EX-13.1 3 y95081exv13w1.txt PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 Sturm, Ruger & Company, Inc. 2003 Annual Report to Stockholders (Only those portions specifically incorporated by reference into the Sturm, Ruger & Company, Inc. 2003 Annual Report on Form 10-K) SELECTED FINANCIAL DATA (Dollars in thousands, except per share data) ================================================================================
December 31, ------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Net firearms sales .................... $ 130,558 $ 139,762 $ 147,622 $ 166,415 $ 188,564 Net castings sales .................... 17,359 21,825 26,708 36,239 53,100 ----------- ----------- ----------- ----------- ----------- Total net sales ....................... 147,917 161,587 174,330 202,654 241,664 =========== =========== =========== =========== =========== Cost of products sold ................. 113,189 125,376 134,449 144,503 170,650 Gross profit .......................... 34,728 36,211 39,881 58,151 71,014 Income before income taxes ............ 20,641 14,135 22,199 44,474 55,483 Income taxes .......................... 8,277 5,668 8,702 17,434 21,749 Net income ............................ 12,364 8,467 13,497 27,040 33,734 Basic and diluted earnings per share .. 0.46 0.31 0.50 1.00 1.25 Cash dividends per share .............. $ 0.80 $ 0.80 $ 0.80 $ 0.80 $ 0.80
December 31, ------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Working capital ....................... $ 102,715 $ 103,116 $ 118,760 $ 123,020 $ 118,593 Total assets .......................... 170,013 183,958 204,378 215,665 215,684 Total stockholders' equity ............ 133,640 137,983 164,340 172,358 166,826 Book value per share .................. $ 4.97 $ 5.13 $ 6.11 $ 6.40 $ 6.20 Return on stockholders' equity ........ 9.3% 6.1% 8.0% 15.9% 21.0% Current ratio ......................... 5.7 to 1 4.8 to 1 6.1 to 1 5.8 to 1 5.2 to 1 Common shares outstanding ............. 26,910,700 26,910,700 26,910,700 26,910,700 26,910,700 Number of stockholders of record ...... 2,036 2,026 2,064 2,011 2,046 Number of employees ................... 1,251 1,418 1,547 1,814 1,952
Selected Financial Data should be read in conjunction with the Consolidated Financial Statements and accompanying notes and Management's Discussion & Analysis of Financial Condition & Results of Operations. -3- Management's Discussion & Analysis of Financial Condition & Results of Operations COMPANY OVERVIEW Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the design, manufacture, and sale of firearms and precision investment castings. The Company's design and manufacturing operations are located in the United States. Substantially all sales are domestic. The Company is the only U.S. firearms manufacturer which offers products in all four industry product categories--rifles, shotguns, pistols, and revolvers. The Company's firearms are sold through a select number of independent wholesale distributors principally to the commercial sporting market. Investment castings manufactured are of titanium and steel alloys. Investment castings are sold either directly to or through manufacturers' representatives to companies in a wide variety of industries. Because many of its competitors are not subject to public filing requirements and industry-wide data is generally not available in a timely manner, the Company is unable to compare its performance to specific current industry trends. Instead, the Company measures itself against its own historical results. The Company does not consider its overall firearms business to be predictably seasonal; however, sales of certain models of firearms are usually lower in the third quarter of the year. RESULTS OF OPERATIONS Year ended December 31, 2003, as compared to year ended December 31, 2002 Consolidated net sales of $147.9 million were achieved by the Company in 2003 representing a decrease of $13.7 million or 8.5% from net sales of $161.6 million in 2002. Firearms segment net sales decreased by $9.2 million or 6.6% to $130.6 million in 2003 from $139.8 million in the prior year. Firearms unit shipments for 2003 decreased 2.4% from 2002, as shipments of all product families declined significantly in the first half of the year. Shipments during the latter half of 2003, especially in the fourth quarter, improved due in large part to the introduction of several new product offerings. Revolver shipments benefited from the popularity of the New Model Single Six revolver in the 17 HMR caliber and the 50th Anniversary Ruger New Model Single Six revolver. Pistol shipments reflected strong demand for the MK-4NRA, a 22 caliber pistol commemorating company founder, William B. Ruger, and rifle shipments benefited from the popularity of the Ruger 40th Anniversary 10/22 Carbine. However, a change in mix from higher priced products to lower priced products resulted in the further decline in sales versus unit shipments. In 2003, the Company instituted a sales incentive program for its distributors which allowed them to earn rebates of up to 1.5% if certain annual overall sales targets were achieved. This program replaced a similar sales incentive program in 2002. From May 1, 2003 to September 30, 2003, the Company offered a consumer-driven sales incentive program for certain centerfire pistols. From August 1, 2002 through November 30, 2002, the Company conducted a similar consumer-driven sales incentive program for certain hunting rifles and revolvers. Sales incentive rebates remained consistent as a percentage of sales in 2003 and 2002. Casting segment net sales decreased 20.5% to $17.4 million in 2003 from $21.8 million in 2002 as a result of lower unit volume. Shipments of titanium golf club heads to Karsten Manufacturing Corporation decreased $7.4 million in 2003 compared to 2002. There are no future shipments expected to Karsten Manufacturing Corporation. The Company continues to pursue other casting business opportunities. Consolidated cost of products sold for 2003 was $113.2 million compared to $125.4 million in 2002, representing a decrease of 9.7%. This decrease of $12.2 million was primarily attributable to decreased sales in both the firearms and investment castings segments and decreased product liability expenses, partially offset by a charge related to certain obsolete firearms inventory in 2003. Gross profit as a percentage of net sales increased to 23.5% in 2003 from 22.4% in 2002. This improvement is due to improved margins in the castings segment compared to 2002 and decreased product liability costs, partially offset by decreased sales in both segments, increased workers' compensation expenses due to increased costs per claim, and an unfavorable adjustment in the firearms segment for a charge related to certain obsolete firearms inventory in 2003. Selling, general and administrative expenses increased 1.7% to $21.0 million in 2003 from $20.7 million in 2002 due primarily to royalties paid to the William B. Ruger Endowment of the NRA Foundation related to shipments of the MK4-NRA commemorative pistol, as well as increased national advertising expense. In 2002, the Company recognized asset impairment charges of $3.3 million related to certain assets in the investment castings segment. Total other income increased from $1.9 million in 2002 to $6.9 million in 2003 primarily due to the pretax gain of $5.9 million from the sale of certain non-manufacturing real estate in Arizona, known as the Single Six Ranch. The Company's earnings on short-term investments declined in 2003 as a result of declining interest rates. -4- The effective income tax rate of 40.1% remained consistent in 2003 and 2002. As a result of the foregoing factors, consolidated net income in 2003 increased to $12.4 million from $8.5 million in 2002, representing an increase of $3.9 million or 46.0%. RESULTS OF OPERATIONS Year ended December 31, 2002, as compared to year ended December 31, 2001 Consolidated net sales of $161.6 million were achieved by the Company in 2002 representing a decrease of $12.7 million or 7.3% from net sales of $174.3 million in 2001. Firearms segment net sales decreased by $7.8 million or 5.3% to $139.8 million in 2002 from $147.6 million in the prior year. Firearms unit shipments for 2002 decreased 9.1% from 2001, as shipments for all product families declined significantly in the latter half of the year. In 2002, the Company instituted a sales incentive program for its distributors which allowed them to earn rebates of up to 1.5% if certain annual overall sales targets were achieved. This program replaced a similar sales incentive program in 2001 which allowed rebates of up to 5%. From August 1, 2002 to November 30, 2002, a consumer-driven sales incentive program for certain hunting rifles and revolvers was in effect. The greater discounts offered in 2001 resulted in the further decline in unit shipments versus sales. Casting segment net sales decreased 18.3% to $21.8 million in 2002 from $26.7 million in 2001 as a result of lower unit volume. Shipments of titanium golf club heads to Karsten Manufacturing Corporation decreased $3.8 million in 2002 compared to 2001. The downturn in castings sales was due to an apparent weakened demand for both steel and titanium castings. Consolidated cost of products sold for 2002 was $125.4 million compared to $134.4 million in 2001, representing a decrease of 6.7%. This decrease of $9.0 million was primarily attributable to decreased sales in both the firearms and investment castings segments, partially offset by increased product liability expenses. Gross profit as a percentage of net sales decreased to 22.4% in 2002 from 22.9% in 2001. This erosion was due to decreased sales in 2002, partially offset by the reversal of an overaccrual related to a pistol rebate program that ended December 31, 2001. Selling, general and administrative expenses decreased 1.0% to $20.7 million in 2002 from $20.9 million in 2001. In 2002, the Company recognized asset impairment charges of $3.3 million related to certain assets in the investment castings segment. Other income-net decreased from $3.2 million in 2001 to $1.9 million in 2002 primarily reflecting decreased earnings on short-term investments as a result of declining interest rates and reduced principal. The effective income tax rate of 40.1% in 2002 increased slightly from the income tax rate of 39.2% in 2001. As a result of the foregoing factors, consolidated net income in 2002 decreased to $8.5 million from $13.5 million in 2001, representing a decrease of $5.0 million or 37.3%. FINANCIAL CONDITION Operations At December 31, 2003, the Company had cash, cash equivalents and short-term investments of $53.4 million, working capital of $102.7 million and a current ratio of 5.7 to 1. Cash provided by operating activities was $14.7 million, $9.9 million, and $23.0 million in 2003, 2002, and 2001, respectively. The increase in cash provided in 2003 is principally the result of a reduction in prepaid and other assets in 2003 of $1.7 million compared with an increase in prepaid and other assets of $6.5 million in 2002, and a decrease in inventories of $3.1 million in 2003 compared with an increase of $1.8 million in 2002. The fluctuations in prepaid and other assets is attributable to the utilization in 2003 of a prepaid income tax asset at December 31, 2002, and the decrease in inventories in 2003 resulted from a planned reduction in firearms production levels. The Company follows a common industry practice of offering a "dating plan" to its firearms customers on selected products, which allows the customer to buy the products commencing in December, the start of the Company's marketing year, and pay for them on extended terms. Discounts are offered for early payment. The dating plan provides a revolving payment plan under which payments for all shipments made during the period December through February must be made by April 30. Shipments made in subsequent months must be paid for within a maximum of 120 days. Dating plan receivable balances were $8.8 million and $9.0 million at December 31, 2003 and 2002, respectively. 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 purchases its various raw materials from a number of suppliers. There is, however, a limited supply of these materials in the marketplace at any given time which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory to provide ample time to locate and obtain additional items at a reasonable cost without interruption of its manufacturing operations. However, if market conditions -5- Management's Discussion & Analysis of Financial Condition & Results of Operations (Continued) result in a significant prolonged inflation of certain prices, the Company's results could be adversely affected. In conjunction with the sale of its Uni-Cast division in June 2000, the Company extended credit to the purchaser in the form of a note and a line of credit, both of which are collateralized by certain of the assets of Uni-Cast. In July 2002, the Company established an additional collateralized line of credit for the purchaser and, as of December 31, 2003, the total amount due from the purchaser was $2.0 million. The Company purchases aluminum castings used in the manufacture of certain models of pistols exclusively from Uni-Cast. Investing and Financing Capital expenditures during the past three years averaged $3.6 million per year. In 2004, the Company expects to spend approximately $8 million on capital expenditures to continue to upgrade and modernize equipment at each of its manufacturing facilities. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash and short-term investments. In 2003, the Company paid dividends of $21.5 million. This amount reflects the regular quarterly dividend of $.20 per share paid in March, June, September, and December 2003. On January 22, 2004, the Company declared a regular quarterly dividend of $.20 per share payable on March 15, 2004. Future dividends depend on many factors, including internal estimates of future performance, then-current cash and short-term investments, and the Company's need for funds. Historically, the Company has not required external financing. Based on its cash flow and unencumbered assets, the Company believes it has the ability to raise substantial amounts of short-term or long-term debt. The Company does not anticipate any need for external financing in 2004. FIREARMS LEGISLATION The sale, purchase, ownership, and use of firearms are subject to thousands of federal, state, and local governmental regulations. The basic federal laws are the National Firearms Act, the Federal Firearms Act, and the Gun Control Act of 1968. These laws generally prohibit the private ownership of fully automatic weapons and place certain restrictions on the interstate sale of firearms unless certain licenses are obtained. The Company does not manufacture fully automatic weapons, other than for the law enforcement market, and holds all necessary licenses under these federal laws. From time to time, congressional committees review proposed bills relating to the regulation of firearms. These proposed bills generally seek either to restrict or ban the sale and, in some cases, the ownership of various types of firearms. Several states currently have laws in effect similar to the aforementioned legislation. Until November 30, 1998, the "Brady Law" mandated a nationwide five-day waiting period and background check prior to the purchase of a handgun. As of November 30, 1998, the National Instant Check System, which applies to both handguns and long guns, replaced the five-day waiting period. The Company believes that the "Brady Law" has not had a significant effect on the Company's sales of firearms, nor does it anticipate any impact on sales in the future. The "Crime Bill" took effect on September 13, 1994, but none of the Company's products were banned as so-called "assault weapons." To the contrary, all the Company's then-manufactured commercially-sold long guns were exempted by name as "legitimate sporting firearms." The Company remains strongly opposed to laws which would restrict the rights of law-abiding citizens to lawfully acquire firearms. The Company believes that the lawful private ownership of firearms is guaranteed by the Second Amendment to the United States Constitution and that the widespread private ownership of firearms in the United States will continue. However, there can be no assurance that the regulation of firearms will not become more restrictive in the future and that any such restriction would not have a material adverse effect on the business of the Company. FIREARMS LITIGATION The Company is a defendant in numerous lawsuits involving its products and is aware of certain other such claims. The Company has expended significant amounts of financial resources and management time in connection with product liability litigation. Management believes that, in every case, the allegations are unfounded, and that the shootings and any results therefrom were due to negligence or misuse of the firearms by third-parties or the claimant, and that there should be no recovery against the Company. Defenses further exist to the suits brought by cities, municipalities, counties, and a state attorney general based, among other reasons, on established state law precluding recovery by municipalities for essential government services, the remoteness of the claims, the types of damages sought to be recovered, and limitations on the extraterritorial authority which may be exerted by a city, municipality, county or state under state and federal law, including State and Federal Constitutions. The only case against the Company alleging liability for criminal shootings by third-parties to ever be permitted to go before a constitutional jury, Hamilton, et al. v. -6- Accu-tek, et al., resulted in a defense verdict in favor of the Company on February 11, 1999. In that case, numerous firearms manufacturers and distributors had been sued, alleging damages as a result of alleged negligent sales practices and "industry-wide" liability. The Company and its marketing and distribution practices were exonerated from any claims of negligence in each of the seven cases decided by the jury. In subsequent proceedings involving other defendants, the New York Court of Appeals as a matter of law confirmed that 1) no legal duty existed under the circumstances to prevent or investigate criminal misuses of a manufacturer's lawfully made products; and 2) liability of firearms manufacturers could not be apportioned under a market share theory. More recently, on October 21, 2003 the New York Court of Appeals declined to hear the appeal from the decision of the New York Supreme Court, Appellate Division, affirming the dismissal of New York Attorney General Eliot Spitzer's public nuisance suit against the Company and other manufacturers and distributors of firearms. In its decision, the Appellate Division relied heavily on the Hamilton decision in concluding that it was "legally inappropriate," "impractical," "unrealistic," and "unfair" to attempt to hold firearms manufacturers responsible under theories of public nuisance for the criminal acts of others. Of the lawsuits brought by municipalities or a state Attorney General, fifteen have been dismissed with no appeal pending. Twelve of those cases are concluded: Atlanta - dismissal by intermediate appellate court, no further appeal; Bridgeport - dismissal affirmed by Connecticut Supreme Court; County of Camden - dismissal affirmed by U.S. Third Circuit Court of Appeals; Miami - dismissal affirmed by intermediate appellate court, Florida Supreme Court declined review; New Orleans - dismissed by Louisiana Supreme Court, United States Supreme Court declined review; Philadelphia - U.S. Third Circuit Court of Appeals affirmed dismissal, no further appeal; Wilmington - dismissed by trial court, no appeal; Boston - voluntary dismissal with prejudice by the City at the close of fact discovery; Cincinnati - voluntarily withdrawn after a unanimous vote of the city council; Detroit - dismissed by Michigan Court of Appeals, no appeal; Wayne County - dismissed by Michigan Court of Appeals, no appeal; and New York State - Court of Appeals denied plaintiff's petition for leave to appeal the Intermediate Appellate Court's dismissal, no further appeal. Camden City was dismissed on July 7, 2003 due to the bankruptcy of one of the parties. No further action has been taken by the city. On November 13, 2003, plaintiffs in the Jersey City case voluntarily dismissed the matter. It is unknown whether plaintiffs will re-file. On December 5, 2003, plaintiffs in the Newark case also voluntarily dismissed the matter. It is unknown whether plaintiffs will re-file. Washington, D.C. is on appeal from its complete dismissal. On March 7, 2003, the consolidated California Cities case involving nine cities and three counties was dismissed as to all manufacturer defendants, and plaintiffs appealed on June 9, 2003. The Chicago dismissal was reversed in part on appeal, and an appeal to the Illinois Supreme Court is pending. On October 20, 2003, the St. Louis Circuit Court dismissed the St. Louis case, and the city has filed a notice of appeal. The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery proceedings on December 23, 2003. Cleveland and New York City are open cases and could proceed to trial. In the NAACP case, on May 14, 2003, an advisory jury returned a verdict rejecting the NAACP's claims. On July 21, 2003, Judge Jack B. Weinstein entered an order dismissing the NAACP law- suit, but this order contained lengthy dicta which defendants believe are contrary to law and fact. Appeals by defendants are pending. Legislation has been passed in approximately 34 states precluding suits of the type brought by the municipalities mentioned above, and similar federal legislation has been introduced in the U.S. Congress. It passed the House by a 2-to-1 bipartisan majority and has over 54 co-sponsors in the Senate. It may be considered by the Senate during 2004. OTHER OPERATIONAL MATTERS In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable environmental regulations and the outcome of such proceedings and orders will not have a material adverse effect on its business. The valuation of the future defined benefit pension obligations at December 31, 2003 indicated that these plans were underfunded. While this estimation has no bearing on the actual funding of the pension plans, it results in the recognition of a cumulative other comprehensive loss of $8.6 million at December 31, 2003 from $8.1 million at December 31, 2002. The Company expects to realize its deferred tax assets through tax deductions against future taxable income or carry back against taxes previously paid. -7- Management's Discussion & Analysis of Financial Condition & Results of Operations (Continued) Inflation's effect on the Company's operations is most immediately felt in cost of products sold because the Company values inventory on the LIFO basis. Generally under this method, the cost of products sold reported in the financial statements approximates current costs, and thus, reduces distortion in reported income. 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. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance with accounting principles generally accepted in the United States, requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses recognized and incurred during the reporting period then ended. We base our estimates on prior experience, facts and circumstances and other assumptions, including those reviewed with actuarial consultants and independent counsel, when applicable, that we believe to be reasonable. However, actual results may differ from these estimates. We believe the determination of our product liability accrual is a critical accounting policy. The Company's management reviews every lawsuit and claim at the outset and is in contact with independent and corporate counsel on an ongoing basis. The provision for product liability claims is based upon many factors, which vary for each case. These factors include the type of claim, nature and extent of injuries, historical settlement ranges, jurisdiction where filed, and advice of counsel. An accrual is established for each lawsuit and claim, when appropriate, based on the nature of each such lawsuit or claim. Amounts are charged to product liability expense in the period in which the Company becomes aware that a claim or, in some instances a threat of claim, has been made when potential losses or costs of defense can be reasonably estimated. Such amounts are determined based on the Company's experience in defending similar claims. Occasionally, charges are made for claims made in prior periods because the cumulative actual costs incurred for that claim, or reasonably expected to be incurred in the future, exceed amounts already provided. Likewise credits may be taken if cumulative actual costs incurred for that claim, or reasonably expected to be incurred in the future, are less than amounts previously provided. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with independent and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company's financial results for a particular period. RECENT ACCOUNTING PRONOUNCEMENTS The Company is not aware of any recent accounting pronouncements that are expected to have a material effect on its financial position or financial results. FORWARD-LOOKING STATEMENTS AND PROJECTIONS The Company may, from time to time, make forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company including lawsuits filed by mayors, a state attorney general and other governmental entities and membership organizations, and the impact of future firearms control and environmental legislation, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events. -8- Consolidated Balance Sheets (Dollars in thousands, except per share data)
December 31, 2003 2002 ASSETS Current Assets Cash and cash equivalents .................................. $ 3,446 $ 3,598 Short-term investments ..................................... 50,026 49,776 Trade receivables, less allowances for doubtful accounts ($441 and $449) and discounts ($772 and $783) ............ 13,284 14,026 Inventories: Finished products ........................................ 15,243 16,999 Materials and products in process ........................ 33,286 34,629 ---------- ---------- 48,529 51,628 Deferred income taxes ...................................... 7,284 6,985 Prepaid expenses and other current assets .................. 1,985 4,536 ---------- ---------- Total Current Assets ....................................... 124,554 130,549 Property, Plant, and Equipment Land and improvements .................................... 1,801 1,797 Buildings and improvements ............................... 32,094 30,824 Machinery and equipment .................................. 94,787 94,841 Dies and tools ........................................... 27,007 26,270 ---------- ---------- 155,689 153,732 Allowances for depreciation .............................. (128,525) (124,538) ---------- ---------- 27,164 29,194 Deferred income taxes ...................................... 8,248 9,594 Other assets ............................................... 10,047 14,621 ---------- ---------- Total Assets ............................................... $ 170,013 $ 183,958 ========== ==========
See accompanying notes to consolidated financial statements. -12-
December 31, 2003 2002 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable and accrued expenses ................ $ 4,386 $ 5,080 Product liability .......................................... 4,000 4,000 Employee compensation and benefits ......................... 6,177 7,324 Workers' compensation ...................................... 6,057 4,765 Dividends payable .......................................... -- 5,382 Income taxes ............................................... 1,219 882 ---------- ---------- Total Current Liabilities .................................. 21,839 27,433 Accrued pension liability .................................. 4,729 6,423 Deferred income taxes ...................................... 7,140 5,886 Product liability .......................................... 2,665 6,233 Contingent liabilities(Note 5) ............................. -- -- Stockholders' Equity Common stock, non-voting, par value $1: Authorized shares - 50,000; none issued ................... -- -- Common stock, par value $1: Authorized shares - 40,000,000 Issued and outstanding shares - 26,910,700 ................ 26,911 26,911 Additional paid-in capital ................................. 2,508 2,508 Retained earnings .......................................... 112,866 116,649 Accumulated other comprehensive income (loss) .............. (8,645) (8,085) ---------- ---------- Total Stockholders' Equity ................................. 133,640 137,983 ---------- ---------- Total Liabilities and Stockholders' Equity ................. $ 170,013 $ 183,958 ========== ==========
-13- Consolidated Statements of Income (In thousands, except per share data)
Year ended December 31, 2003 2002 2001 Net firearms sales ............................... $ 130,558 $ 139,762 $ 147,622 Net castings sales ............................... 17,359 21,825 26,708 ---------- ---------- ---------- Total net sales .................................. 147,917 161,587 174,330 Cost of products sold ............................ 113,189 125,376 134,449 ---------- ---------- ---------- Gross profit ..................................... 34,728 36,211 39,881 Expenses: Selling ......................................... 15,189 14,777 14,473 General and administrative ...................... 5,827 5,885 6,392 Impairment of long-lived assets ................. -- 3,311 -- ---------- ---------- ---------- 21,016 23,973 20,865 ---------- ---------- ---------- Operating profit ................................. 13,712 12,238 19,016 Gain on sale of real estate ...................... 5,922 -- -- Other income-net ................................. 1,007 1,897 3,183 ---------- ---------- ---------- Total other income ............................... 6,929 1,897 3,183 ---------- ---------- ---------- Income before income taxes ....................... 20,641 14,135 22,199 Income taxes ..................................... 8,277 5,668 8,702 ---------- ---------- ---------- Net Income ....................................... $ 12,364 $ 8,467 $ 13,497 ========== ========== ========== Basic and Diluted Earnings Per Share ............. $ 0.46 $ 0.31 $ 0.50 ========== ========== ========== Cash Dividends Per Share ......................... $ 0.80 $ 0.80 $ 0.80 ========== ========== ==========
See accompanying notes to consolidated financial statements. Consolidated Statements of Stockholders' Equity (Dollars in thousands)
Accumulated Additional Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income (loss) Total ---------- ---------- ---------- ------------- ---------- Balance at December 31, 2000 ..................... $ 26,911 $ 2,434 $ 143,125 $ (112) $ 172,358 Net income ..................................... 13,497 13,497 Additional minimum pension liability, net of deferred taxes of $29 ................. (44) (44) ---------- Comprehensive income ........................... 13,453 Stock options compensation ..................... 58 58 Cash dividends declared and paid ............... (21,529) (21,529) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2001 ..................... 26,911 2,492 135,093 (156) 164,340 Net income ..................................... 8,467 8,467 Additional minimum pension liability, net of deferred taxes of $5,287 .............. (7,929) (7,929) ---------- Comprehensive income ........................... 538 ---------- Stock options compensation ..................... 16 16 Cash dividends declared and paid ............... (21,529) (21,529) Unpaid dividends declared ...................... (5,382) (5,382) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2002 ..................... 26,911 2,508 116,649 (8,085) 137,983 Net income ..................................... 12,364 12,364 Additional minimum pension liability, net of deferred taxes of $373 ................ (560) (560) ---------- Comprehensive income ............................ 11,804 ---------- Cash dividends declared and paid ................ (16,147) (16,147) ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 2003 ..................... $ 26,911 $ 2,508 $ 112,866 $ (8,645) $ 133,640 ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. -14- Consolidated Statements of Cash Flows (In thousands)
Year ended December 31, 2003 2002 2001 OPERATING ACTIVITIES Net income .................................................... $ 12,364 $ 8,467 $ 13,497 Adjustments to reconcile net income to cash provided by operating activities: Depreciation .............................................. 5,923 7,490 8,151 Impairment of long-lived assets - ......................... -- 3,311 -- Gain on sale of real estate ............................... (5,922) (209) -- Deferred income taxes ..................................... 2,674 1,533 1,302 Changes in operating assets and liabilities: Trade receivables ....................................... 742 1,095 (767) Inventories ............................................. 3,099 (1,835) 1,571 Trade accounts payable and accrued expenses ............. (549) (1,813) 1,038 Product liability ....................................... (3,568) (2,229) (3,846) Prepaid expenses, other assets, and other liabilities ... (386) (6,048) 2,843 Income taxes ............................................ 337 178 (808) ---------- ---------- ---------- Cash provided by operating activities ..................... 14,714 9,940 22,981 INVESTING ACTIVITIES Property, plant, and equipment additions (3,996) (3,155) (3,605) Purchases of short-term investments ........................... (148,620) (145,392) (165,183) Proceeds from sales or maturities of short-term investments ...................................... 148,370 159,574 167,101 Net proceeds from sale of real estate ......................... 10,909 322 -- ---------- ---------- ---------- Cash provided (used) by investing activities .............. 6,663 11,349 (1,687) FINANCING ACTIVITIES Dividends paid ................................................ (21,529) (21,529) (21,529) ---------- ---------- ---------- Cash used by financing activities ......................... (21,529) (21,529) (21,529) ---------- ---------- ---------- Decrease in cash and cash equivalents ........................... (152) (240) (235) Cash and cash equivalents at beginning of year .................. 3,598 3,838 4,073 ---------- ---------- ---------- Cash and Cash Equivalents at End of Year ........................ $ 3,446 $ 3,598 $ 3,838 ========== ========== ==========
See accompanying notes to consolidated financial statements. -15- Notes to Consolidated Financial Statements 1. Significant Accounting Policies ORGANIZATION Sturm, Ruger & Company, Inc. (the "Company") is principally engaged in the design, manufacture, and sale of firearms and precision 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 independent wholesale distributors to the sporting and law enforcement markets. Investment castings are sold either directly to or through manufacturers' representatives to companies in a wide variety of industries. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year balances may have been reclassified to conform with current year presentation. REVENUE RECOGNITION Revenue is recognized, net of any estimated discounts, sales incentives, or rebates, 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 instruments, 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 $49.4 million and $47.2 million at December 31, 2003 and 2002, respectively. During 2003, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases, the effect of which decreased costs of products sold by approximately $0.2 million. 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 predominately over 15, 10, and 3 years for buildings, machinery and equipment, and tools and dies, respectively. In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which requires the use of a specific accounting model to determine the valuation of long-lived assets. Long-lived assets are reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. In performing this review, the carrying value of the assets is compared to the projected undiscounted cash flows to be generated from the assets. If the sum of the undiscounted expected future cash flows is less than the carrying value of the assets, the assets are considered to be impaired. Impairment losses are measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. When fair value estimates are not available, the Company estimates fair value using the estimated future cash flows discounted at a rate commensurate with the risks associated with the recovery of the assets. The Company adopted SFAS No. 144 on January 1, 2002. INCOME TAXES Income taxes are accounted for using the asset and liability method in accordance with SFAS No. 109. Under this 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. -16- PRODUCT LIABILITY The Company provides for product liability claims including estimated legal costs to be incurred defending such 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, 2003, 2002, and 2001 were $2.3 million, $2.2 million, and $2.1 million, respectively. SHIPPING COSTS Costs incurred related to the shipment of products are included in selling expense. Such costs totaled $1.7 million, $1.6 million, and $1.6 million in 2003, 2002, and 2001, respectively. STOCK OPTIONS The Company accounts for employee stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." Had compensation expense for the Plans been determined in accordance with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):
2003 2002 2001 ---------- ---------- ---------- Net Income As reported ........................................... $ 12,364 $ 8,467 $ 13,497 Add: Recognized stock-based employee compensation, net of tax ............................................ -- 10 35 Deduct: Employee compensation expense determined under fair value method, net tax ............................ (387) (387) (366) ---------- ---------- ---------- Pro forma ............................................. $ 11,977 $ 8,090 $ 13,166 ========== ========== ========== Earnings per share (basic and diluted): As reported ........................................... $ 0.46 $ 0.31 $ 0.50 Pro forma ............................................. $ 0.44 $ 0.30 $ 0.49 ========== ========== ==========
EARNINGS PER SHARE Basic earnings per share is based upon the weighted-average number of shares of Common Stock outstanding during the year, which was 26,910,700 in 2003, 2002, and 2001. Diluted earnings per share reflect the impact of options outstanding using the treasury stock method. This results in diluted weighted-average shares outstanding of 26,919,400 in 2003, 27,002,200 in 2002, and 26,922,800 in 2001. RECENT ACCOUNTING PRONOUNCEMENTS The Company is not aware of any recent accounting pronouncements that are expected to have a material effect on its financial position or financial results. 2. INCOME TAXES The Federal and state income tax provision consisted of the following (in thousands):
Year ended December 31, 2003 2002 2001 ------------------------- ------------------------- ------------------------- CURRENT DEFERRED Current Deferred Current Deferred ---------- ---------- ---------- ---------- ---------- ---------- Federal ............ $ 4,286 $ 2,286 $ 3,190 $ 1,303 $ 6,009 $ 1,072 State .............. 1,317 388 945 230 1,391 230 ---------- ---------- ---------- ---------- ---------- ---------- $ 5,603 $ 2,674 $ 4,135 $ 1,533 $ 7,400 $ 1,302 ========== ========== ========== ========== ========== ==========
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): -17- Notes to Consolidated Financial Statements (Continued)
December 31, 2003 2002 ------------ ---------- ---------- Deferred tax assets: Product liability ........................................ $ 2,673 $ 4,103 Employee compensation and benefits ....................... 4,025 3,553 Allowances for doubtful accounts and discounts ........... 677 887 Inventories .............................................. 1,248 1,109 Additional minimum pension liability ..................... 5,764 5,391 Other .................................................... 1,145 1,536 ---------- ---------- Total deferred tax assets .................................. 15,532 16,579 ---------- ---------- Deferred tax liabilities: Depreciation ............................................. 1,416 1,428 Pension plans ............................................ 5,724 4,458 ---------- ---------- Total deferred tax liabilities ............................. 7,140 5,886 ---------- ---------- Net deferred tax assets .................................... $ 8,392 $ 10,693 ========== ==========
In accordance with the provisions of SFAS No. 87, "Employers' Accounting for Pension Plan Costs," changes in deferred tax assets relating to the additional minimum pension liability are not charged to expense and are therefore not included in the deferred tax provision, instead they are charged to other comprehensive income. The effective income tax rate varied from the statutory Federal income tax rate as follows:
Year ended December 31, 2003 2002 2001 ----------------------- ---- ---- ---- Statutory Federal income tax rate ................ 35.0% 35.0% 35.0% State income taxes, net of Federal tax benefit ... 5.4 5.4 4.7 Other items ...................................... (0.3) (0.3) (0.5) ---- ---- ---- Effective income tax rate ........................ 40.1% 40.1% 39.2% ==== ==== ====
The Company made income tax payments of approximately $2.8 million, $6.4 million, and $4.7 million during 2003, 2002, and 2001, respectively. The Company expects to realize its deferred tax assets through tax deductions against future taxable income or carry back against taxes previously paid. 3. PENSION PLANS The Company and its subsidiaries sponsor two defined benefit pension plans which cover substantially all employees. A third defined benefit pension plan is non-qualified and covers certain executive officers of the Company. The cost of these defined benefit plans and the balances of plan assets and obligations are shown below (in thousands).
Change in Benefit Obligation 2003 2002 ---------------------------- ---------- ---------- Benefit obligation at January 1 .................................... $ 47,788 $ 41,370 Service cost ..................................... 1,507 1,414 Interest cost .................................... 3,011 2,879 Actuarial loss ................................... 3,033 3,807 Benefits paid .................................... (1,741) (1,682) ---------- ---------- Benefit obligation at December 31 .................................. 53,598 47,788 ---------- ---------- Change in Plan Assets --------------------- ---------- ---------- Fair value of plan assets at January 1 .................................... 38,806 36,723 Actual return on plan assets ..................... 4,549 (721) Employer contributions ........................... 4,826 4,486 Benefits paid .................................... (1,741) (1,682) ---------- ---------- Fair value of plan assets at December 31 .................................. 46,440 38,806 ---------- ---------- Funded status .................................... (7,158) (8,982) Unrecognized net actuarial loss .................. 16,679 15,734 Unrecognized prior service cost .................................... 2,063 2,629 Unrecognized transition obligation ...................................... 22 33 ---------- ---------- Net amount recognized ............................ $ 11,606 $ 9,414 ========== ==========
Weighted Average Assumptions for the year ended December 31, 2003 2002 -------------------------------- ---- ---- Discount rate .................................... 6.5% 7.0% Expected long-term return on plan assets ..................................... 8.0% 8.0% Rate of compensation increases ................... 5.0% 5.0% ---- ----
Components of Net Periodic Pension Cost -------------------------- ---------- ---------- Service cost ..................................... $ 1,507 $ 1,414 Interest cost .................................... 3,011 2,879 Expected return on assets ....................................... (3,231) (3,344) Amortization of unrecognized transition asset ................................ 11 (121) Recognized gains ................................. 770 329 Prior service cost recognized .................... 566 600 ---------- ---------- Net periodic pension cost ........................ $ 2,634 $ 1,757 ========== ==========
-18-
Amounts Recognized on the Balance Sheet 2003 2002 ------------------------- ---------- ---------- Accrued benefit liability ............................. $ (4,729) $ (6,423) Intangible asset ...................................... 1,926 2,361 Accumulated other comprehensive income ................................. 8,645 8,085 Deferred tax asset .................................... 5,764 5,391 ---------- ---------- $ 11,606 $ 9,414 ========== ==========
Weighted Average Assumptions as of December 31, ------------------------------ ---------- ---------- Discount rate ......................................... 6.00% 6.50% Rate of compensation increases ........................ 5.00% 5.00% ========== ==========
Information for Pension Plans with an Accumulated Benefit Obligation in excess of plan assets (in millions) 2003 2002 ------------------------------------- ---------- ---------- Projected benefit obligation .......................... $ 53,598 $ 47,788 Accumulated benefit obligation ........................ 51,169 45,229 Fair value of plan assets ............................. $ 46,440 $ 38,806 ---------- ----------
Pension Weighted Average Asset Allocations as of December 31, ------------------------------- ---------- ---------- Debt securities 70% 68% Equity securities ..................................... 27% 28% Money market funds .................................... 3% 4% ---------- ---------- 100% 100% ========== ==========
The accumulated benefit obligation for all the defined benefit pension plans was $51.2 million and $45.2 million as of December 31, 2003 and 2002, respectively. Intangible assets are included in other assets in the consolidated balance sheet. The measurement dates of the assets and liabilities of all plans presented for 2003 and 2002 were December 31, 2003 and December 31, 2002, respectively. The Company expects to contribute $2.5 million in the form of cash payments to its pension plans in 2004. None of this contribution is required by funding regulations or laws. The investment objective is to produce income and long-term appreciation through a target asset allocation of 75% debt securities and other fixed income investments including cash and short-term instruments, and 25% of equity investments, to provide for the current and future benefit payments of the plans. The pension plans are not invested in the common stock of the Company. The Company determines the expected return on plan assets based on the target asset allocations. In addition, the historical returns of the plan assets are also considered in arriving at the expected rate of return. The Company also sponsors two defined contribution plans which cover substantially all of its hourly and salaried employees and a non-qualified defined contribution plan which covers certain of its salaried employees. Expenses related to the defined contribution plans were $1.5 million, $1.6 million, and $1.5 million in 2003, 2002, and 2001, respectively. In accordance with SFAS No. 87, "Employers' Accounting for Pension Costs," the Company recorded an additional minimum pension liability which decreased comprehensive income by $0.6 million, $7.9 million, and $44,000 in 2003, 2002, and 2001, respectively. 4. STOCK INCENTIVE AND BONUS PLANS In 1998, the Company adopted, and in May 1999 the shareholders approved, the 1998 Stock Incentive Plan (the "1998 Plan") under which employees may be granted options to purchase shares of the Company's Common Stock and stock appreciation rights. The Company has reserved 2,000,000 shares for issuance under the 1998 Plan. These options have an exercise price equal to the fair market value of the shares of the Company at the date of grant, become vested ratably over five years, and expire ten years from the date of grant. To date, no stock appreciation rights have been granted. On December 18, 2000 the Company adopted, and in May 2001 the shareholders approved, the 2001 Stock Option Plan for Non-Employee Directors (the "2001 Plan") under which non-employee directors are granted options to purchase shares of the Company's authorized but unissued stock. The Company has reserved 200,000 shares for issuance under the 2001 Plan. Options granted under the 2001 Plan have an exercise price equal to the fair market value of the shares of the Company at the date of grant and expire ten years from the date of grant. Twenty-five percent of the options vest immediately and the remaining options vest ratably over three years. -19- Notes to Consolidated Financial Statements (Continued) The following table summarizes the activity of the Plans:
Weighted Average Shares Exercise Price --------- ---------------- Outstanding at December 31, 2000 ........................... 1,370,000 $ 11.94 Granted ................................................... 220,000 9.99 Exercised ................................................. -- -- Canceled .................................................. (100,000) 11.94 --------- ---------- Outstanding at December 31, 2001 ........................... 1,490,000 11.65 Granted ................................................... -- -- Exercised ................................................. -- -- Canceled .................................................. (160,000) 11.94 --------- ---------- Outstanding at December 31, 2002 ........................... 1,330,000 11.62 Granted ................................................... -- -- Exercised ................................................. -- -- Canceled .................................................. (235,000) 11.94 --------- ---------- Outstanding at December 31, 2003 ........................... 1,095,000 $ 11.55 ========= ==========
There were 1,023,000 exercisable options at December 31, 2003, with a weighted average exercise price of $11.65 and an average contractual life remaining of 5.3 years. At December 31, 2003, an aggregate of 1,105,000 shares remain available for grant under the Plans. The weighted average fair value of options granted under the Plans was estimated at $1.86 on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions in 2001: dividend yield of 8.0%, expected volatility of 34.3%, risk free rate of return of 2.0%, and expected lives of 5 years. The estimated fair value of options granted is subject to the assumptions made and if the assumptions changed, the estimated fair value amounts could be significantly different. 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, 2003, 502,000 shares of Common Stock were reserved for future awards. 5. CONTINGENT LIABILITIES As of December 31, 2003, the Company is a defendant in approximately 21 lawsuits involving its products and is aware of certain other such claims. These lawsuits and claims fall into two categories: (i) Those that claim damages from the Company related to allegedly defective product design which stem from a specific incident. These lawsuits and claims are based principally on the theory of "strict liability" but also may be based on negligence, breach of warranty, and other legal theories, and (ii) Those brought by cities, municipalities, counties, associations, individuals and one state Attorney General against firearms manufacturers, distributors and dealers seeking to recover damages allegedly arising out of the misuse of firearms by third parties in the commission of homicides, suicides and other shootings involving juveniles and adults. The complaints by municipalities seek damages, among other things, for the costs of medical care, police and emergency services, public health services, and the maintenance of courts, prisons, and other services. In certain instances, the plaintiffs seek to recover for decreases in property values and loss of business within the city due to criminal violence... In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacture, marketing and distribution practices of the various defendants. These suits allege, among other claims, strict liability or negligence in the design of products, public nuisance, negligent entrustment, negligent distribution, deceptive or fraudulent advertising, violation of consumer protection statutes and conspiracy or concert of action theories. Most of these cases do not allege a specific injury to a specific individual as a result of the misuse or use of any of the Company's products. Management believes that, in every case, the allegations are unfounded, and that the shootings and any results therefrom were due to negligence or misuse of the firearms by third-parties or the claimant, and that there should be no recovery against the Company. Defenses further exist to the suits brought by cities, municipalities, counties, and the Attorney General based, among other reasons, on established state law precluding recovery by municipalities for essential government services, the remoteness of the claims, the types of damages sought to be recovered, and limitations on the extraterritorial authority which may be exerted by a city, municipality, county or state under state and federal law, including State and Federal Constitutions. -20- Provision is made for product liability claims based upon many factors related to the severity of the alleged injury and potential liability exposure, based upon prior claim experience. Because the Company's experience in defending these lawsuits and claims is that unfavorable outcomes are typically not probable or estimable, only in rare cases is an accrual established for such costs. In most cases, an accrual is established only for estimated legal defense costs. Product liability accruals are periodically reviewed to reflect then-current estimates of possible liabilities and expenses incurred to date and reasonably anticipated in the future. Threatened product liability claims are reflected in the Company's product liability accrual on the same basis as actual claims; i.e., an accrual is made for reasonably anticipated possible liability and claims-handling expenses on an ongoing basis. A range of reasonably possible loss relating to unfavorable outcomes cannot be made. However, in the product liability cases in which a dollar amount of damages is claimed, the amount of damages claimed, which totaled $436 million and $837 million at December 31, 2003 and 2002, respectively, are set forth as an indication of possible maximum liability that the Company might be required to incur in these cases (regardless of the likelihood or reasonable probability of any or all of this amount being awarded to claimants) as a result of adverse judgments that are sustained on appeal. Product liability claim payments are made when appropriate if, as, and when claimants and the Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the lawsuits and claims develop, the timing of which may vary greatly from case to case. A time schedule cannot be determined in advance with any reliability concerning when payments will be made in any given case. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with independent and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company's financial results for a particular period. 6. ASSET IMPAIRMENT CHARGES In 2002 the Company recognized asset impairment charges of $3.3 million related to certain assets in the investment castings segment. As a result of the significant reduction in sales and substantial losses incurred by this segment, in the fourth quarter of 2002 the Company evaluated the recoverability of certain assets and wrote off $1.0 million of a building and $2.3 million of machinery and equipment. The Company was required to reduce the carrying value of the assets to fair value and recognized asset impairment charges, because the carrying value of the affected assets exceeded the projected future undiscounted cash flows. The fair value of the building was based on available market data and the fair value of the machinery and equipment was based on estimated discounted cash flows from the assets. A similar evaluation of the recoverability of other certain assets in the investment castings segment was performed in the fourth quarter of 2003. This evaluation did not result in the recognition of an asset impairment charge. 7. RELATED PARTY TRANSACTIONS In 2003, 2002, and 2001, the Company paid Newport Mills, of which William B. Ruger, Jr., Chairman and Chief Executive Officer of the Company, is the sole proprietor, $243,000, $222,750, and $263,250, respectively, for storage rental and office space. On July 17, 2003, the Company sold two automobiles to Mr. Ruger, Jr. for $60,000. 8. OPERATING SEGMENT INFORMATION The Company has two reportable operating segments: firearms and investment castings. The firearms segment manufactures and sells rifles, pistols, revolvers, and shotguns principally to a select number of licensed independent wholesale distributors primarily located in the United States. The investment castings segment consists of two operating divisions which manufacture and sell titanium and steel investment castings. Corporate segment income relates to interest income on short-term investments, the sale of non-operating assets, and other non-operating activities. Corporate segment assets consist of cash and short-term investments and other non-operating assets. The Company evaluates performance and allocates resources, in part, based on profit or loss before taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 1). Intersegment sales are recorded at the Company's cost plus a fixed profit percentage. The $3.3 million asset impairment charges recorded in 2002 are included in the investment castings segment. The Company's assets are located entirely in the United States and export sales are insignificant. Revenues from one customer in the firearms segment totaled $24.8 million, $24.0 million and $30.4 million in 2003, 2002, and 2001, respectively. Revenues from an additional customer in the firearms segment totaled $15.5 million in 2003. Revenues from a third customer in the firearms segment totaled $20.1 million in 2001. -21- Notes to Consolidated Financial Statements (Continued)
Year ended December 31, (in thousands) 2003 2002 2001 ---------- ---------- ---------- Net Sales Firearms .................................. $ 130,558 $ 139,762 $ 147,622 Castings Unaffiliated ............................ 17,359 21,825 26,708 Intersegment ............................ 15,653 17,679 27,282 ---------- ---------- ---------- 33,012 39,504 53,990 Eliminations .............................. (15,653) (17,679) (27,282) ---------- ---------- ---------- $ 147,917 $ 161,587 $ 174,330 ========== ========== ========== Income (Loss) Before Income Taxes Firearms .................................. $ 18,392 $ 23,673 $ 22,800 Castings .................................. (4,439) (11,230) (3,473) Corporate ................................. 6,688 1,692 2,872 ---------- ---------- ---------- $ 20,641 $ 14,135 $ 22,199 ========== ========== ========== Identifiable Assets Firearms .................................. $ 72,600 $ 79,301 $ 78,774 Castings .................................. 17,939 19,394 27,351 Corporate ................................. 79,474 85,263 98,588 ---------- ---------- ---------- $ 170,013 $ 183,958 $ 204,713 ========== ========== ========== Depreciation Firearms .................................. $ 3,301 $ 3,448 $ 3,395 Castings .................................. 2,622 4,042 4,756 ---------- ---------- ---------- $ 5,923 $ 7,490 $ 8,151 ========== ========== ========== Capital Expenditures Firearms .................................. $ 3,215 $ 2,767 $ 2,073 Castings .................................. 781 388 1,532 ---------- ---------- ---------- $ 3,996 $ 3,155 $ 3,605 ========== ========== ==========
9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 2003 (in thousands, except per share data):
THREE MONTHS ENDED ------------------------------------------------------- 3/31/03 6/30/03 9/30/03 12/31/03 ---------- ---------- ---------- ---------- NET SALES .............................. $ 41,132 $ 31,801 $ 36,820 $ 38,164 GROSS PROFIT ........................... 12,437 6,507 5,718 10,066 NET INCOME ............................. 4,527 1,035 3,852 2,950 BASIC AND DILUTED EARNINGS PER SHARE ... $ 0.17 $ 0.04 $ 0.14 $ 0.11
Three Months Ended -------------------------------------------------------- 3/31/02 6/30/02 9/30/02 12/31/02 ---------- ---------- ---------- ---------- Net sales ........................................ $ 48,440 $ 39,784 $ 38,040 $ 35,323 Gross profit ..................................... 12,280 9,945 6,925 7,061 Net income (loss) ................................ 4,532 2,905 1,360 (330) Basic and diluted earnings (loss) per share ...... $ 0.17 $ 0.11 $ 0.05 $ (0.02)
-22- Report of Independent Auditors (KPMG LOGO) Stamford Square 3001 Summer Street Stamford, CT 06905 INDEPENDENT AUDITORS' REPORT 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, 2003 and 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sturm, Ruger & Company, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP February 6, 2004 KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is a member of KPMG International, a Swiss association. -23- Stockholder Information COMMON STOCK DATA The Company's Common Stock is traded on the New York Stock Exchange under the symbol "RGR." At February 1, 2004, the Company had 2,033 stockholders of record. (RGR LISTED NYSE LOGO) 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 -------- -------- --------- 2003: FIRST QUARTER ......................................... $ 11.20 $ 8.76 $ .20 SECOND QUARTER ........................................ 10.29 8.24 .20 THIRD QUARTER ......................................... 11.97 10.06 .20 FOURTH QUARTER ........................................ 11.75 10.40 .20 2002: First Quarter ......................................... $ 13.40 $ 11.40 $ .20 Second Quarter ........................................ 14.80 12.15 .20 Third Quarter ......................................... 14.24 10.75 .20 Fourth Quarter ........................................ 12.90 8.96 .20
CORPORATE GOVERNANCE INFORMATION Our Corporate Code of Business Conduct and Ethics, Corporate Board Governance Guidelines, and charters for our Nominating and Corporate Governance, Audit, and Compensation Committees are posted on our Stockholder Relations section of our corporate website at www.ruger.com. Simply click on "Corporate Governance Documents." Written copies may also be obtained by telephoning our Corporate Secretary's office at 203-259-7843, or by written request to the Corporate Headquarters at One Lacey Place, Southport, CT 06890. Shareholders, employees, or other persons wishing to anonymously report to the Board of Directors' Audit Committee any suspected accounting irregularities, auditing fraud, violations of our corporate Compliance Program, or violations of the Company's Code of Business Conduct and Ethics, may do so by telephoning 1-800-826-6762. This service is independently monitored 24 hours a day, 7 days a week. ANNUAL MEETING The Annual Meeting of Stockholders will be held on May 4, 2004 at the Lake Sunapee Country Club, New London, New Hampshire, at 10:30am. PRINCIPAL BANKS Fleet Bank, Southport, Connecticut Lake Sunapee Savings Bank, Newport, New Hampshire Sugar River Savings Bank, Newport, New Hampshire Bank One, Arizona, NA, Prescott, Arizona INDEPENDENT AUDITORS KPMG LLP, Stamford, Connecticut TRANSFER AGENT Computershare Investor Services, L.L.C. Attention: Shareholder Communications 2 North LaSalle Street P.O. Box A3504 Chicago, IL 60690-5190 www.computershare.com CORPORATE ADDRESS To correspond with the Company or to request a copy of the Annual Report on Form 10-K for 2003 free of charge, please visit our website www.ruger.com or write to: CORPORATE SECRETARY STURM, RUGER & COMPANY, INC. ONE LACEY PLACE SOUTHPORT, CONNECTICUT 06890 TELEPHONE: 203-259-7843 FAX: 203-256-3367 FACILITIES All Ruger firearms and investment castings are proudly designed and manufactured by American workers at Ruger facilities in Newport, New Hampshire and Prescott, Arizona. Corporate Headquarters is located in Southport, Connecticut U.S.A. DIRECTORS WILLIAM B. RUGER, JR. Chairman STEPHEN L. SANETTI Vice Chairman RICHARD T. CUNNIFF* Vice Chairman Ruane, Cunniff & Co., Inc.** TOWNSEND HORNOR*+ Corporate Director PAUL X. KELLEY*+ Partner of J.F. Lehman & Company** JOHN M. KINGSLEY, JR. Corporate Director JAMES E. SERVICE**+ Consultant Director OFFICERS WILLIAM B. RUGER, JR. Chief Executive Officer STEPHEN L. SANETTI President and Chief Operating Officer THOMAS A. DINEEN Treasurer and Chief Financial Officer LESLIE M. GASPER Corporate Secretary * Audit Committee Member ** Compensation Committee Member + Nominating and Corporate Governance Committee Member -24-