.3 million, $37.0 million, and $70.6 million of revenues for the years 1996, 1995, and 1994, respectively. REVOLVERS--A revolver is a handgun which has a cylinder that holds the ammunition in a series of chambers which are successively aligned with the barrel of the gun during each firing cycle. There are two general types of revolvers, single-action and double-action. To fire a single-action revolver, the hammer must be pulled back to cock the gun and align the cylinder before the trigger is pulled. To fire a double-action revolver, a single trigger pull advances the cylinder and cocks and releases the hammer. The Company presently manufactures eight different types of single-action revolvers: the New Model Super Single-Six, the New Model .32 magnum Super Single-Six, the New Model Blackhawk, the New Model Super Blackhawk, the Vaquero, the Bisley, the Old Army Cap & Ball, and the New Bearcat. The Company presently manufactures four different types of double-action revolvers: the SP101, the GP100, the Redhawk, and the Super Redhawk. Sales of revolvers by the Company accounted for approximately $31.5 million, $34.8 million, and $32.9 million of revenues for the years 1996, 1995, and 1994, respectively. The Company also manufactures and sells accessories and replacement parts for its firearms. These sales accounted for approximately $2.4 million, $2.6 million, and $2.9 million of revenues for the years 1996, 1995, and 1994, respectively. PRODUCTS--INVESTMENT CASTINGS The investment castings products currently manufactured by the Company and sold to unrelated third parties consist of titanium, ferrous (both chrome-moly and stainless), and aluminum parts for a wide variety of industries including sporting goods, commercial, and military. -3- 4 ITEM 1--BUSINESS (CONTINUED) The Company's newest castings facility, Ruger Investment Casting ("RIC"), located in Prescott, Arizona, engineers and produces titanium, ferrous, and aluminum castings. This facility's manufacturing activity during 1996 and 1995 for outside customers consisted primarily of producing titanium "Great Big Bertha" golf club heads for Callaway Golf. Sales of golf club heads to Callaway Golf accounted for approximately $59.7 million and $23.1 million of revenues during 1996 and 1995, respectively. No sales were made to Callaway Golf during 1994. The Pine Tree Castings Division of the Company, located in Newport, New Hampshire, engineers and produces ferrous castings for a wide range of commercial customers. The Company's Uni-Cast Division, located in Manchester, New Hampshire, engineers and produces primarily large complicated aluminum castings for a number of prime defense contractors. Uni-Cast is also involved with research and development of composite metal matrix technology licensed from the Lanxide Corporation. Sales from the Company's investment castings operations (excluding intercompany transactions) accounted for approximately $74.5 million, $36.8 million, and $16.4 million or 33.3%, 19.1%, and 8.3% of the Company's total net sales for 1996, 1995, and 1994, respectively. MANUFACTURING FIREARMS--The Company produces most rifles, and all shotguns and revolvers at the Newport, New Hampshire facility. Some rifles and all pistols are produced at the Prescott, Arizona facility. Many of the basic metal component parts of the firearms manufactured by the Company are produced by the Company's castings facilities through a process known as precision investment castings. See "Manufacturing-Investment Castings" for a description of the investment castings process. The Company initiated the use of this process in the production of component parts for firearms in 1953 and believes that its widespread use of investment castings in the firearms manufacturing process is unique among firearms manufacturers. The investment castings process provides greater design flexibility and results in component parts which are generally close to their ultimate shape and, therefore, require less machining. Through the use of investment castings, the Company is able to produce durable and less costly component parts for its firearms. Third parties supply the Company with various raw materials for its firearms, such as fabricated steel components, walnut and birch lumber for rifle and shotgun stocks and other component parts. These raw materials and component parts are readily available from multiple sources at competitive prices. All assembly, inspection, and testing of firearms manufactured by the Company is performed at the Company's manufacturing facilities. Every firearm, including every chamber of every revolver, manufactured by the Company is test-fired prior to shipment. INVESTMENT CASTINGS--The Company manufactures all of its precision investment castings products at one of its three investment castings facilities. To produce a product by the investment castings method, a wax model of the product is created and coated ("invested") with several layers of ceramic material. The shell is then heated to melt the interior wax which is poured off, leaving a hollow mold. To cast the desired product, molten metal is poured into the mold and allowed to cool and solidify. The mold is then broken off to reveal a near net shape cast metal part. Titanium investment castings products are manufactured by the Company's RIC Division located in Prescott, Arizona. This is the Company's newest investment castings facility and also has the capabilities of producing ferrous and aluminum investment castings products. In the latter part of 1994 and throughout 1995 and 1996, the Company significantly added to the production capacity of Ruger Investment Casting and believes that this facility is one of the largest investment castings facilities in the Southwest. -4- 5 ITEM 1--BUSINESS (CONTINUED) The Company and Callaway Golf entered into a joint venture agreement in June 1995 to plan, develop, build, and operate a foundry for the production of golf club heads investment cast in titanium. The joint venture, named Antelope Hills, LLC, is owned 50% by the Company and 50% by Callaway Golf. This facility was completed in the first quarter of 1997 and has production capacity for titanium products similar to that of RIC. The Company's Pine Tree Castings Division manufactures primarily all of the ferrous investment castings produced by the Company. Aluminum investment castings products are primarily manufactured by the Company's Uni-Cast Division located in Manchester, New Hampshire. In 1996 the Company spent $2.2 million in capital expenditures for the Uni-Cast Division to both modernize and outfit the facility to produce castings made of inorganic composites such as ceramic reinforced aluminum alloys. Additional capital expenditures of $2.5 million are budgeted in 1997. Raw materials including wax, ceramic material, and metal alloys necessary for the production of investment cast products are supplied to the Company through third parties. The Company believes that all these raw materials, with the exception of certain titanium metal alloys ("titanium"), are readily available from multiple sources at competitive prices. Presently, the Company buys most of its titanium under a short-term (approximately one year) purchasing arrangement from one supplier. Although there are limited suppliers of titanium, management believes that other sources could provide the Company with the requirements to meet production demands. If it becomes necessary to change titanium suppliers, the Company believes that it has adequate quantities of titanium in inventory to provide enough time to locate another supplier without interruption of manufacturing operations. MARKETING AND DISTRIBUTION FIREARMS--The Company's firearms are primarily marketed through a network of selected independent distributors who purchase the products directly from the Company for resale to gun dealers and legally authorized end-users. These end-users include sportsmen, hunters, law enforcement and other governmental organizations, and gun collectors. In late 1987, the Company reduced by more than one-half the number of domestic commercial distributors of its firearms in order to encourage its remaining distributors to focus their efforts on the Company's products. Each of these distributors carries the entire line of firearms manufactured by the Company for the commercial market. Management believes that the increase in sales since 1988 is due in part to this strategy. In 1996, the number of distributors decreased primarily as a result of certain distributors consolidating operations with other distributors of the Company. Currently, 21 distributors service the domestic commercial market, with an additional 57 servicing the domestic law enforcement market and two servicing the Canadian market. Three of these distributors service both the domestic commercial market and the domestic law enforcement market. Currently, five distributors account for approximately 54% of the Company's sales of firearms, with the largest distributor, Jerry's Sport Center (Forest City, Pennsylvania), accounting for approximately 12% of consolidated net sales. The Company employs seven employees and two independent contractors who service these distributors and call on dealers and law enforcement agencies. Because the ultimate demand for the Company's firearms comes from end-users, rather than from the Company's distributors, the Company believes that the loss of any distributor would not have a material adverse effect on the Company. The Company considers its relationships with its distributors to be satisfactory. In addition, the Company markets its firearms directly to foreign customers, consisting primarily of law enforcement agencies and foreign governments. Foreign sales were less than 10% of the Company's consolidated net sales for each of the past three years. No material portion of the Company's business is subject to renegotiation of profits or termination of contracts at the election of a government purchaser. -5- 6 ITEM 1--BUSINESS (CONTINUED) In the fourth quarter of 1996, the Company received annual orders from its distributors for the 1997 marketing year. These orders may be adjusted quarterly by the distributors to allow for market fluctuations. In prior years, only one adjustment to the annual orders, in the second quarter of the year, was allowed. As of March 1, 1997, unfilled firearms were approximately $122.4 million as compared to approximately $203.7 million at March 1, 1996. The Company believes that the major reason for this decrease is an overall slowdown in the United States firearms market, especially in the industry product categories of rifles, shotguns, and revolvers. In addition, the Company believes that firearms segment orders at March 1, 1996 were inflated by distributors seeking certain models of the Company's products that were in short supply due to production constraints during 1995. The impact of the Company's change in the annual order policy and recently introduced firearm models on unfilled orders as of March 1, 1997 is not readily determinable at this time. However, it is anticipated that demand for new firearms models will be strong. Most of the firearms manufactured by the Company are sold on terms requiring payment in full within 30 days. However, certain products which are generally used during the fall hunting season are sold pursuant to a "dating plan" which in general allows the purchasing distributor to buy the products commencing in December, the normal start of the Company's dating plan year, and pay for them on extended terms. Discounts are offered for early payment. Management believes that this dating plan serves to level out the demand for these seasonal products throughout the entire year and facilitates an efficient manufacturing schedule. The Company does not consider its overall firearms business to be significantly seasonal; however sales of certain models of firearms are usually lower in the third quarter of the year. INVESTMENT CASTINGS--The investment castings segment's principal markets are sporting goods, commercial, and military. Sales are made directly to customers or through manufacturers' representatives. The Company's largest castings segment customer in 1996 and 1995, Callaway Golf Company, Inc. (Carlsbad, California) accounted for approximately 27% and 12% of consolidated net sales and 80% and 62% of castings segment sales, respectively. One customer in 1994 represented 23% of castings segment sales. COMPETITION FIREARMS--Competition in the firearms industry is intense and comes from both foreign and domestic manufacturers. While some of these competitors concentrate on a single industry product category, such as rifles or pistols, several foreign competitors manufacture products in all four industry categories (rifles, shotguns, pistols and revolvers). Some of these competitors are subsidiaries of large corporations with substantially greater financial resources than the Company. The Company is the only domestic manufacturer which produces firearms in all four industry product categories and believes that it is the largest U.S. firearms manufacturer, according to BATF Data. The principal methods of competition in the industry are product quality and price. The Company believes that it can compete effectively with all of its present competitors based upon the high quality, reliability and performance of its products, and the competitiveness of its pricing. INVESTMENT CASTINGS--There are a large number of investment castings manufacturers, both domestic and foreign, with which the Company competes. Competition varies based on the type of investment castings products (titanium, ferrous, or aluminum) and the end use of the product (sporting goods, commercial, or military). Many of these competitors are larger than the Company and may have greater resources. The principal methods of competition in the industry are quality, production lead time, and price. The Company believes that it can compete effectively with all of its present competitors and has expended significant amounts of resources on both expanding and modernizing its investment castings facilities in 1996, 1995 and 1994. -6- 7 ITEM 1--BUSINESS (CONTINUED) EMPLOYEES As of February 28, 1997, the Company employed 2,010 full-time employees of which approximately 26% had at least ten years of service with the Company. None of the Company's employees are subject to a collective bargaining agreement. The Company has never experienced a strike during its entire 47-year history and believes its employee relations are satisfactory. RESEARCH AND DEVELOPMENT In 1996, 1995 and 1994, the Company spent approximately $1.7 million, $1.7 million and $1.9 million, respectively, on research activities relating to the development of new products and the improvement of existing products. As of February 28, 1997, the Company had approximately 53 employees engaged in research and development activities as part of their responsibilities. PATENTS AND TRADEMARKS The Company owns various United States and foreign patents and trademarks which have been secured over a period of years and which expire at various times. It is the policy of the Company to apply for patents and trademarks whenever new products or processes deemed commercially valuable are developed or marketed by the Company. However, none of these patents and trademarks are considered to be basic to any important product or manufacturing process of the Company and, although the Company deems its patents and trademarks to be of value, it does not consider its business materially dependent on patent or trademark protection. ENVIRONMENTAL MATTERS The Company has programs in place that monitor compliance with various environmental regulations. However, 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 effect on its business. EXECUTIVE OFFICERS OF THE COMPANY Set forth below are the names, ages, and positions of the executive officers of the Company. Officers serve at the pleasure of the Board of Directors of the Company.
Name Age Position With Company - -------------------------------------------------------------------------------- William B. Ruger 80 Chairman of the Board, Chief Executive Officer, Treasurer, and Director William B. Ruger, Jr. 57 Vice Chairman, Senior Executive Officer, and Director Gerald W. Bersett 56 President, Chief Operating Officer, and Director Erle G. Blanchard 50 Vice President, Controller Stephen L. Sanetti 47 Vice President, General Counsel Leslie M. Gasper 43 Corporate Secretary John R. Pagano 32 Assistant Controller
-7- 8 ITEM 1--BUSINESS (CONTINUED) William B. Ruger has been the Chairman of the Board, Chief Executive Officer, and Treasurer of the Company since 1949. He is the father of William B. Ruger, Jr. William B. Ruger, Jr. became Vice Chairman and Senior Executive Officer of the Company in 1995 and has been a Director of the Company since 1970. Previously, he served as President of the Company from 1991 to 1995 and as Senior Vice President of the Company from 1970 to 1990. Gerald W. Bersett became President and Chief Operating Officer of the Company in August 1995 and a Director of the Company in November 1996. Previously, he was the President of the Winchester Division of the Olin Corporation since 1988 and Vice President of the Olin Corporation since 1993. Erle G. Blanchard returned to the Company as Vice President, Controller in March 1996. From March 1995 to March 1996, he was not employed by the Company. Prior to this, he served as Plant Manager of the Newport Firearms Manufacturing facility since 1986 and became Vice President - Controller - Newport in 1993. Stephen L. Sanetti has been Vice President, General Counsel of the Company since 1993. Prior to this, he served as General Counsel since 1980. Leslie M. Gasper has been Secretary of the Company since 1994. Prior to this, she was the Administrator of the Company's pension plans which position she held for more than five years prior thereto. John R. Pagano became Assistant Controller of the Company in 1996. Previously he was the Manager of Corporate Accounting since 1991. Prior to joining the Company in 1991, he was a Manager at Ernst & Young LLP. ITEM 2--PROPERTIES The Company's manufacturing operations are carried out at three facilities. The following table sets forth certain information regarding each of these facilities:
Approximate Aggregate Usable Square Feet Status ------------------------------------------ Newport, New Hampshire 350,000 Owned Prescott, Arizona 230,000 Leased Manchester, New Hampshire 50,000 Owned
The Company completed construction of a 15,000 square foot addition to the Manchester, New Hampshire facility in 1996 to be used for manufacturing operations. The Newport and Prescott facilities each contain enclosed ranges for testing firearms and also contain modern tool room facilities. The lease of the Prescott facility provides for rental payments which approximate real property taxes. The Company's headquarters and related operations are in Southport, Connecticut. Manufacturing operations at this location were moved in 1991 to the Company's Newport and Prescott facilities. There are no mortgages on any of the real estate owned by the Company. -8- 9 ITEM 3--LEGAL PROCEEDINGS The Company is a defendant in approximately 15 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 number of lawsuits and claims that were tried, dismissed, settled, or otherwise resolved and average settlement payments (excluding legal fees) were as follows: 1996-21 and $45,000, 1995-18 and $46,000, 1994-24 and $55,000. For a description of all pending lawsuits against the Company through September 30, 1996, reference is made to the discussion under the caption "Item 3. LEGAL PROCEEDINGS" of the Company's Annual Reports on Form 10-K for the years ended December 31, 1988, 1994 and 1995 and to the discussion under caption "Item 1. LEGAL PROCEEDINGS" of the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1987, September 30, 1990, September 30, 1993, June 30, and September 30, 1994, March 31 and June 30, 1995, and March 31 and June 30, 1996. The following case was instituted against the Company during the three months ended December 31, 1996, which involved significant demands for compensatory and/or punitive damages: Armol J. Davidson v. Sturm Ruger & Company, Inc. instituted in the USDC for the District of Mississippi (Southern Division) on October 29, 1996. The complaint alleges that on or about May 31, 1996, a Ruger magnum pistol discharged while plaintiff was loading it, resulting in injury to his right calf. Actual and punitive damages totaling $30,000,000 are demanded. During the three months ending December 31, 1996, two previously reported cases were settled: Clark Montana Lowry Alaska These cases were settled for amounts within the insurance limits and/or self-insured retention of the Company. The dismissal of the Forni case (New York), which involved a claim arising out of an intentional criminal shooting, was upheld by the New York Supreme Court's Appellate Division on October 3, 1996. No further appeal was taken by plaintiffs. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -9- 10 PART II ITEM 5--MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required for this Item is incorporated by reference to pages 4 and 23 of the Company's 1996 Annual Report to Stockholders. ITEM 6--SELECTED FINANCIAL DATA The information required for this Item is incorporated by reference to page 4 of the Company's 1996 Annual Report to Stockholders. ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required for this Item is incorporated by reference to pages 6 through 9 of the Company's 1996 Annual Report to Stockholders. ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (A) FINANCIAL STATEMENTS The consolidated balance sheets of Sturm, Ruger & Company, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996 and the report dated February 21, 1997 of Ernst & Young LLP, independent auditors, are incorporated by reference to pages 12 through 22 of the Company's 1996 Annual Report to Stockholders. (B) SUPPLEMENTARY DATA Quarterly results of operations for 1996 and 1995 are incorporated by reference to page 21 of the Company's 1996 Annual Report to Stockholders. ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information as to the directors of the Company under the caption "ELECTION OF DIRECTORS" on pages 2 and 3 of the Company's Proxy Statement relating to the Annual Meeting of Stockholders to be held May 20, 1997 is incorporated by reference into this Report. The information set forth under the caption "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 12 of the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 20, 1997 is incorporated by reference into this Report. The information as to executive officers of the Company is included in Part I hereof under the caption "Executive Officers of the Company" in reliance upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. -10- 11 ITEM 11--EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to those sections of the Company's Proxy Statement relating to the Annual Meeting of Stockholders to be held May 20, 1997 under the captions "DIRECTOR COMPENSATION AND INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES," "EXECUTIVE COMPENSATION," "BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION," "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION," "COMPANY STOCK PRICE PERFORMANCE", "PENSION PLAN TABLE," and "SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE" on pages 4 through 10. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to those sections of the Company's Proxy Statement relating to the Annual Meeting of Stockholders to be held May 20, 1997 under the captions "ELECTION OF DIRECTORS," "PRINCIPAL STOCKHOLDERS," and "SECURITY OWNERSHIP OF MANAGEMENT" on pages 2, 3, 10, and 11. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to those sections of the Company's Proxy Statement relating to the Annual Meeting of Stockholders to be held May 20, 1997 under the caption "DIRECTOR COMPENSATION AND INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES" and "EXECUTIVE COMPENSATION" on pages 4 and 5. -11- 12 PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Form 10-K. (1) Financial Statements: Consolidated Balance Sheets--December 31, 1996 and 1995 Consolidated Statements of Income--Years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Stockholders' Equity--Years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995, and 1994 Notes to Consolidated Financial Statements Report of Independent Auditors This information is incorporated by reference to the Company's 1996 Annual Report to Stockholders as noted in Item 8. (2) Financial Statement Schedules: Schedule II-Valuation and Qualifying Accounts-Page 15 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or the required information is disclosed elsewhere, and therefore, have been omitted.
(3) Listing of Exhibits: Page No. -------- Exhibit 3.1 Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibits 4.1 and 4.2 to the Form S-3 Registration Statement previously filed by the Company File No. 33-62702). Exhibit 3.2 Bylaws of the Company, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 3.3 Amendment to Article 2, Sections 4 and 5 of the Bylaws of the Company. 18 Exhibit 10.1 Sturm, Ruger & Company, Inc. 1986 Stock Bonus Plan (Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, as amended by Form 8 filed March 27, 1990, SEC File No. 0-4776).
-12- 13 ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED)
Page No. -------- Exhibit 10.2 Amendment to Sturm, Ruger & Company, Inc. 1986 Stock Bonus Plan (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776). Exhibit 10.3 Sturm, Ruger & Company, Inc. Supplemental Executive Profit Sharing Retirement Plan (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776). Exhibit 10.4 Agreement and Assignment of Lease dated September 30, 1987 by and between Emerson Electric Co. and Sturm, Ruger & Company, Inc. (Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, SEC File No. 0-4776). Exhibit 10.5 Sturm, Ruger & Company, Inc. Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 10.6 Operating Agreement of Antelope Hills, LLC, a Delaware Limited Liability Company, dated as of October 5, 1995 (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, SEC File No. 0-4776). Exhibit 13.1 Annual Report to Stockholders of the Company for the year ended December 31, 1996. Except for those portions of such Annual Report to Stockholders expressly incorporated by reference into the Report, such Annual Report to Stockholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "filed" document. 20 Exhibit 23.1 Consent of Independent Auditors. 49 Exhibit 99.1 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1987, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.2 Item 3 LEGAL PROCEEDINGS from the Annual Report on Form 10-K of the Company for the year ended December 31, 1988, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.3 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1990, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS.
-13- 14 ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) Exhibit 99.4 Item 1 LEGAL PROCEEDINGS from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1993, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.5 Item 1 LEGAL PROCEEDINGS from the Quarterly Reports on Form 10-Q of the Company for the quarters ended June 30 and September 30, 1994, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.6 Item 3 LEGAL PROCEEDINGS from the Annual Report on Form 10-K of the Company for the year ended December 31, 1994, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.7 Item 1 LEGAL PROCEEDINGS from the Quarterly Reports on Form 10-Q of the Company for the quarters ended March 31 and June 30, 1995, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.8 Items 3 LEGAL PROCEEDINGS from the Annual Report on Form 10-K of the Company for the year ended December 31, 1995, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS. Exhibit 99.9 Item 1 LEGAL PROCEEDINGS from the Quarterly Reports on Form 10-Q of the Company for the quarters ended March 31 and June 30, 1996, SEC File No. 1-10435, incorporated by reference in Item 3 LEGAL PROCEEDINGS.
(b) Report on Form 8-K filed in the fourth quarter of 1996: None -14- 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant) S/LESLIE M. GASPER ----------------------- Leslie M. Gasper Corporate Secretary March 21, 1997 ----------------------- Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
S/WILLIAM B. RUGER 3/14/97 S/WILLIAM B. RUGER, JR. 3/14/97 - ---------------------------------------------------- ------------------------------------------------ William B. Ruger William B. Ruger, Jr. Principal Executive Officer, Chairman, Vice Chairman, Senior Executive Officer, Chief Executive Officer, Treasurer, Director Director S/JOHN M. KINGSLEY, JR. 3/15/97 S/STANLEY B. TERHUNE 3/14/97 - ---------------------------------------------------- ------------------------------------------------ John M. Kingsley, Jr. Stanley B. Terhune Director Director S/RICHARD T. CUNNIFF 3/17/97 S/TOWNSEND HORNOR 3/17/97 - ---------------------------------------------------- ------------------------------------------------ Richard T. Cunniff Townsend Hornor Director Director S/PAUL X. KELLEY 3/14/97 S/GERALD W. BERSETT 3/14/97 - ---------------------------------------------------- ------------------------------------------------ Paul X. Kelley Gerald W. Bersett Director President and Chief Operating Officer, Director S/JAMES E. SERVICE 3/14/97 - ---------------------------------------------------- James E. Service Director
-15- 16 ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1996 STURM, RUGER & COMPANY, INC. AND SUBSIDIARIES SOUTHPORT, CONNECTICUT ITEMS 14(a)(2) AND 14(d) FINANCIAL STATEMENT SCHEDULE CERTAIN EXHIBITS -16- 17 Sturm, Ruger & Company, Inc. and Subsidiaries Item 14(a)(2) and Item 14(d)--Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts (In Thousands)
- -------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - -------------------------------------------------------------------------------------------------------------------------- ADDITIONS -------------------------- (1) (2) Charged to Balance at Charged to Other Balance Beginning Costs and Accounts at End Description of Period Expenses -Describe Deductions of Period - -------------------------------------------------------------------------------------------------------------------------- Deductions from asset accounts: Allowance for doubtful accounts: Year ended December 31, 1996 $ 981 $ 18 $ 165 (a) $ 834 ------- -------- ----------- ------- Year ended December 31, 1995 $ 900 $ 200 $ 119 (a) $ 981 ------- ------- ----------- ------- Year ended December 31, 1994 $ 922 $ 50 $ 72 (a) $ 900 ------- -------- ------------ ------- Allowance for discounts: Year ended December 31, 1996 $ 871 $4,408 $4,184 (b) $1,095 ------- ------ ---------- ------ Year ended December 31, 1995 $ 650 $7,451 $7,230 (b) $ 871 ------- ------ ---------- ------- Year ended December 31, 1994 $ 919 $4,202 $4,471 (b) $ 650 ------- ------ ---------- ------- Product safety modifications accrual: Year ended December 31, 1996 $1,439 $ 137 (c) $1,302 ------ ---------- ------ Year ended December 31, 1995 $1,548 $ 109 (c) $1,439 ------ ---------- ------ Year ended December 31, 1994 $1,705 $ 157 (c) $1,548 ------ ---------- ------
]---------- (a) Accounts written off (b) Discounts taken (c) Costs incurred -17- EX-3.3 2 AMENDMENT TO ARTICLE 2, OF THE BYLAWS 1 STURM, RUGER & COMPANY, INC. Unanimous Written Consent of Directors In Lieu of Meeting Pursuant to Section 141(f) of the Delaware General Corporation Law February 13, 1997 RESOLVED, that the Board of Directors of the Corporation deems it advisable and in the best interests of the Corporation that Article 2, Sections 4 and 5 of the Bylaws of the Corporation be amended to read in full as follows: "Section 4. Notice of Meetings. Written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by or at the direction of the President or Secretary to each shareholder of record entitled to vote at such meeting, by leaving such notice with him or at his residence or usual place of business, or by mailing a copy thereof addressed to him at his last known post-office address as last shown on the stock records of the corporation, postage pre-paid, not less than ten nor more than sixty days before the date of such meeting. Section 5. Closing of Transfer Books or Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders of any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, sixty days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty days and, in case of a meeting of the shareholders, not less than ten days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of the shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When the determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof." CERTIFICATION I, Leslie M. Gaspar, Secretary of Sturm, Ruger & Company, Inc., a Delaware Corporation, do hereby certify that the above is a true and complete excerpt of the unanimous written consent of the Board of Directors of Sturm, Ruger & Company, Inc. which was made on February 13, 1997. S/Leslie M. Gaspar --------------------------- Leslie M. Gaspar, Secretary STURM, RUGER & COMPANY, INC. a Delaware Corporation Subscribed and Sworn to before me this 20th day of March 1997 S/Mary Krim - ----------------------------------- Notary Commission Exp. May 31, 2000 EX-13.1 3 DECEMBER 31, 1996 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 Selected Financial Data (Dollars in thousands, except per share data)
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Net firearms sales ................................. $ 148,829 $ 155,622 $ 180,079 $ 176,203 $ 138,967 Net castings sales ................................. 74,466 36,847 16,358 17,996 17,108 - ----------------------------------------------------------------------------------------------------------------------------------- Total net sales .................................... $ 223,295 $ 192,469 $ 196,437 $ 194,199 $ 156,075 =================================================================================================================================== Cost of products sold .............................. $ 150,200 $ 134,930 $ 125,439 $ 123,336 $ 105,826 Gross profit ....................................... 73,095 57,539 70,998 70,863 50,249 Income before income taxes and cumulative effect of accounting change ................ 56,835 43,846 56,992 55,997 37,142 Income taxes ....................................... 22,450 17,670 22,943 22,768 14,991 Net income ......................................... 34,385 26,176 34,049 32,789 22,151 Net income per share ............................... 1.28 0.97 1.27 1.22 0.82 Cash dividends per share ........................... 0.80 0.70 0.60 0.525 0.625 December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Working capital .................................... $ 95,217 $ 91,942 $ 93,852 $ 81,504 $ 65,358 Total assets ....................................... 189,890 178,552 169,492 150,085 124,185 Total stockholders' equity ......................... 146,727 133,735 126,295 108,389 89,725 Book value per share ............................... 5.45 4.97 4.69 4.03 3.33 Return on stockholders' equity ..................... 24.5% 20.1% 29.0% 33.1% 25.4% Current ratio ...................................... 5.0 to 1 4.6 to 1 4.8 to 1 4.3 to 1 4.5 to 1 Common shares outstanding .......................... 26,916,800 26,910,800 26,904,800 26,904,800 26,904,800 Number of stockholders of record ................... 1,899 1,678 1,478 1,400 1,164 Number of employees ................................ 2,094 1,937 1,905 1,719 1,549
Selected Financial Data should be read in conjunction with the Consolidated Financial Statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations. [THE FOLLOWING TABLES WERE PRESENTED AS BAR GRAPHS IN THE PRINTED MATERIAL] <<<<<<<<<<<<<<<<<<<<<<<<>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 4----- 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The Company's sales are comprised of the sales of fire- arms and investment castings. The Company is the only U.S. firearms manufacturer which offers products in all four industry product categories - rifles, shotguns, pistols, and revolvers. Investment castings are manufactured using titanium, ferrous, and aluminum alloys. Results of Operations All share and per share amounts have been adjusted to reflect the two-for-one stock split on September 16, 1996. Year ended December 31, 1996, as compared to year ended December 31, 1995: Record consolidated net sales of $223.3 million were achieved by the Company in 1996, an increase of $30.8 million or 16.0% from 1995 net sales of $192.5 million. The record 1996 consolidated net sales were achieved by strong operations of the castings segment, offset by a slight decrease in the firearms segment during a difficult year for the entire firearms industry. The Company's previous record consolidated net sales of $196.4 million were reached in 1994. Firearms segment net sales were $148.8 million in 1996 compared to $155.6 million in 1995, a decrease of $6.8 million or 4.4%. Unit shipments of firearms in 1996 decreased by 6.6% from 1995. This is the second year in a row that firearms segment sales decreased and was primarily a result of reduced overall market demand and corresponding sales levels in the latter half of 1996 of the Company's firearms models in the industry product categories of rifles, pistols, and revolvers. The Company's Newport, New Hampshire manufacturing facility, which produces rifles, shotguns, and revolvers, implemented certain operational changes in the fourth quarter of 1996 and first quarter of 1997 to more accurately match firearm production levels with expected market demand and reduce inventory quantities. Also, in December 1996, the Company commenced a sales promotion program that provides discounts of up to 10% on certain double-action revolver models based on customer purchases. This program did not have a significant impact on 1996 sales or operating results and the impact of the program on 1997 sales or operating results cannot be estimated by the Company at the present time. The Company anticipates that sales levels of rifles and revolvers for the first half of 1997 will be less than the first half of 1996. Sales and unit shipments of pistols in 1996 were less than in 1995 due to a special sales promotion offered in the fourth quarter of 1995. At the present time the Company anticipates that demand for pistols in 1997 will approximate 1996 levels. Castings segment net sales increased by 102.1% to $74.5 million in 1996 from $36.8 million in 1995. This increase was primarily achieved by Ruger Investment Casting ("RIC") producing and shipping greater quantities of titanium golf club heads for Callaway Golf, Inc. ("Callaway Golf"). Approximately 61% of the sales in dollars to Callaway Golf were made in the first six months of 1996. Sales of titanium golf club heads in the latter half of 1996 were affected by changes in production mix, completion of 1996 golf club model requirements, and a reduction of sales price per unit. In August 1996, the Company received shipping instructions from Callaway Golf covering the 1997 golf club production program for titanium golf club heads through 1997. This order, valued at approximately $66 million, was part of the production anticipated in the existing contract between the two companies. The sales price per unit of titanium golf club heads was reduced in this order from the amount the Company had previously received through most of 1996. In March 1997 the Company 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 may 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 RIC. Consolidated cost of products sold for 1996 was $150.2 million compared to $134.9 million for 1995. This increase of $15.3 million or 11.3% was primarily attributable to increases in sales by the castings segment. Gross profit as a percentage of net sales increased to 32.7% in 1996 from 29.9% in 1995. Efficiencies realized from increased production and sales of investment cast titanium golf club heads and reductions in product liability and workers' compensation costs were the primary reasons for this increase. The 1995 year was adversely impacted by a number of factors including the special sales promotion offered on most pistol models in the fourth quarter of 1995, an unfavorable firearm product sales mix, costs incurred by RIC to expand capacity for the production of titanium golf club heads, and inefficiencies from decreased firearm unit production at the Company's Prescott, Arizona facility. The gross profit margin for castings segment sales was higher in 1996 than in 1995. 6----- 3 Selling, general and administrative expenses increased by 13.1% to $19.2 million in 1996 from $17.0 million in 1995. This increase was primarily the result of increased advertising costs and additions to the Company's executive management in the latter part of 1995 and first quarter of 1996. The effective income tax rate decreased in 1996 to 39.5% from 40.3% in 1995 due to lower state income taxes. As a result of the preceding factors, consolidated net income for 1996 increased to $34.4 million from $26.2 million for 1995, or by $8.2 million and 31.4%. Results of Operations Year ended December 31, 1995, as compared to year ended December 31, 1994: Consolidated net sales of $192.5 million were reached by the Company in 1995, a decrease of $4.0 million or 2.0% from 1994 consolidated net sales of $196.4 million. Firearms segment net sales decreased in 1995 by $24.5 million or 13.6% to $155.6 million from $180.1 million in 1994. The decrease in firearm unit shipments of 12.8% was primarily attributable to weak demand throughout most of the year for pistols, which are manufactured in the Company's Prescott, Arizona facility. In the fourth quarter of 1995, the Company offered a special sales promotion on most pistol models. This program, which reduced the average selling price of these pistols by 10% to 30%, had the impact of producing significantly greater sales quantities than those anticipated if the program had not been offered. Sales of firearms in the other industry product categories - rifles, shotguns, and revolvers - remained strong in 1995 with demand for these products being substantially in excess of the production capacity of the Company's Newport, New Hampshire facility through most of the year. In the third quarter of 1995, the outfitting of machinery and equipment in the 65,000 square foot addition to the Newport facility was completed which enabled the facility to realize significant firearm production increases in the fourth quarter. Castings segment net sales increased by 125.3% to $36.8 million in 1995 from $16.4 million in 1994. This increase was achieved by RIC commencing the shipment of "Great Big Bertha" titanium golf club heads to Callaway Golf in the first quarter of 1995. The Company invested considerable resources in late 1994 and throughout 1995 to significantly increase its capacity to produce titanium investment castings. Higher production quantities of "Great Big Bertha" titanium golf club heads were achieved beginning in the latter part of the third quarter and increased steadily through the fourth quarter of 1995. Consolidated cost of products sold for 1995 was $134.9 million compared to $125.4 million for 1994, an increase of $9.5 million or 7.6%. This increase was primarily attributable to a number of factors which affected both the firearms and castings segments, consisting of an unfavorable firearm product sales mix, costs incurred by RIC to expand capacity for the production of an increasing number of titanium golf club heads, inefficiencies from decreased firearm unit production at the Company's Prescott, Arizona facility, and increases in castings segment sales which had higher manufacturing costs as a percentage of sales dollars. During the third quarter of 1995, the Company implemented certain steps that reallocated production capacity from the Prescott firearms facility. Specifically, the Company transferred skilled production employees and manufacturing floor space to RIC. Also, significant process changes in the manufacturing of titanium golf club heads were made in the fourth quarter of 1995 which had a positive impact on both production and operating margins. In June 1995, the Company entered into a joint venture agreement with Callaway Golf to collaborate in the construction and operation of a new investment castings foundry, Antelope Hills, LLC ("Antelope Hills"), for the production of titanium golf club heads. Under the terms of this agreement, Callaway Golf committed to purchase a quantity of titanium golf club heads with sales prices totalling a minimum of approximately $150 million in the years 1996 through 1998 from combined Company and Antelope Hills facilities. As a result of the foregoing and the impact of the special sales promotion offered on most pistol models in the fourth quarter of 1995, gross profit as a percentage of net sales decreased to 29.9% in 1995 from 36.1% in 1994. Selling, general and administrative expenses increased nominally by 1.5% to $17.0 million in 1995 from $16.7 million in 1994. This increase was primarily due to the addition of a new executive officer to the Company. Other income-net increased in 1995 compared to 1994 primarily as a result of interest rates on Treasury Bills which while declining during 1995, generally were higher than those prevailing during most of 1994. This more than offset the decrease in average fund balances available for investment in 1995. The effective tax rate remained unchanged in 1995 from 1994 at 40.3%. As a result of the foregoing factors, consolidated net income for 1995 decreased to $26.2 million from $34.0 million for 1994, or by $7.9 million and 23.1%. Financial Condition At December 31, 1996, the Company had cash, cash equivalents, -----7 4 and short-term investments of $33.4 million, working capital of $95.2 million, and a current ratio of 5.0 to 1. Cash provided by operating activities was $24.4 million, $16.9 million, and $35.4 million for the years ended December 31, 1996, 1995, and 1994, respectively. The $7.4 million increase in 1996 from 1995 is primarily a result of increased net income. The 1995 decrease from 1994 is the result of a decline in net income of $7.9 million as well as an increase in inventory of $15.2 million in 1995. Future inventory levels will be determined based on a number of conditions including market demand for the Company's products, production capabilities, and the Company's ability to obtain raw materials at favorable prices. The Company has reviewed its inventory management policies in the latter part of 1996 and plans to reduce inventory quantities of raw material, work-in-process, and finished goods throughout 1997. 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 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 are required to be paid for within 90 days. Dating plan receivables were $10.0 million at December 31, 1996 compared to $7.9 million at December 31, 1995. The Company has reserved the right to discontinue the dating plan at any time and has been able to finance this plan from internally generated funds provided by operating activities. The Company's production of titanium golf club heads requires certain titanium metal alloys ("titanium"). Presently, the Company buys a majority of its titanium under a short-term purchasing arrangement from one supplier. Although there are limited suppliers of titanium, management believes that other sources could provide the Company with the requirements to meet production demands. However, purchase prices charged by these alternative suppliers might be higher than 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 in inventory to provide enough time to locate another supplier without interruption of manufacturing operations. Capital expenditures for the past three years averaged $11.9 million per year. These expenditures have all been internally financed through funds provided by operations. The Company has budgeted $7.9 million for capital expenditures in 1997 to upgrade and modernize its facilities and to add capacity for the production of ceramic-reinforced metal composite products at the Uni-Cast Division. The Company finances and intends to continue to finance these activities with funds provided from operations. Additional capital expenditures of $7.5 million were made by the Company during 1996 and have totaled $9.2 million to date towards the construction and outfitting of Antelope Hills. 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 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 the 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. In 1996 dividends paid totaled $21.5 million. This amount reflects regular quarterly dividends of $0.20 per share paid on March 15, 1996, June 15, 1996, September 16, 1996, and December 15, 1996. On February 1, 1997 the Company declared a regular quarterly dividend of $0.20 per share payable on March 14, 1997. Future dividends depend on many factors including internal estimates of future performance and the Company's needs for funds. Historically the Company has not required external financing. Based on its cash flow and unencumbered assets, the Company believes that it has the ability to raise substantial amounts of short-term and long-term debt. However, 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 sales 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. 8----- 5 The "Brady Law" mandates a nationwide five 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 approximately twenty-six 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 ten round capacity manufactured after September 13, 1994 other than to law enforcement agencies. Only two such magazines (9mm and .40 caliber) were commercially sold by the Company and production of substitute ten 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 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 such restrictions will 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 and as a result of favorable litigation experiences over the past several years product liability expenses declined in 1996. The Company anticipates that these types of expenses in 1997 will approximate 1996 levels. 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 effect on its business. In October 1996, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 96-1, Environmental Remediation Liabilities, the effect of which is not expected to be material to the operating results of the Company. The Company expects to realize its deferred tax assets through tax deductions against future taxable income or a carryback against taxes previously paid. Inflation's effect on the Company's operations is most immediately felt in the 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 reporting 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 with the exception of higher prices of titanium in 1996. In 1996, the rate of inflationary cost increases was higher than in 1995, and in 1995 was lower than 1994. 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 market demand for the Company's firearms products, the Company's efforts to match production with market demand and reduce inventory quantities, the ability to generate additional titanium investment castings sales, the results of pending litigation against the Company, and the impact of possible additional firearms control legislation 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 castings, the failure to achieve certain operational goals, new firearm 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 the 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 or non-occurrence of anticipated events. -----9 6 Consolidated Balance Sheets (Dollars in thousands, except per share data)
December 31, 1996 1995 Assets Current Assets Cash and cash equivalents .................................. $ 2,729 $ 3,633 Short-term investments ..................................... 30,652 43,477 Trade receivables, less allowances for doubtful accounts ($834 and $981) and discounts ($1,095 and $871) .......... 21,074 19,864 Inventories: Finished products ........................................ 11,895 6,039 Materials and products in process ........................ 43,173 36,253 - ------------------------------------------------------------------------------------- 55,068 42,292 Deferred income taxes ...................................... 7,949 7,231 Prepaid expenses and other assets .......................... 1,690 1,044 - ------------------------------------------------------------------------------------- Total Current Assets ....................................... 119,162 117,541 Property, Plant, and Equipment Land and improvements .................................... 3,495 3,423 Buildings and improvements ............................... 21,830 20,087 Machinery and equipment .................................. 72,440 67,913 Dies and tools ........................................... 20,732 19,449 - ------------------------------------------------------------------------------------- 118,497 110,872 Allowances for depreciation .............................. (74,330) (66,742) - ------------------------------------------------------------------------------------- 44,167 44,130 Deferred Income Taxes ...................................... 4,672 4,338 Investment in Joint Venture (Note 3) ....................... 10,586 1,645 Other Assets ............................................... 11,303 10,898 - ------------------------------------------------------------------------------------- Total Assets ............................................... $ 189,890 $ 178,552 =====================================================================================
See accompanying notes 12----- 7
December 31, 1996 1995 Liabilities and Stockholders' Equity Current Liabilities Trade accounts payable and accrued expenses ................ $ 4,628 $ 3,993 Product safety modifications ............................... 1,302 1,439 Product liability .......................................... 3,000 3,000 Employee compensation ...................................... 8,312 7,888 Workers' compensation ...................................... 6,108 6,262 Income taxes ............................................... 595 3,017 - ------------------------------------------------------------------------------------- Total Current Liabilities .................................. 23,945 25,599 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 shares -26,916,800 and 26,910,800 ........................ 26,917 26,911 Additional paid-in capital ................................. 2,514 2,380 Retained earnings .......................................... 117,296 104,444 - ------------------------------------------------------------------------------------- Total Stockholders' Equity ................................. 146,727 133,735 - ------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity ................. $ 189,890 $ 178,552 =====================================================================================
-----13 8 Consolidated Statements of Income (In thousands, except per share data)
Year ended December 31, 1996 1995 1994 Net firearms sales .......................................... $ 148,829 $ 155,622 $ 180,079 Net castings sales .......................................... 74,466 36,847 16,358 - --------------------------------------------------------------------------------------------------- Total net sales ............................................. 223,295 192,469 196,437 Cost of products sold ....................................... 150,200 134,930 125,439 - --------------------------------------------------------------------------------------------------- Gross profit ................................................ 73,095 57,539 70,998 Expenses: Selling ................................................... 13,214 12,345 12,399 General and administrative ................................ 5,959 4,612 4,304 - --------------------------------------------------------------------------------------------------- 19,173 16,957 16,703 - --------------------------------------------------------------------------------------------------- 53,922 40,582 54,295 Other income-net, principally interest ...................... 2,913 3,264 2,697 - --------------------------------------------------------------------------------------------------- Income Before Income Taxes .................................. 56,835 43,846 56,992 Income taxes ................................................ 22,450 17,670 22,943 - --------------------------------------------------------------------------------------------------- Net Income .................................................. $ 34,385 $ 26,176 $ 34,049 =================================================================================================== Net Income Per Share ........................................ $ 1.28 $ 0.97 $ 1.27 =================================================================================================== Cash Dividends Per Share .................................... $ 0.80 $ 0.70 $ 0.60 ===================================================================================================
See accompanying notes Consolidated Statements of Stockholders' Equity (Dollars in thousands)
Additional Common Paid-In Retained Stock Capital Earnings - --------------------------------------------------------------------------------------------------- Balance at December 31, 1993 - Note 1 ....................... $ 26,905 $ 2,283 $ 79,201 Net income ................................................ 34,049 Cash dividends ............................................ (16,143) - --------------------------------------------------------------------------------------------------- Balance at December 31, 1994 ................................ 26,905 2,283 97,107 Net income ................................................ 26,176 Issuance of 6,000 shares of Common Stock .................. 6 97 (3) Cash dividends ............................................ (18,836) - --------------------------------------------------------------------------------------------------- Balance at December 31, 1995 ................................ 26,911 2,380 104,444 Net income ................................................ 34,385 Issuance of 6,000 shares of Common Stock .................... 6 134 (3) Cash dividends ............................................ (21,530) - --------------------------------------------------------------------------------------------------- Balance at December 31, 1996 ................................ $ 26,917 $ 2,514 $ 117,296 ===================================================================================================
See accompanying notes 14----- 9 Consolidated Statements of Cash Flows (In thousands)
Year ended December 31, 1996 1995 1994 Operating Activities Net income ................................................ $ 34,385 $ 26,176 $ 34,049 Adjustments to reconcile net income to cash provided by operating activities: Depreciation .......................................... 7,588 6,876 5,281 Issuance of Common Stock .............................. 137 100 -- Net provision for product safety modifications ........ (137) (109) (157) Provision for product liability claims, net of payments of $2,300, $3,269, and $2,564 ........... -- 731 1,436 Deferred income taxes ................................. (1,052) (960) (1,036) Changes in operating assets and liabilities: Trade receivables ................................... (1,210) (1,975) 1,374 Inventories ......................................... (12,776) (15,188) (5,757) Trade accounts payable and accrued expenses ......... 635 (2,086) 1,675 Prepaid expenses, other assets, and other liabilities (781) 1,095 1,913 Income taxes ........................................ (2,422) 2,276 (3,414) - --------------------------------------------------------------------------------------------------- Cash provided by operating activities ............. 24,367 16,936 35,364 Investing Activities Property, plant, and equipment additions .................. (7,625) (15,714) (12,434) Purchases of short-term investments ....................... (156,132) (158,953) (168,621) Proceeds from sales or maturities of short-term investments .................................. 168,957 174,126 161,883 Investment in joint venture ............................... (8,941) (1,645) -- - --------------------------------------------------------------------------------------------------- Cash used by investing activities ................. (3,741) (2,186) (19,172) Financing Activities Dividends paid ............................................ (21,530) (18,836) (16,143) - --------------------------------------------------------------------------------------------------- Cash used by financing activities ................. (21,530) (18,836) (16,143) - --------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents ............ (904) (4,086) 49 Cash and cash equivalents at beginning of year .............. 3,633 7,719 7,670 - --------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year .................... $ 2,729 $ 3,633 $ 7,719 ===================================================================================================
See accompanying notes. -----15 10 Notes to Consolidated Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES STOCK SPLIT Sturm, Ruger & Company, Inc. (the "Company") effected a two-for-one stock split, in the form of a 100% stock dividend, 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 dividend resulted in a retroactively applied transfer of $13,458,400 (par value of $1 per share) from retained earnings to Common Stock, which had the effect of decreasing retained earnings and increasing Common Stock. ORGANIZATION 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 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, of which the Company owns 50%, is accounted for using the equity method (See Note 3). All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION Revenue is recognized upon the shipment of products. CASH EQUIVALENTS The Company considers interest-bearing deposits with financial institutions with remaining maturities of three months or less at the time of acquisition to be cash equivalents. SHORT-TERM INVESTMENTS Short-term investments are recorded at cost plus accrued interest, which approximates market, and are principally United States Treasury Bills, all maturing within one year. The income from short-term investments is included in other income - net. The Company intends to hold these investments until maturity. INVENTORIES Inventories are stated at the lower of cost, principally determined by the last-in, first-out (LIFO) method, or market. If inventories had been valued using the first-in, first-out method, inventory values would have been higher by approximately $37.8 million and $33.1 million at December 31, 1996 and 1995, respectively. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated on the basis of cost. Depreciation is computed by the straight-line and declining balance methods. INCOME TAXES Income taxes are accounted for using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. Under the liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of the Company's assets and liabilities. PRODUCT LIABILITY The Company provides for product liability claims. The provision for product liability claims is charged to cost of products sold. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expenses for the years ended December 31, 1996, 1995, and 1994 were $3.2 million, $2.1 million, and $2.1 million, respectively. 16----- 11 Notes to Consolidated Financial Statements (continued) NET INCOME PER COMMON SHARE Net income per common share is based upon the weighted average number of shares of Common Stock outstanding during the year which was 26,913,300 in 1996, 26,906,936 in 1995, and 26,904,800 in 1994. Common Stock equivalents represent shares awarded, but not issued, pursuant to the Company's Stock Bonus Plan (See Note 5). Common Stock equivalents in 1996, 1995, and 1994 were immaterial. 2. INCOME TAXES The Federal and state income tax provision (benefit) consisted of the following (in thousands):
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ CURRENT DEFERRED Current Deferred Current Deferred - ------------------------------------------------------------------------------------------------------------------------------------ Federal ................ $ 19,036 $ (816) $ 15,292 $ (775) $ 19,485 $ (841) State .................. 4,466 (236) 3,338 (185) 4,494 (195) - ------------------------------------------------------------------------------------------------------------------------------------ $ 23,502 $ (1,052) $ 18,630 $ (960) $ 23,979 $ (1,036) ====================================================================================================================================
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Product liability ................................................................ $ 8,776 $ 8,887 Employee compensation ............................................................ 2,241 2,047 Product safety modifications ..................................................... 514 575 Allowances for doubtful accounts and discounts ................................... 1,016 741 Inventory ........................................................................ 414 1,113 Other ............................................................................ 3,930 2,186 - ------------------------------------------------------------------------------------------------------------------------------------ Total deferred tax assets .......................................................... 16,891 15,549 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax liabilities: Prepaid insurance ................................................................ 361 372 Depreciation ..................................................................... 2,343 2,065 Pension plans .................................................................... 1,566 1,543 - ------------------------------------------------------------------------------------------------------------------------------------ Total deferred tax liabilities ..................................................... 4,270 3,980 - ------------------------------------------------------------------------------------------------------------------------------------ Net deferred tax assets ............................................................ $12,621 $11,569 ====================================================================================================================================
The effective income tax rate varied from the statutory Federal income tax rate as follows:
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Statutory Federal income tax rate ........................................ 35.0% 35.0% 35.0% State income taxes, net of Federal tax benefit ........................... 4.8 4.7 5.0 Other items .............................................................. (.3) .6 .3 - ------------------------------------------------------------------------------------------------------------------------------------ Effective income tax rate ................................................ 39.5% 40.3% 40.3% ====================================================================================================================================
The Company made income tax payments of approximately $25.9 million, $16.4 million, and $27.4 million during 1996, 1995, and 1994, respectively. -----17 12 Notes to Consolidated Financial Statements (continued) 3. JOINT VENTURE In 1995, the Company entered into a joint venture agreement with Callaway Golf Company, Inc. ("Callaway Golf") to construct and operate a foundry for the production of golf club heads investment cast in titanium. The joint venture, named Antelope Hills, LLC ("Antelope Hills"), is owned 50% by the Company and 50% by Callaway Golf. The Company has been designated as the manager of the facility and is responsible for all daily activity and recordkeeping. Construction of Antelope Hills is substantially complete, and production is expected to commence in 1997. Assets and liabilities of Antelope Hills were $15.7 million and $ .1 million, respectively, at December 31, 1996. Antelope Hills incurred a net loss of $ .3 million in 1996, one-half of which has been charged to the Company's 1996 operations. The Company has the option of purchasing Callaway Golf's interest in Antelope Hills at a price equal to Callaway Golf's investment plus 10% per year. 4. PENSION PLANS The Company and its subsidiaries sponsor two defined benefit pension plans which cover substantially all hourly (Hourly Plan) and salaried (Salaried Plan) employees. A third defined benefit pension plan, the Supplemental Executive Retirement Plan (Supplemental Plan), is non-qualified and covers certain executive officers of the Company. Benefits under the Hourly Plan are based on the number of years of service. Benefits under the Salaried Plan are based on years of service, basic compensation during the last five years of employment, and Social Security "Covered Compensation". The Company's funding policy for the Hourly Plan and Salaried Plan is to contribute annually amounts sufficient to fund each plan's normal cost and provide for amortization of any unfunded prior service cost over a period of approximately twenty years. Benefits under the Supplemental Plan are based on years of service, compensation as defined, and certain offsets for benefits received under the Company's other pension plans and from Social Security. The Supplemental Plan is unfunded. The Company also sponsors a defined contribution plan (Profit Sharing Plan) which covers substantially all of its salaried employees and a non-qualified defined contribution plan (Supplemental Executive Profit Sharing Plan) which covers certain of its salaried employees. Contributions to these plans are determined annually by the Company's Board of Directors and, in the case of the Profit Sharing Plan, contributions cannot exceed the maximum amount deductible for Federal income tax purposes. A summary of the components of net periodic pension cost for the defined benefit pension plans and amounts charged to pension expense for the defined contribution plans follows (in thousands):
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Defined benefit plans: Service cost-benefits earned during the period ....................... $ 1,134 $ 817 $ 832 Interest cost on projected benefit obligation ........................ 1,747 1,472 1,278 Actual return on plan assets ......................................... (1,074) (3,249) 550 Net amortization and deferral ........................................ (534) 1,687 (2,478) - ------------------------------------------------------------------------------------------------------------------------------------ Net periodic pension cost of defined benefit plans ..................... 1,273 727 182 Profit Sharing Plan .................................................... 814 706 684 Supplemental Executive Profit Sharing Plan ............................. 360 285 211 - ------------------------------------------------------------------------------------------------------------------------------------ Net periodic pension cost .............................................. $ 2,447 $ 1,718 $ 1,077 ====================================================================================================================================
18----- 13 Notes to Consolidated Financial Statements (continued) The following table sets forth the funded status and amounts recognized in the consolidated balance sheets for the Company's defined benefit pension plans (in thousands):
December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS ASSETS BENEFITS - ------------------------------------------------------------------------------------------------------------------------------------ Actuarial present value of accumulated benefit obligation, including vested benefits of $23,158 in 1996 and $21,200 in 1995 .............................................................. $(18,088) $ (5,718) $(21,918) ==================================================================================================================================== Actuarial present value of projected benefit obligation for services rendered to date ..................................................... $(18,088) $ (7,693) $(23,611) Plans' assets (unallocated insurance contracts) at market value ................. 19,313 4,019 21,784 - ------------------------------------------------------------------------------------------------------------------------------------ Plans' assets in excess of (less than) projected benefit obligation ............. 1,225 (3,674) (1,827) Prior service cost not yet recognized in net periodic pension cost .............. 651 2,641 1,536 Unrecognized net gain from past experience, different from that assumed, and effects of changes in assumptions ........................... 2,372 48 3,640 Unrecognized net liability (asset) from date of adoption of SFAS No. 87 (January 1, 1987) ................................................. (796) 100 (818) - ------------------------------------------------------------------------------------------------------------------------------------ Prepaid (accrued) pension cost .................................................. $ 3,452 $ (885) $ 2,531 ====================================================================================================================================
Hourly Plan Salaried Plan Supplemental Plan - ------------------------------------------------------------------------------------------------------------------------------------ December 31, December 31, December 31, 1996 1995 1994 1996 1995 1994 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Summary of significant actuarial assumptions used: Weighted average discount rate ......................... 7.5% 7% 8% 7.5% 7% 8% 7.5% Rate of increase in compensation levels ................ N/A N/A N/A 5% 5% 5% 5% Expected long-term rate of return on assets ............ 9% 9% 9% 9% 9% 9% N/A
In 1996, the Company changed the weighted average discount rates which decreased the projected benefit obligation by approximately $1.9 million at December 31, 1996. 5. STOCK BONUS PLAN The Company's Stock Bonus Plan, as amended, covers its key employees excluding members of the Ruger family. Pursuant to the Plan, awards are made of Common Stock and a cash bonus approximating the estimated income tax on the awards. At December 31, 1996, 502,000 shares of Common Stock are reserved for future awards. 6. CONTINGENT LIABILITIES The Company is a defendant in approximately 15 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 number of lawsuits and claims that were tried, dismissed, settled or otherwise resolved and average settlement payments (excluding legal fees) were as follows: 1996-21 and $45,000, 1995-18 and $46,000, 1994-24 and $55,000. -----19 14 Notes to Consolidated Financial Statements (continued) 7. INDUSTRY SEGMENT DATA AND CONCENTRATIONS OF CREDIT RISK The Company's business segments are engaged in manufacturing firearms and ferrous and nonferrous investment castings. Corporate assets, consisting principally of cash and cash equivalents, short-term investments, and deferred taxes, have been segregated along with related income; however, general corporate expenses are allocated to the segments in relation to the size of their operations. The Company's manufacturing operations are located in the United States of America and export sales are not significant. Intersegment sales are accounted for at cost. The firearms segment's principal markets are sporting and law enforcement. Distribution is mainly through a select number of distributors primarily located throughout the United States. Sales of firearms to two distributors accounted for approximately 12% and 7% of 1996, 12% and 9% of 1995, and 15% and 8% of 1994 consolidated net sales, respectively. The castings segment's principal markets are sporting goods, commercial, and military. Sales are made direct to customers and through manufacturers' representatives. In 1996 and 1995, sales of castings to one customer accounted for approximately 27% and 12%, respectively, of consolidated net sales.
Year ended December 31, 1996 1995 1994 (in thousands) - -------------------------------------------------------------------------------- Net Sales Firearms ........................ $ 148,829 $ 155,622 $ 180,079 Castings Unaffiliated .................. 74,466 36,847 16,358 Intersegment .................. 21,128 30,956 33,468 - -------------------------------------------------------------------------------- 95,594 67,803 49,826 Eliminations .................... (21,128) (30,956) (33,468) - -------------------------------------------------------------------------------- $ 223,295 $ 192,469 $ 196,437 ================================================================================ Income Before Income Taxes Firearms ........................ $ 32,688 $ 34,778 $ 51,275 Castings ........................ 21,474 6,051 3,204 Corporate (principally interest income) .............. 2,673 3,017 2,513 - -------------------------------------------------------------------------------- $ 56,835 $ 43,846 $ 56,992 ================================================================================ Identifiable Assets Firearms ........................ $ 80,504 $ 80,006 $ 68,734 Castings ........................ 58,239 34,730 18,655 Corporate ....................... 51,147 63,816 82,103 - -------------------------------------------------------------------------------- $ 189,890 $ 178,552 $ 169,492 ================================================================================ Depreciation Firearms ........................ $ 4,550 $ 4,523 $ 3,782 Castings ........................ 3,038 2,353 1,499 - -------------------------------------------------------------------------------- $ 7,588 $ 6,876 $ 5,281 ================================================================================ Capital Expenditures Firearms ........................ $ 2,899 $ 7,245 $ 8,009 Castings ........................ 4,726 8,469 4,425 - -------------------------------------------------------------------------------- $ 7,625 $ 15,714 $ 12,434 ================================================================================
20----- 15 Notes to Consolidated Financial Statements (continued) The Company performs periodic credit evaluations of its distributors' and other customers' financial condition and generally does not require collateral. The Company had a concentration of trade receivables from five firearms distributors aggregating $10.0 million (ranging from $.9 million to $3.7 million) and $8.1 million (ranging from $.8 million to $2.5 million) as of December 31, 1996 and 1995, respectively. These distributors sell to numerous retailers and dealers in different regions of the country. The Company had a trade receivable with one castings segment customer of $5.5 million and $5.1 million as of December 31, 1996 and 1995, respectively. 8. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 1996 (in thousands, except per share data):
THREE MONTHS ENDED - -------------------------------------------------------------------------------- 3/31/96 6/30/96 9/30/96 12/31/96 - -------------------------------------------------------------------------------- NET SALES .................. $65,557 $65,926 $48,036 $43,776 GROSS PROFIT ............... 22,468 23,683 13,095 13,849 NET INCOME ................. 11,114 11,648 5,665 5,958 NET INCOME PER SHARE ....... .41 .43 .21 .22 Three Months Ended - -------------------------------------------------------------------------------- 3/31/95 6/30/95 9/30/95 12/31/95 - -------------------------------------------------------------------------------- Net sales .................. $50,303 $45,196 $42,086 $54,884 Gross profit ............... 17,627 14,106 7,500 18,306 Net income ................. 8,559 6,480 2,101 9,036 Net income per share ....... .32 .24 .08 .34
The sum of the quarters' net income per share may not equal the full year per share amounts due to rounding differences resulting from changes in the number of shares of Common Stock outstanding. The Company made certain adjustments in the fourth quarters of 1996 and 1995 resulting from changes in estimates that were material to the operating results of each quarter. These adjustments related primarily to inventory and increased net income in the fourth quarters of 1996 and 1995 by approximately $1.2 million or $.05 per share and $1.5 million or $.06 per share, respectively. -----21 16 Report of Independent Auditors [LOGO] ERNST & YOUNG LLP 1111 Summer Street Phone: 203 326 8200 Stamford, Connecticut 06905 Fax: 203 326 8228 Stockholders and Board of Directors Sturm, Ruger & Company, Inc. We have audited the accompanying consolidated balance sheets of Sturm, Ruger & Company, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sturm, Ruger & Company, Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ERNST & YOUNG LLP February 21, 1997 22----- 17 Stockholder Information COMMON STOCK DATA The Company's Common Stock is traded on the New York Stock Exchange under the symbol "RGR". At February 28, 1997 the Company had 1,916 stockholders of record. The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock as reported on the New York Stock Exchange and dividends paid on Common Stock. DIVIDENDS HIGH LOW PER SHARE - ----------------------------------------------------------------------- 1996: FIRST QUARTER $19.25 $13.81 $ .20 SECOND QUARTER 27.00 18.25 .20 THIRD QUARTER 24.88 16.63 .20 FOURTH QUARTER 20.38 16.50 .20 1995: First Quarter $17.25 $14.00 $.175 Second Quarter 16.31 13.50 .175 Third Quarter 17.81 15.38 .175 Fourth Quarter 15.63 12.94 .175 ITEMS OF INTEREST TO STOCKHOLDERS ANNUAL MEETING The Annual Meeting of Stockholders will be held on Tuesday, May 20, 1997 at the Fairfield County Hunt Club, Westport, Connecticut, at 10:30 a.m. PRINCIPAL BANKS Fleet Bank, Southport, Connecticut Lake Sunapee Savings Bank, Newport, New Hampshire Bank One, Arizona, NA, Prescott, Arizona INDEPENDENT AUDITORS Ernst & Young LLP, Stamford, Connecticut TRANSFER AGENT Harris Trust & Savings Bank, Chicago, Illinois FORM 10-K REPORT AVAILABLE A copy of the Sturm, Ruger & Company, Inc. Annual Report on Form 10-K filed with the Securities and Exchange Commission for 1996 can be obtained free of charge by writing to: Corporate Secretary Sturm, Ruger & Company, Inc. Lacey Place Southport, Connecticut 06490 CALL US AT 203-259-7843, OR FAX AT 203-254-2195. VISIT US ON THE INTERNET AT WWW.RUGER-FIREARMS.COM -----23 EX-23.1 4 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Sturm, Ruger & Company, Inc. of our report dated February 21, 1997, included in the 1996 Annual Report to Stockholders of Sturm, Ruger & Company, Inc. Our audits also included the consolidated financial statement schedule of Sturm, Ruger & Company, Inc. and Subsidiaries listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. S/ERNST & YOUNG LLP ERNST & YOUNG LLP Stamford, Connecticut February 21, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,729 30,652 23,003 1,929 55,068 119,162 118,497 74,330 189,890 23,945 0 0 0 26,917 119,810 189,890 223,295 223,295 150,200 19,173 0 18 0 56,835 22,450 34,385 0 0 0 34,385 1.28 1.28
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