STURM RUGER & CO INC - Annual Report: 2019 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to ________

Commission File Number 0-4776

STURM, RUGER & COMPANY, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	06-0633559
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1 Lacey Place, Southport, Connecticut	06890
(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	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $1 par value	RGR	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ 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. [☒]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer [☒] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ].

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2019:

Common Stock, $1 par value - $928,739,700

The number of shares outstanding of the registrant's common stock as of February 14, 2020: Common Stock, $1 par value - 17,452,000 shares

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the registrant’s Proxy Statement relating to the 2020 Annual Meeting of Stockholders to be held May 13, 2020 are incorporated by reference into Part III (Items 10 through 14) of this Report.

TABLE OF CONTENTS


PART I
Item 1.Business	4
Item 1A.Risk Factors	10
Item 1B.Unresolved Staff Comments	14
Item 2.Properties	15
Item 3.Legal Proceedings	16
Item 4.Mine Safety Disclosures	16
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.Selected Financial Data	20
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.Quantitative and Qualitative Disclosures About Market Risk	46
Item 8.Financial Statements and Supplementary Data	47
Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	79
Item 9A.Controls and Procedures	79
Item 9B.Other Information	80
PART III
Item 10.Directors, Executive Officers and Corporate Governance	80
Item 11.Executive Compensation	80
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	80
Item 13.Certain Relationships and Related Transactions and Director Independence	81
Item 14.Principal Accounting Fees and Services	81


PART IV
Item 15.Exhibits and Financial Schedules	82
Signatures	84
Financial Statement Schedule	85
Exhibits	87

EXPLANATORY NOTE:

In this Annual Report on Form 10-K, Sturm, Ruger & Company, Inc. and Subsidiary (the “Company”) makes 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, the impact of future firearms control and environmental legislation, and accounting estimates, any one or more of which could cause actual results to differ materially from those projected. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other words and terms of similar meaning, typically identify such forward-looking statements. 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.

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PART I

ITEM 1—BUSINESS

Company Overview

Sturm, Ruger & Company, Inc. and Subsidiary (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Virtually all of the Company’s sales for the year ended December 31, 2019 were from the firearms segment, with approximately 1% from the castings segment. Export sales represent approximately 5% of firearms sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic.

The Company has been in business since 1949 and was incorporated in its present form under the laws of Delaware in 1969. The Company primarily offers products in three industry product categories – rifles, pistols, and revolvers. The Company’s firearms are sold through independent wholesale distributors, principally to the commercial sporting market.

The Company manufactures and sells investment castings made from steel alloys and metal injection molding (“MIM”) parts for internal use in the firearms segment and has minimal sales to outside customers. The castings and MIM parts sold to outside customers, either directly or through manufacturers’ representatives, represented approximately 1% of the Company’s total sales for the year ended December 31, 2019.

For the years ended December 31, 2019, 2018, and 2017, net sales attributable to the Company's firearms operations were $406.3 million, $490.6 million and $517.7 million. The balance of the Company's net sales for the aforementioned periods was attributable to its castings operations.

Firearms Products

The Company presently manufactures firearm products, under the “Ruger” name and trademark, in the following industry categories:

Rifles		Revolvers
•	Single-shot	•	Single-action
•	Autoloading	•	Double-action
•	Bolt-action
•	Modern sporting

Pistols
•	Rimfire autoloading
•	Centerfire autoloading

Most firearms are available in several models based upon caliber, finish, barrel length, and other features.

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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. Net sales of rifles by the Company accounted for $200.6 million, $258.1 million, and $243.0 million of total net sales for the years 2019, 2018, and 2017, respectively.

Pistols

A pistol is a handgun in which the ammunition chamber is an integral part of the barrel and which typically is fed ammunition from a magazine contained in the grip. Net sales of pistols by the Company accounted for $124.8 million, $144.3 million, and $176.2 million of revenues for the years 2019, 2018, and 2017, respectively.

Revolvers

A revolver is a handgun that 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 is 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. Net sales of revolvers by the Company accounted for $56.8 million, $63.3 million, and $74.6 million of revenues for the years 2019, 2018, and 2017, respectively.

Accessories

The Company also manufactures and sells accessories and replacement parts for its firearms. These sales accounted for $24.1 million, $25.0 million, and $23.9 million of total net sales for the years 2019, 2018, and 2017, respectively.

Castings Products

Net sales attributable to the Company’s casting operations (excluding intercompany transactions) accounted for $4.2 million, $5.0 million, and $4.6 million, for 2019, 2018, and 2017, respectively. These sales represented approximately 1% of total net sales in each of these years.

Manufacturing

Firearms

The Company produces one model of pistol, all of its revolvers and most of its rifles at the Newport, New Hampshire facility. Most of the Company’s pistols are produced at the Prescott, Arizona facility. Some rifle models and pistol models are produced at the Mayodan, North Carolina facility.

Many of the basic metal component parts of the firearms manufactured by the Company are produced by the Company's castings segment through processes known as precision investment casting. The Company also uses many MIM parts in its firearms. See "Manufacturing- Investment Castings and Metal Injected Moldings" below for a description of these processes. The Company believes that investment castings and MIM parts provide greater design flexibility and result in component parts which are generally close to their ultimate shape and, therefore, require less machining than processes requiring machining a solid billet of metal to obtain a part. Through the

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use of investment castings and MIM parts, the Company endeavors to produce durable and less costly component parts for its firearms.

All assembly, inspection, and testing of firearms manufactured by the Company are 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 and Metal Injection Moldings

To produce a product by the investment casting method, a wax model of the part 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 part, 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.

Metal injection molding is a three part powder metallurgy process by which a feedstock consisting of finely powdered metal and binders is processed through injection molding, debinding, and sintering equipment to produce steel, stainless steel, and alloy parts of complex shape and geometry. This process allows for high volume production while eliminating many of the wastes of traditional metal working methods, yielding net shape and near net shape parts.

Marketing and Distribution

Firearms

The Company's firearms are primarily marketed through a network of federally licensed, independent wholesale distributors who purchase the products directly from the Company. They resell to federally licensed, independent retail firearms dealers who in turn resell to legally authorized end users. All retail purchasers are subject to a point-of-sale background check by law enforcement. These end users include sportsmen, hunters, people interested in self-defense, law enforcement and other governmental organizations, and gun collectors. Each domestic distributor carries the entire line of firearms manufactured by the Company for the commercial market. Currently, 14 distributors service the domestic commercial market, with an additional 26 distributors servicing the domestic law enforcement market and 41 distributors servicing the export market.

In 2019, the Company’s largest customers and the percent of firearms sales they represented were as follows: Lipsey’s-26%; and Sports South-22%; Davidson’s-15%.

In 2018, the Company’s largest customers and the percent of firearms sales they represented were as follows: Davidson’s-21%; Lipsey’s-20%; and Sports South-16%.

In 2017, the Company’s largest customers and the percent of firearms sales they represented were as follows: Davidson’s-21%; Lipsey’s-18%; Sports South-13%; and Jerry’s/Ellett Brothers-12%.

The Company employs 15 employees who service these distributors and call on retailers and law enforcement agencies. Because the ultimate demand for the Company's firearms comes from end users rather than from the independent wholesale distributors, the Company believes that the loss

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of any distributor would not have a material, long-term adverse effect on the Company, but may have a material adverse effect on the Company’s financial results for a particular period. The Company considers its relationships with its distributors to be satisfactory.

The Company also exports its firearms through a network of selected commercial distributors and directly to certain foreign customers, consisting primarily of law enforcement agencies and foreign governments. Foreign sales were no more than 5% of the Company's consolidated net sales for each of the past three fiscal years.

The Company does not consider its overall firearms business to be predictably seasonal; however, orders of many models of firearms from the distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.

Investment Castings and Metal Injection Moldings

The castings segment provides castings and MIM parts for the Company’s firearms segment. In addition, the castings segment produces some products for a number of customers in a variety of industries.

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 competitors manufacture products in all four industry categories (rifles, shotguns, pistols, and revolvers). The principal methods of competition in the industry are product innovation, quality, availability, brand, and price. The Company believes that it can compete effectively with all of its present competitors.

Investment Castings and Metal Injection Moldings

There are a large number of investment castings and MIM manufacturers, both domestic and foreign, with which the Company competes. Competition varies based on the type of investment castings products and the end use of the product. Companies offering alternative methods of manufacturing such as wire electric discharge machining (EDM) and advancements in computer numeric controlled (CNC) machining also compete with the Company’s castings segment. Many of these competitors are larger corporations than the Company with substantially greater financial resources than the Company, which could affect the Company’s ability to compete with these competitors. The principal methods of competition in the industry are quality, price, and production lead time.

Employees

As of February 1, 2020, the Company employed approximately 1,580 full-time employees, approximately 31% of whom had at least ten years of service with the Company. From time to time, the Company uses temporary employees to supplement its workforce. As of February 1, 2020, the Company did not have any temporary employees.

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None of the Company's employees are subject to a collective bargaining agreement.

Research and Development

In 2019, 2018, and 2017, the Company spent approximately $8.2 million, $8.5 million, and $9.8 million, respectively, on research and development activities relating to new products and the improvement of existing products. As of February 1, 2020, the Company had approximately 55 employees whose primary responsibilities were research and development activities.

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 fundamental to any important product or manufacturing process of the Company and, although the Company deems its patents and trademarks to be valuable and therefore works to police and protect them, it does not consider its business materially dependent on patent or trademark protection.

Environmental Matters

The Company is committed to achieving high standards of environmental quality and product safety, and strives to provide a safe and healthy workplace for its employees and others in the communities in which it operates. 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 governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment. These regulations are integrated into the Company’s manufacturing, assembly, and testing processes. The Company believes that it is generally in compliance with applicable environmental regulations and that the outcome of any environmental proceedings and orders will not have a material adverse effect on the financial position of the Company, but could have a material adverse effect on the financial results for a particular period.

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Information about our Executive Officers

Set forth below are the names, ages, and positions of the executive officers of the Company. Officers serve at the discretion of the Board of Directors of the Company.

Name	Age	Position With Company

Christopher J. Killoy	61	President and Chief Executive Officer

Thomas A. Dineen	51	Senior Vice President, Treasurer, and Chief Financial Officer

Thomas P. Sullivan	59	Senior Vice President of Operations

Kevin B. Reid, Sr.	59	Vice President, General Counsel, and Corporate Secretary

Shawn C. Leska	48	Vice President, Sales

Christopher J. Killoy became President & Chief Executive Officer on May 9, 2017. Previously he served as President and Chief Operating Officer since January 1, 2014. Prior to that he served as Vice President of Sales and Marketing since November 27, 2006. Mr. Killoy originally joined the Company in 2003 as Executive Director of Sales and Marketing, and subsequently served as Vice President of Sales and Marketing from November 1, 2004 to January 25, 2005.

Thomas A. Dineen became Senior Vice President on July 10, 2017. Previously he served as Vice President since May 24, 2006. Prior to that he served as Treasurer and Chief Financial Officer since May 6, 2003 and had been Assistant Controller since 2001. Mr. Dineen joined the Company as Manager, Corporate Accounting in 1997.

Thomas P. Sullivan became Senior Vice President of Operations on July 1, 2017. Mr. Sullivan joined the Company as Vice President of Newport Operations for the Newport, New Hampshire Firearms and Pine Tree Castings divisions on August 14, 2006.

Kevin B. Reid, Sr. became Vice President and General Counsel on April 23, 2008. Previously he served as the Company’s Director of Marketing from June 4, 2007. Mr. Reid joined the Company in July 2001 as an Assistant General Counsel.

Shawn C. Leska became Vice President, Sales on November 6, 2015. Mr. Leska joined the Company in 1989 and has served in a variety of positions in the sales department. Most recently, Mr. Leska served as Director of Sales since 2011.

Where You Can Find More Information

The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and accordingly, files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K, and

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other information with the Securities and Exchange Commission (the "SEC"). As an electronic filer, the Company's public filings are maintained on the SEC's Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is http://www.sec.gov.

The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act accessible free of charge through the Company's Internet site after the Company has electronically filed such material with, or furnished it to, the SEC. The address of that website is http://www.ruger.com. However, such reports may not be accessible through the Company's website as promptly as they are accessible on the SEC’s website.

Additionally, the Company’s corporate governance materials, including its Corporate Governance Guidelines, the charters of the Audit, Compensation, Nominating and Corporate Governance, Risk Oversight and Capital Policy committees, and the Code of Business Conduct and Ethics may also be found under the “Investor Relations” subsection of the “Corporate” section of the Company’s Internet site at http://www.ruger.com/corporate. A copy of the foregoing corporate governance materials is available upon written request to the Corporate Secretary at Sturm, Ruger & Company, Inc., 1 Lacey Place, Southport, Connecticut 06890.

ITEM 1A—RISK FACTORS

The Company’s operations could be affected by various risks, many of which are beyond its control. Based on current information, the Company believes that the following identifies the most significant risk factors that could adversely affect its business. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

In evaluating the Company’s business, the following risk factors, as well as other information in this report, should be carefully considered.

Changes in government policies and firearms legislation could adversely affect the Company’s financial results.

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 manufactured after 1986 and place certain restrictions on the interstate sale of firearms unless certain licenses are obtained. The Company does not manufacture fully automatic weapons and holds all necessary licenses under these federal laws. Several states currently have laws in effect similar to the aforementioned legislation.

In 2005, Congress enacted the Protection of Lawful Commerce in Arms Act (“PLCAA”). The PLCAA was enacted to address abuses by cities and agenda-driven individuals who wrongly sought to make firearms manufacturers liable for legally manufactured and lawfully sold products if those products were later used in criminal acts. The Company believes the PLCAA merely

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codifies common sense and long standing tort principles. If the PLCAA is repealed or efforts to circumvent it are successful and lawsuits similar to those filed by cities and agenda-driven individuals in the late 1990s and early 2000s are allowed to proceed, it could have a material adverse impact on the Company.

Currently, federal and several states’ legislatures are considering additional legislation relating to the regulation of firearms. These proposed bills are numerous and extremely varied, but many seek either to restrict or ban the sale and, in some cases, the ownership of various types of firearms. Other legislation seeks to require new technologies, such as microstamping and so-called “smart gun” technology, which are not proven, reliable or feasible. Such legislation became effective in California in 2013, which has limited our ability to sell certain products in California. If similar legislation is enacted in other states, it could effectively ban or severely limit the sale of affected firearms. There also are legislative proposals to limit magazine capacity.

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. Numerous bills regulating the ownership of firearms have been proposed at the state and federal levels, and these bills propose a wide variety of restrictions including, for example, limiting the number of firearms that may be purchased in a specified time, increasing the age for ownership, imposing additional licensing requirements, and levying new taxes on firearms and/or ammunition

The Company’s results of operations could be further adversely affected if legislation with diverse requirements is enacted.

With literally thousands of laws being proposed at the federal, state and local levels, if even a small percentage of these laws are enacted and they are incongruent, the Company could find it difficult, expensive or even practically impossible to comply with them, impeding new product development and distribution of existing products.

The Company’s results of operations could be adversely affected by litigation.

The Company faces risks arising from various asserted and unasserted litigation matters. These matters include, but are not limited to, assertions of allegedly defective product design or manufacture, alleged failure to warn, purported class actions against firearms manufacturers, generally seeking relief such as medical expense reimbursement, property damages, and punitive damages arising from accidents involving firearms or the criminal misuse of firearms, and those lawsuits filed on behalf of municipalities alleging harm to the general public. Various factors or developments can lead to changes in current estimates of liabilities such as final adverse judgment, significant settlement or changes in applicable law. A future adverse outcome in any one or more of these matters could have a material adverse effect on the Company’s financial results. See Note 19 to the financial statements which are included in this Annual Report on Form 10-K.

The Company relies upon relationships with financial institutions.

The Company utilizes the services of numerous financial institutions, including banks, insurance carriers, transfer agents, and others. Anti-gun politicians, gun-control activists, and others may

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target these institutions and attempt to pressure them into ceasing to do business with the Company, which could have a material adverse impact on our business, operating results, and financial condition.

Our insurance may be insufficient to protect us from claims or losses.

We maintain insurance coverage with third-party insurers. However, not every risk or liability is or can be protected by insurance, and, for those risks we insure, the limits of coverage we purchase or that are reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. Moreover, there is a risk that commercially available liability insurance will not continue to be available to us at a reasonable cost, if at all. If liability claims or losses exceed our current or available insurance coverage, our business and prospects may be harmed.

The Company’s results of operations could be adversely affected by a decrease in demand for Company products.

If demand for the Company’s products decreases significantly, the Company would be unable to efficiently utilize its capacity, and profitability would suffer. Decreased demand could result from a macroeconomic downturn, or could be specific to the firearms industry as a result of social, political, or other factors. If the decrease in demand occurs abruptly, the adverse impact would be even greater.

The financial health of our independent distributors is critical to our success.

Over 90% of our sales are made to 14 federally licensed, independent wholesale distributors. We review our distributors’ financial statements and have credit insurance for many of them. However, our credit evaluations of distributors and credit insurance may not be completely effective, especially if an interest rate increase exacts an additional financial strain.

If one or more independent distributors experience financial distress or liquidity issues, our sales could be adversely affected and we may not be able to collect our accounts receivable on a timely basis, which would have an adverse impact on our operating results and financial condition.

The Company must comply with various laws and regulations pertaining to workplace safety and environment, environmental matters, and firearms manufacture.

In the normal course of its manufacturing operations, the Company is subject to numerous federal, state and local laws and governmental regulations, and governmental proceedings and orders. These laws and regulations pertain to matters like workplace safety and environment, firearms serial number tracking and control, waste disposal, air emissions and water discharges into the environment. Noncompliance with any one or more of these laws and regulations could have a material adverse impact on the Company.

Misconduct of our employees or contractors could cause us to lose customers and could have a significant adverse impact on our business and reputation.

Misconduct, fraud or other improper activities by our employees or contractors could have a material adverse impact on our business and reputation. Such misconduct could include the failure to comply with federal, state, local or foreign government procurement regulations, regulations regarding the protection of personal information, laws and regulations relating to antitrust and any other applicable laws or regulations.

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Product quality and performance is important to the Company’s success.

The Company has a long history of producing rugged, reliable firearms for the commercial market. While we believe our record of designing, manufacturing, and selling high-quality products demonstrates our commitment to safety and quality, we have occasionally identified design and/or manufacturing issues with respect to some firearms and, as a result, issued a product safety bulletin or initiated a product recall. Depending upon the volume of products we have shipped into the market, any future recall or safety bulletin could harm our reputation, cause us to lose business, and cause us to incur significant support and repair costs.

Business disruptions at one of the Company’s manufacturing facilities could adversely affect the Company’s financial results.

The Newport, New Hampshire, Prescott, Arizona and Mayodan, North Carolina facilities are critical to the Company’s success. These facilities house the Company’s principal production, research, development, engineering, design, and shipping operations. Any event that causes a disruption of the operation of any of these facilities for even a relatively short period of time could have a material adverse effect on the Company’s ability to produce and ship products and to provide service to its customers.

We rely on our information and communications systems in our operations. Security breaches and other disruptions could adversely affect our business and results of operations.

Cyber-security threats are significant and evolving and include, among others, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. In addition to security threats, we are also subject to other systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, natural disasters, power shortages, terrorist attacks or other events. The unavailability of our information or communications systems, the failure of these systems to perform as anticipated or any significant breach of data security could cause loss of data, disrupt our operations, lead to financial losses from remedial actions, require significant management attention and resources, and negatively impact our reputation among our customers and the public, which could have a negative impact on our financial condition, results of operations and liquidity.

Price increases for raw materials could adversely affect the Company’s financial results.

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is 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 or on order to provide ample time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

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Retention of key management is critical to the success of the Company.

We rely on the management and leadership skills of our senior management team. Our senior executives are not bound by employment agreements. The loss of the services of one or more of our senior executives or other key personnel could have a significant adverse impact on our business.

ITEM 1B—UNRESOLVED STAFF COMMENTS

None

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ITEM 2—PROPERTIES

The Company’s manufacturing operations are carried out at four facilities. The following table sets forth certain information regarding each of these facilities:

	Approximate Aggregate Usable Square Feet	Status	Segment

Newport, New Hampshire	350,000	Owned	Firearms/Castings

Prescott, Arizona	230,000	Leased	Firearms

Mayodan, North Carolina	220,000	Owned	Firearms

Earth City, Missouri	35,000	Leased	Castings

Each firearms facility contains enclosed ranges for testing firearms. The lease of the Prescott facility provides for rental payments which are approximately equivalent to estimated rates for real property taxes.

The Company has other facilities that were not used in its manufacturing operations in 2019:

	Approximate Aggregate Usable Square Feet	Status	Segment

Southport, Connecticut	25,000	Owned	Corporate

Newport, New Hampshire (Dorr Woolen Building)	45,000	Owned	Firearms

Enfield, Connecticut	10,000	Leased	Firearms

Rochester, New Hampshire	2,000	Leased	Firearms

Fairport, New York	3,700	Leased	Corporate

There are no mortgages or any other major encumbrance on any of the real estate owned by the Company.

The Company’s principal executive offices are located in Southport, Connecticut.

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ITEM 3—LEGAL PROCEEDINGS

The nature of the legal proceedings against the Company is discussed at Note 19 to the financial statements, which are included in this Form 10-K.

The Company has reported all cases instituted against it through September 28, 2019, and the results of those cases, where terminated, to the SEC on its previous Form 10-Q and 10-K reports, to which reference is hereby made.

There were no lawsuits formally instituted against the Company during the three months ending December 31, 2019.

ITEM 4—MINE SAFETY DISCLOSURES – NOT APPLICABLE

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PART II

ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the New York Stock Exchange under the symbol “RGR.” At February 7, 2020, the Company had 1,683 stockholders of record.

Issuer Repurchase of Equity Securities

In 2017 and 2019 the Company repurchased shares of its common stock. In 2018, the Company did not repurchase any shares of its common stock. Details of the purchases in 2017 and 2019 follow:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program

First Quarter 2017
January 29 to February 25		900,997	$	49.70		900,997
February 26 to April 1		173,288	$	49.92		173,288
Third Quarter 2017
July 30 to August 26		4,490	$	47.92		4,490
August 27 to September 30		240,933	$	46.30		240,933
Third Quarter 2019
July 28 to August 24		44,500		44.83		44,500
Total		1,364,208	$	48.96		1,364,208	$	86,710,000

All of these purchases were made with cash held by the Company and no debt was incurred.

At December 31, 2019 approximately $87 million remained authorized for share repurchases.

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Comparison of Five-Year Cumulative Total Return*

Sturm, Ruger & Co., Inc., Standard & Poor’s 500, Recreation and Russell 2000 Index

(Performance Results Through 12/31/19)

Assumes $100 invested at the close of trading 12/14 in Sturm, Ruger & Co., Inc. common stock, Standard & Poor’s 500, Recreation, and Russell 2000 Index.

* Cumulative total return assumes reinvestment of dividends.

Source: Value Line Publishing LLC

	2014	2015	2016	2017	2018	2019
Sturm, Ruger & Co., Inc.	$100.00	$175.58	$159.48	$173.26	$168.32	$151.26
Standard & Poor’s 500	$100.00	$101.39	$113.52	$138.30	$132.24	$173.88
Recreation	$100.00	$113.47	$122.91	$147.76	$129.65	$171.05
Russell 2000 Index	$100.00	$95.59	$115.96	$132.95	$118.31	$149.70

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information regarding compensation plans under which equity securities of the Company are authorized for issuance as of December 31, 2019:

Equity Compensation Plan Information
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b) *	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders
			—
2007 Stock Incentive Plan	113,601	—	—
2017 Stock Incentive Plan	276,839	—	460,977
Equity compensation plans not approved by security holders
None.
Total	390,440	—	460,977

*	Restricted stock units are settled in shares of common stock on a one-for-one basis. Accordingly, such units have been excluded for purposes of computing the weighted-average exercise price.

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ITEM 6 — SELECTED FINANCIAL DATA

(Dollars in thousands, except per share data)

December 31,		2019		2018		2017		2016		2015
Net firearms sales	$	406,326	$	490,607	$	517,701	$	658,433	$	544,850
Net castings sales		4,180		5,028		4,555		5,895		6,244
Total net sales		410,506		495,635		522,256		664,328		551,094
Cost of products sold		310,958		361,277		368,248		444,774		378,934
Gross profit		99,548		134,358		154,008		219,554		172,160
Income before income taxes		43,027		68,714		77,646		135,921		96,100
Income taxes		10,736		17,781		25,504		48,449		33,974
Net income		32,291		50,933		52,142		87,472		62,126
Basic earnings per share		1.85		2.92		2.94		4.62		3.32
Diluted earnings per share		1.82		2.88		2.91		4.59		3.21
Cash dividends per share	$	0.82	$	1.10	$	1.36	$	1.73	$	1.10


December 31,		2019		2018		2017		2016		2015
Working capital	$	188,072	$	160,998	$	114,107	$	133,870	$	107,279
Total assets		348,961		335,532		284,318		346,879		315,883
Total stockholders’ equity		285,458		264,242		230,149		265,900		227,738
Book value per share	$	16.05	$	15.14	$	13.21	$	14.23	$	12.17
Return on stockholders’ equity		11.8%		20.6%		21.0%		35.4%		30.1%
Current ratio		4.1 to 1		3.3 to 1		3.2 to 1		2.7 to 1		2.3 to 1
Common shares outstanding		17,450,500		17,458,000		17,427,100		18,688,500		18,713,400
Number of stockholders of record		1,675		1,652		1,664		1,678		1,702
Number of employees		1,609		1,811		1,838		2,120		1,920
Number of temporary employees		0		11		2		310		205

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ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company Overview

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of sales are from firearms. Export sales represent approximately 5% of total sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.

The Company also manufactures investment castings made from steel alloys and metal injection molding (“MIM”) parts for internal use in its firearms and for sale to unaffiliated, third-party customers. Approximately 1% of sales are from the castings segment.

Orders of many models of firearms from the independent distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year. This is due in part to the timing of the distributor show season, which occurs during the first quarter.

Results of Operations - 2019

Product Demand

The estimated sell-through of the Company’s products from the independent distributors to retailers in 2019 decreased 18% from 2018. For the same period, the National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) increased 1%. The greater reduction in the sell-through of the Company’s products relative to adjusted NICS background checks may be attributable to the following:

•

More aggressive promotions, discounts, rebates and the extension of payment terms offered by our competitors,

•

The loss of a formerly significant distributor that ultimately filed for bankruptcy protection in June 2019 and the market disruption caused by the subsequent liquidation of its inventory of Ruger products,

•

The loss of three additional smaller distributors in the second half of 2019,

•

An apparent increase in sales of used firearms at retail, which are captured by adjusted NICS checks, and

•

Decreased retailer inventories as the anticipation of further discounting continues to encourage cautious buying behavior by retailers.

New products represented $102.0 million or 26% of firearms sales in 2019, compared to $145.6 million or 30% of firearms sales in 2018. New product sales include only major new products that were introduced in the past two years. In 2019, new products included the Pistol Caliber Carbine,

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the Wrangler, the Ruger-57, the Precision Rimfire Rifle, the AR pistol, the Security-9 pistol, the LCP II in .22, and the EC9s pistol.

Estimated sell-through from distributors to retailers and total adjusted NICS background checks:

	2019		2018		2017

Estimated Units Sold from Distributors to Retailers (1)		1,355,500		1,654,600		1,663,100

Total Adjusted NICS Background Checks (2)		13,199,000		13,116,000		13,967,800

(1)	The estimates for each period were calculated by taking the beginning inventory at the distributors, plus shipments from the Company to distributors during the period, less the ending inventory at distributors. These estimates are only a proxy for actual market demand as they:

	•	Rely on data provided by independent distributors that are not verified by the Company,
	•	Do not consider potential timing issues within the distribution channel, including goods-in-transit, and
	•	Do not consider fluctuations in inventory at retail.

(2)	NICS background checks are performed when the ownership of most firearms, either new or used, is transferred by a Federal Firearms Licensee. NICS background checks are also performed for permit applications, permit renewals, and other administrative reasons.

The adjusted NICS data presented above was derived by the NSSF by subtracting NICS checks that are not directly related to the sale of a firearm, including checks used for concealed carry (“CCW”) permit application checks as well as checks on active CCW permit databases.

Adjusted NICS data can be impacted by changes in state laws and regulations and any directives and interpretations issued by governmental agencies. For example, the use of state issued permits to carry firearms, in lieu of NICS background checks, for certain transactions was significantly curtailed in 2019. This resulted in increases in adjusted NICS background checks for Alabama and Minnesota of 66% and 33%, respectively. Excluding Alabama and Minnesota, adjusted NICS decreased 1% in 2019.

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Orders Received and Ending Backlog

The Company uses the estimated unit sell-through of our products from the independent distributors to retailers, along with inventory levels at the independent distributors and at the Company, as the key metrics for planning production levels.

Orders Received in 2019 decreased 7% from 2018. Our ending order backlog of 187,900 units at December 31, 2019 increased 34,900 units from backlog of 153,000 units at December 31, 2018.

The units ordered, value of orders received and ending backlog, net of Federal Excise Tax, for the trailing three years are as follows (dollars in millions, except average sales price):

	2019		2018		2017

Orders Received	$	398.4	$	430.0	$	386.2

Average Sales Price of Orders Received	$	293	$	281	$	297

Ending Backlog	$	57.8	$	55.6	$	75.4

Average Sales Price of Ending Backlog	$	308	$	364	$	296

Production

The Company reviews the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, semi-monthly to plan production levels and manage inventories. These reviews resulted in a decrease in total unit production of 18% in 2019 compared to 2018.

Annual Summary Unit Data

Firearms unit data for orders, production, and shipments follows:

	2019		2018		2017

Units Ordered		1,361,100		1,531,100		1,298,800

Units Produced		1,313,400		1,610,300		1,610,900

Units Shipped		1,326,200		1,633,000		1,665,300

Average Sales Price	$	306	$	300	$	311

Units – Backlog		187,900		153,000		254,900

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Inventories

The Company’s finished goods inventory decreased by 12,900 units during 2019.

Distributor inventories of the Company’s products decreased by 29,300 units during 2019 and approximate a reasonable level to support rapid fulfillment of retailer demand. In the aggregate, total Company and distributor inventories decreased by 11% in 2019.

Inventory data follows:

	December 31,
	2019		2018		2017

Units – Company Inventory		67,400		80,300		102,900

Units – Distributor Inventory (3)		270,400		299,700		321,300

Total inventory (4)		337,800		380,000		424,200

	(3)	Distributor ending inventory as provided by the independent distributors of the Company’s products. These numbers do not include goods-in-transit inventory that has been shipped from the Company but not yet received by the distributors.

	(4)	This total does not include inventory at retailers. The Company does not have access to data on retailer inventories.

Year ended December 31, 2019, as compared to year ended December 31, 2018:

Net Sales

Consolidated net sales were $410.5 million in 2019. This represents a decrease of $85.1 million or 17.2% from 2018 consolidated net sales of $495.6 million.

Firearms segment net sales were $406.3 million in 2019. This represents a decrease of $84.3 million or 17.2% from 2018 firearms net sales of $490.6 million. Firearms unit shipments decreased 19% in 2019.

Casting segment net sales were $4.2 million in 2019. This represents a decrease of $0.8 million or 16.9% from 2018 casting sales of $5.0 million.

Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $311.0 million in 2019. This represents a decrease of $50.3 million or 13.9% from 2018 consolidated cost of products sold of $361.3 million.

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The gross margin was 24.3% in 2019. This represents a decrease from 27.1% in 2018 as illustrated below:

(in thousands)
Year Ended December 31,		2019					2018

Net sales	$	410,506		100	%	$	495,635	100.0	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls		313,769		76.4	%		354,997	71.6	%

LIFO expense		796		0.2	%		1,882	0.4	%

Overhead rate adjustments to inventory		(3,710	)	(0.9	)%		1,777	0.4	%

Labor rate adjustments to inventory		(415	)	(0.1	)%		193	—

Product liability		718		0.2	%		1,514	0.3	%

Product safety bulletins and recalls		(200	)	(0.1	)%		914	0.2	%

Total cost of products sold		310,958		75.7	%		361,277	72.9	%

Gross profit	$	99,548		24.3	%	$	134,358	27.1	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls- In 2019, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability and safety bulletins and recalls increased 4.8% as a percentage of sales compared to 2018. This increase was due primarily to to the decrease in sales and production which resulted in unfavorable deleveraging of fixed costs.

LIFO- The Company recognized LIFO expense in 2019 and 2018 of $0.8 million and $1.9 million, respectively, which increased cost of products sold in both periods.

Overhead Rate Change- The net impact on inventory in 2019 and 2018 from the change in the overhead rates used to absorb overhead expenses into inventory was an increase of $3.7 million and a decrease of $1.8 million, respectively, reflecting decreased overhead efficiency in 2019 and increased overhead efficiency in 2018. The increase in inventory value in 2019 resulted in a corresponding decrease to cost of products sold and the decrease in inventory value in 2018 resulted in a corresponding increase to cost of products sold.

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Labor Rate Adjustments- In 2019, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was an increase of $0.4 million, reflecting decreased labor efficiency. This increase in inventory value resulted in a corresponding decrease to cost of products sold. In 2018, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was a decrease of $0.2 million, reflecting increased labor efficiency. This decrease in inventory value resulted in a corresponding increase to cost of products sold.

Product Liability- This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. These costs totaled $0.7 million and $1.5 million in 2019 and 2018, respectively. See Note 19 in the notes to the financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

Product Safety Bulletins and Recalls- In October 2018, the Company issued a safety bulletin announcing that some Ruger American Pistols chambered in 9mm may exhibit premature wear of the locking surfaces between the slide and barrel. The Company offered a free retrofit to customers of affected pistols and recorded a $1.0 million expense in the third quarter of 2018, which was the expected total cost of the safety bulletin. In 2019, the estimated costs remaining for the product safety bulletin was reduced, which decreased cost of sales by $0.2 million in 2019.

Gross Profit- Gross profit was $99.5 million or 24.3% of sales in 2019. This is a decrease of $34.9 million from 2018 gross profit of $134.4 million or 27.1% of sales in 2018.

Selling, General and Administrative

Selling, general and administrative expenses were $60.1 million in 2019, a decrease of $7.3 million from $67.4 million in 2018, and an increase from 13.6% of sales in 2018 to 14.6% of sales in 2019. This decrease was primarily attributable to reductions in firearms promotional expense and incentive compensation.

Other Operating Income, net

Other operating income, net was de minimis in 2019 and 2018.

Operating Income

Operating income was $39.4 million or 9.6% of sales in 2019. This is a decrease of $27.6 million from 2018 operating income of $67.0 million or 13.5% of sales.

Royalty Income

Royalty income was $0.7 million in 2019 and $0.8 million in 2018.

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Interest Income

Interest income was $2.6 million in 2019, an increase of $2.4 million from $0.2 million in 2018, due to interest income on short-term investments in 2019.

Interest Expense

Interest expense was $0.2 million and $0.3 million in 2019 and 2018, respectively.

Other Income, Net

Other income, net was $0.5 million in 2019, a decrease of $0.5 million from $1.0 million in 2018.

Income Taxes and Net Income

The effective income tax rate was 25.0% in 2019 and 25.9% in 2018.

As a result of the foregoing factors, consolidated net income was $32.3 million in 2019. This represents a decrease of $18.6 million from 2018 consolidated net income of $50.9 million.

Non-GAAP Financial Measure

In an effort to provide investors with additional information regarding its results, the Company refers to various United States generally accepted accounting principles (“GAAP”) financial measures and one non-GAAP financial measure, EBITDA, which management believes provides useful information to investors. This non-GAAP measure may not be comparable to similarly titled measures being disclosed by other companies. In addition, the Company believes that the non-GAAP financial measure should be considered in addition to, and not in lieu of, GAAP financial measures. The Company believes that EBITDA is useful to understanding its operating results and the ongoing performance of its underlying business, as EBITDA provides information on the Company’s ability to meet its capital expenditure and working capital requirements, and is also an indicator of profitability. The Company believes that this reporting provides better transparency and comparability to its operating results. The Company uses both GAAP and non-GAAP financial measures to evaluate its financial performance.

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Non-GAAP Reconciliation – EBITDA

EBITDA

(Unaudited, dollars in thousands)

Year ended December 31,		2019			2018

Net income	$	32,291		$	50,933

Income tax expense		10,736			17,781
Depreciation and amortization expense		29,331			31,972
Interest expense		192			330
Interest income		(2,594	)		(211	)
EBITDA	$	69,956		$	100,805

EBITDA is defined as earnings before interest, taxes, and depreciation and amortization. The Company calculates this by adding the amount of interest expense, income tax expense and depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest income that was included in net income from net income to arrive at EBITDA. The Company’s EBITDA calculation also excludes any one-time non-cash, non-operating expense.

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Quarterly Data

To supplement the summary annual unit data and discussion above, the same data for the last eight quarters follows:

		2019
	Q4		Q3		Q2		Q1

Units Ordered		413,900		362,200		257,900		327,100

Units Produced		355,000		286,500		297,900		374,000

Units Shipped		387,500		328,400		288,300		322,000

Estimated Units Sold from Distributors to Retailers		397,000		295,100		316,300		347,100

Total Adjusted NICS Background Checks		4,001,000		2,956,000		2,828,000		3,414,000

Average Unit Sales Price	$	269	$	286	$	329	$	351

Units – Backlog		187,900		161,500		127,700		158,100

Units – Company Inventory		67,400		100,000		141,900		132,300

Units – Distributor Inventory (5)		270,400		280,000		246,700		274,700

	2018
	Q4		Q3		Q2		Q1

Units Ordered		312,800		237,800		344,600		635,900

Units Produced		402,400		404,200		415,200		388,500

Units Shipped		394,800		386,200		411,600		440,400

Estimated Units Sold from Distributors to Retailers		400,000		364,000		381,100		509,500

Total Adjusted NICS Background Checks		3,813,000		2,708,000		2,863,000		3,731,000

Average Unit Sales Price	$	304	$	295	$	309	$	295

Units – Backlog		153,000		235,000		383,400		450,400

Units – Company Inventory		80,300		72,700		54,700		51,000

Units – Distributor Inventory (5)		299,700		304,800		282,700		252,300

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(5)	Distributor ending inventory as provided by the independent distributors of the Company’s products.

(in millions except average sales price, net of Federal Excise Tax)

	2019
	Q4		Q3		Q2		Q1

Orders Received	$	121.5	$	102.3	$	70.3	$	104.3

Average Sales Price of Orders Received	$	294	$	283	$	273	$	319

Ending Backlog	$	57.8	$	44.7	$	37.8	$	58.9

Average Sales Price of Ending Backlog	$	308	$	277	$	296	$	372

	2018
	Q4		Q3		Q2		Q1

Orders Received	$	92.9	$	66.6	$	95.4	$	175.1

Average Sales Price of Orders Received	$	297	$	280	$	277	$	275

Ending Backlog	$	55.6	$	81.5	$	125.0	$	149.2

Average Sales Price of Ending Backlog	$	364	$	347	$	326	$	331

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Fourth Quarter Gross Profit Analysis

The gross margin for the fourth quarter of 2019 and 2018 was 23.6% and 27.9%, respectively. Details of the gross margin are illustrated below:

(in thousands)
Three Months Ended December 31,		2019					2018

Net sales	$	105,139		100.0	%	$	121,121		100.0	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, and product liability		81,462		77.4	%		86,151		71.1	%

LIFO expense (income)		(976	)	(0.9	)%		530		0.4	%

Overhead rate adjustments to inventory		(214	)	(0.2	)%		72		0.1	%

Labor rate adjustments to inventory		(18	)	—			(46	)	—

Product liability		103		0.1	%		566		0.5	%

Total cost of products sold		80,357		76.4	%		87,273		72.1	%

Gross profit	$	24,782		23.6	%	$	33,848		27.9	%

Note: For a discussion of the captions in the above table, please see the “Cost of Products Sold and Gross Profit” discussion above.

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Results of Operations - 2018

Year ended December 31, 2018, as compared to year ended December 31, 2017:

Annual Summary Unit Data

Firearms unit data for orders, production, shipments and ending inventory, and castings setups (a measure of foundry production) are as follows:

	2018		2017		2016

Units Ordered		1,531,100		1,298,800		2,246,600

Units Produced		1,610,300		1,610,900		2,125,500

Units Shipped		1,633,000		1,665,300		2,055,500

Average Sales Price	$	300	$	311	$	320

Units – Backlog		153,000		254,900		621,400

Units – Company Inventory		80,300		102,900		157,400

Units – Distributor Inventory (1)		299,700		321,300		319,300

Castings Setups		83,401		91,715		170,681

Orders Received and Ending Backlog

(in millions except average sales price, net of Federal Excise Tax):

	2018		2017		2016

Orders Received	$	430.0	$	386.2	$	688.5

Average Sales Price of Orders Received (2)	$	281	$	297	$	306

Ending Backlog	$	55.6	$	75.4	$	195.0

Average Sales Price of Ending Backlog (2)	$	364	$	296	$	314

	(1)	Distributor ending inventory as provided by the independent distributors of the Company’s products.

	(2)	Average sales price for orders received and ending backlog is net of Federal Excise Tax of 10% for handguns and 11% for long guns.

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Product Demand

The estimated sell-through of the Company’s products from the independent distributors to retailers in 2018 was essentially unchanged from 2017. For the same period, the National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) decreased 6%. Despite the apparent reduction in overall industry demand, as reflected by the NICS data, the estimated sell-through of the Company’s products from the independent distributors to retailers remained consistent with the prior year due to strong demand for some of the Company’s products, particularly those that were introduced in December 2017.

New products represented $145.6 million or 30% of firearms sales in 2018, compared to $137.8 million or 27% of firearms sales in 2017. New product sales include only major new products that were introduced in the past two years. In 2018, new products included the Pistol Caliber Carbine, the Precision Rimfire Rifle, the Mark IV pistol, the LCP II pistol, the Security-9 pistol, and the EC9s pistol.

Estimated sell-through from distributors to retailers and total adjusted NICS background checks:

	2018		2017		2016

Estimated Units Sold from Distributors to Retailers (1)		1,654,600		1,663,100		2,007,200

Total Adjusted NICS Background Checks (2)		13,116,000		13,967,800		15,727,700

(1)	The estimates for each period were calculated by taking the beginning inventory at the distributors, plus shipments from the Company to distributors during the period, less the ending inventory at distributors. These estimates are only a proxy for actual market demand as they:

	•	Rely on data provided by independent distributors that are not verified by the Company,
	•	Do not consider potential timing issues within the distribution channel, including goods-in-transit, and
	•	Do not consider fluctuations in inventory at retail.

(2)	NICS background checks are performed when the ownership of most firearms, either new or used, is transferred by a Federal Firearms Licensee. NICS background checks are also performed for permit applications, permit renewals, and other administrative reasons.

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Production

The Company reviews the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, semi-monthly to plan production levels and manage increases in inventory. Total unit production in 2018 was materially unchanged from 2017.

Inventories

The Company’s finished goods inventory decreased by 22,600 units during 2018.

Distributor inventories of the Company’s products decreased by 21,600 units during 2018 and approximate a reasonable level to support rapid fulfillment of retailer demand. In the aggregate, total Company and distributor inventories decreased by 10% in 2018.

Inventory data follows:

		December 31,
	2018		2017		2016
Units – Company Inventory		80,300		102,900		157,400

Units – Distributor Inventory (3)		299,700		321,300		319,300

Total inventory (4)		380,000		424,200		476,700

	(3)	Distributor ending inventory as provided by the independent distributors of the Company’s products. These numbers do not include goods-in-transit inventory that has been shipped from the Company but not yet received by the distributors.

	(4)	This total does not include inventory at retailers. The Company does not have access to data on retailer inventories.

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Quarterly Summary Unit Data

To supplement the summary annual unit data and discussion above, the same data for the last eight quarters follows:

	2018
	Q4		Q3		Q2		Q1

Units Ordered		312,800		237,800		344,600		635,900

Units Produced		402,400		404,200		415,200		388,500

Units Shipped		394,800		386,200		411,600		440,400

Estimated Units Sold from Distributors to Retailers		400,000		364,000		381,100		509,500

Total Adjusted NICS Background Checks		3,813,000		2,708,000		2,863,000		3,731,000

Average Unit Sales Price	$	304	$	295	$	309	$	295

Units – Backlog		153,000		235,000		383,400		450,400

Units – Company Inventory		80,300		72,700		54,700		51,000

Units – Distributor Inventory (5)		299,700		304,800		282,700		252,300

	2017
	Q4		Q3		Q2		Q1

Units Ordered		467,500		221,900		214,400		395,000

Units Produced		320,800		327,300		432,900		529,900

Units Shipped		383,200		329,100		432,000		521,000

Estimated Units Sold from Distributors to Retailers		425,600		341,300		362,400		533,800

Total Adjusted NICS Background Checks		4,210,000		2,948,000		3,116,000		3,694,000

Average Unit Sales Price	$	306	$	315	$	302	$	319

Units – Backlog		254,900		170,600		277,800		495,400

Units – Company Inventory		102,900		165,400		167,200		166,200

Units – Distributor Inventory (5)		321,300		363,800		376,000		306,400

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(5)

Distributor ending inventory as provided by the independent distributors of the Company’s products.

(in millions except average sales price, net of Federal Excise Tax)

	2018
	Q4		Q3		Q2		Q1

Orders Received	$	92.9	$	66.6	$	95.4	$	175.1

Average Sales Price of Orders Received	$	297	$	280	$	277	$	275

Ending Backlog	$	55.6	$	81.5	$	125.0	$	149.2

Average Sales Price of Ending Backlog	$	364	$	347	$	326	$	331

	2017
	Q4		Q3		Q2		Q1

Orders Received	$	129.0	$	62.9	$	62.4	$	131.9

Average Sales Price of Orders Received	$	276	$	283	$	291	$	334

Ending Backlog	$	75.4	$	56.6	$	95.0	$	163.8

Average Sales Price of Ending Backlog	$	296	$	332	$	342	$	331

Net Sales

Consolidated net sales were $495.6 million in 2018. This represents a decrease of $26.7 million or 5.1% from 2017 consolidated net sales of $522.3 million.

Firearms segment net sales were $490.6 million in 2018. This represents a decrease of $27.1 million or 5.2% from 2017 firearms net sales of $517.7 million. Firearms unit shipments decreased 1.9% in 2018.

Casting segment net sales were $5.0 million in 2018. This represents an increase of $0.4 million or 10.4% from 2017 casting sales of $4.6 million.

Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $361.3 million in 2018. This represents a decrease of $6.9 million or 1.9% from 2017 consolidated cost of products sold of $368.2 million.

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The gross margin was 27.1% in 2018. This represents a decrease from 29.5% in 2017 as illustrated below:

(in thousands)


Year Ended December 31,		2018				2017

Net sales	$	495,635	100.0	%	$	522,256		100.0	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls		354,997	71.6	%		367,551		70.4	%

LIFO expense		1,882	0.4	%		2,639		0.5	%

Overhead rate adjustments to inventory		1,777	0.4	%		(4,423	)	(0.9	)%

Labor rate adjustments to inventory		193	—			(379	)	(0.1	)%

Product liability		1,514	0.3	%		360		0.1	%

Product safety bulletins and recalls		914	0.2	%		2,500		0.5	%

Total cost of products sold		361,277	72.9	%		368,248		70.5	%

Gross profit	$	134,358	27.1	%	$	154,008		29.5	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls- In 2018, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability increased 1.2% as a percentage of sales compared to 2017. This increase was due primarily to the adoption of ASC 606, which resulted in $12.1 million of promotional expenses that had been classified as selling expenses in prior years being included in cost of products sold in 2018.

LIFO- The Company recognized LIFO expense in 2018 and 2017 of $1.9 million and $2.6 million, respectively, which increased cost of products sold in both periods.

Overhead Rate Change- The net impact on inventory in 2018 and 2017 from the change in the overhead rates used to absorb overhead expenses into inventory was a decrease of $1.8 million and an increase of $4.4 million, respectively, reflecting increased overhead efficiency in 2018 and decreased overhead efficiency in 2017. The decrease in inventory value in 2018 resulted in a corresponding increase to cost of products sold and the increase in inventory value in 2017 resulted in a corresponding decrease to cost of products sold.

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Labor Rate Adjustments- In 2018, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was a decrease of $0.2 million, reflecting increased labor efficiency. This decrease in inventory value resulted in a corresponding increase to cost of products sold. In 2017, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was an increase of $0.4 million, reflecting decreased labor efficiency. This increase in inventory value resulted in a corresponding decrease to cost of products sold.

Product Liability- This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. These costs totaled $1.5 million and $0.4 million in 2018 and 2017, respectively. See Note 19 in the notes to the financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

Product Safety Bulletins and Recalls – In October 2018, the Company issued a safety bulletin announcing that some Ruger American Pistols chambered in 9mm may exhibit premature wear of the locking surfaces between the slide and barrel. The Company offered a free retrofit to customers of affected pistols and recorded a $1.0 million expense in the third quarter of 2018, which was the expected total cost of the safety bulletin.

In June 2017, the Company discovered that Mark IV pistols manufactured prior to June 1, 2017 had the potential to discharge unintentionally if the safety was not utilized correctly. The Company recalled all Mark IV pistols and recorded a $2.5 million expense in the second quarter, which is the expected total cost of the recall. Also, the Company issued a Product Safety Bulletin for certain Ruger Precision Rifles due to the potential for interference between the aluminum bolt shroud and the cocking piece and recorded a $0.2 million expense in the third quarter of 2017.

Gross Profit- Gross profit was $134.4 million or 27.1% of sales in 2018. This is a decrease of $19.6 million from 2017 gross profit of $154.0 million or 29.5% of sales in 2017.

Selling, General and Administrative

Selling, general and administrative expenses were $67.4 million in 2018, a decrease of $10.2 million from $77.6 million in 2017, and a decrease from 14.9% of sales in 2017 to 13.6% of sales in 2018. These decreases were primarily attributable to reductions in firearms promotional expense. Effective January 1, 2018, the Company adopted ASC 606 which modified revenue recognition related to certain sales promotion activities that include the shipment of no charge firearms. As a result, approximately $12.1 million of promotional expenses that had been classified as selling expenses in prior years are recorded as cost of products sold in 2018.

Other Operating Income, net

Other operating income, net was de minimis in 2018 and 2017.

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Operating Income

Operating income was $67.0 million or 13.5% of sales in 2018. This is a decrease of $9.3 million from 2017 operating income of $76.3 million or 14.6% of sales.

Royalty Income

Royalty income was $0.8 million in 2018 and $0.5 million in 2017.

Interest Income and Interest Expense

Interest income and interest expense were insignificant in 2018 and 2017.

Other Income, Net

Other income, net was $1.0 million in 2018, an increase of $0.1 million from $0.9 million in 2017.

Income Taxes and Net Income

The effective income tax rate was 25.9% in 2018 and 32.8% in 2017. The decrease in the effective tax rate in 2018 is primarily attributable to the “2017 Tax Cuts and Jobs Act” which reduced the Federal corporate income tax rate to 21% beginning in 2018.

As a result of the foregoing factors, consolidated net income was $50.9 million in 2018. This represents a decrease of $1.2 million from 2017 consolidated net income of $52.1 million.

Non-GAAP Financial Measure

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Non-GAAP Reconciliation – EBITDA

EBITDA

(Unaudited, dollars in thousands)

Year ended December 31,	2018			2017

Net income	$	50,933		$	52,142

Income tax expense		17,781			25,504
Depreciation and amortization expense		31,972			34,264
Interest expense		330			152
Interest income		(211	)		(27	)
EBITDA	$	100,805		$	112,035

Financial Condition

Liquidity

At December 31, 2019, the Company had cash and cash equivalents of $35.4 million and $129.5 million in short term investments. Our pre-LIFO working capital of $235.2 million, less the LIFO reserve of $47.1 million, resulted in working capital of $188.1 million and a current ratio of 4.1 to 1.

Operations

Cash provided by operating activities was $49.6 million, $119.8 million, and $101.2 million in 2019, 2018, and 2017, respectively. The decrease in cash provided in 2019 compared to 2018 is primarily attributable to decreased earnings in 2019, an increase in accounts receivable in 2019 compared to a significant decrease in accounts receivable in 2018, and decreases in accounts payable and accrued expenses in 2019 compared to increases in those accounts in 2018.

The increase in cash provided in 2018 compared to 2017 is attributable to significant decreases in accounts payable and accrued expenses in 2017 compared to modest increases in 2018, partially offset by other working capital fluctuations.

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks,

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wax, ceramic material, metal alloys, various synthetic products and other component parts. There is 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 or on order to provide sufficient time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

Investing and Financing

Capital expenditures were $20.3 million, $10.5 million, and $33.6 million in 2019, 2018, and 2017, respectively. In 2020, the Company expects capital expenditures to approximate $20 million, much of which will relate to tooling and fixtures for new product introductions and to upgrade and modernize manufacturing equipment. Due to market conditions and business circumstances, actual capital expenditures could vary significantly from the budgeted amount. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash.

As of December 31, 2019, the Company had $129.5 million of United States Treasury instruments which mature within one year.

In 2019, the Company repurchased 44,500 shares of its common stock for $2.0 million in the open market. The average price per share purchased was $44.83. These purchases were funded with cash on hand. No shares were repurchased in 2018. In 2017, the Company repurchased 1,319,708 shares of its common stock for $64.8 million in the open market. The average price per share purchased was $49.14. These purchases were funded with cash on hand.

At December 31, 2019, $86.7 million remained authorized for future share repurchases.

The Company paid dividends totaling $14.3 million, $19.2 million, and $23.9 million in 2019, 2018, and 2017, respectively. The dividend varies every quarter because the Company pays a percentage of earnings rather than a fixed amount per share. The Company’s practice is to pay a dividend of approximately 40% of net income.

On February 14, 2020, the Company’s Board of Directors authorized a dividend of 18¢ per share to shareholders of record on March 13, 2020. The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash, and the Company’s need for funds.

The Company provides supplemental discretionary contributions to substantially all employees’ individual 401(k) accounts.

Based on its unencumbered assets, the Company believes it has the ability to raise cash through issuance of short-term or long-term debt. The Company’s unsecured $40 million credit facility,

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which expires on September 30, 2020, remained unused at December 31, 2019 and the Company has no debt.

Contractual Obligations

The table below summarizes the Company’s significant contractual obligations at December 31, 2019, and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods. This table excludes amounts already recorded on the Company’s balance sheet as current liabilities at December 31, 2019.

“Purchase Obligations” as used in the below table includes all agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Certain of the Company’s purchase orders or contracts for the purchase of raw materials and other goods and services that may not necessarily be enforceable or legally binding on the Company are also included in “Purchase Obligations” in the table, and, therefore, certain of the Company’s purchase orders or contracts included in the table may represent authorizations to purchase rather than legally binding agreements. The Company expects to fund all of these commitments with cash flows from operations and current cash.

Payment due by period (in thousands)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 Years
Long-Term Debt Obligations		—		—		—		—		—
Capital Lease Obligations		—		—		—		—		—
Operating Lease Obligations	$	3,420	$	589	$	803	$	428	$	1,600
Purchase Obligations	$	40,124	$	40,124		—		—		—
Other Long Term Liabilities Reflected on the Registrant’s Balance sheet Under GAAP		—		—		—		—		—

Total	$	43,544	$	40,713	$	803	$	428	$	1,600

The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

Firearms Legislation and Litigation

See Item 1A - Risk Factors and Note 19 to the financial statements which are included in the Annual Report on Form 10-K for a discussion of firearms legislation and litigation.

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Other Operational Matters

In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to workplace safety, firearms serial number tracking and control, waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable Bureau of Alcohol, Tobacco, Firearms & Explosives, environmental, and safety regulations and the outcome of any proceedings or orders will not have a material adverse effect on the financial position or results of operations of the Company. If these regulations become more stringent in the future and we are not able to comply with them, such noncompliance could have a material adverse impact on the Company.

Since 2018, two of the Company’s independent domestic wholesale distributors filed for bankruptcy protection. Additionally, three of our smaller domestic distributors discontinued their firearms distribution operations in 2019. Currently, there are 14 domestic distributors. Additionally, the Company has 41 and 26 distributors servicing the export and law enforcement markets, respectively.

The Company self-insures a significant amount of its product liability, workers’ compensation, medical, and other insurance. It also carries significant deductible amounts on various insurance policies.

The Company expects to realize its deferred tax assets through tax deductions against future taxable income.

Critical Accounting Policies and Estimates

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 net sales and expenses recognized and incurred during the reporting period then ended. The Company bases estimates on prior experience, facts and circumstances, and other assumptions, including those reviewed with actuarial consultants and independent counsel, when applicable, that are believed to be reasonable. However, actual results may differ from these estimates.

The Company believes the determination of its product liability accrual is a critical accounting policy. The Company’s management reviews every lawsuit and claim 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 a claim, has been made when potential losses or costs of defense are probable and 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

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reasonably expected to be incurred in the future, exceed amounts already provided with respect to such claims. 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 related costs, in the opinion of management, after consultation with independent and corporate counsel, there is a remote likelihood that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but such litigation may have a material impact on the Company’s financial results and cash flows for a particular period.

The Company believes the valuation of its inventory and the related excess and obsolescence reserve is also a critical accounting policy. Inventories are carried at the lower of cost, principally determined by the last-in, first-out (LIFO) method, or market. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and prevailing inventory costs existing at that time.

The Company determines its excess and obsolescence reserve by projecting the year in which inventory will be consumed into a finished product. Given ever-changing market conditions, customer preferences and the anticipated introduction of new products, it does not seem prudent to carry inventory at full cost beyond that needed during the next 36 months.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers Topic 606, (“ASC 606”), which supersedes nearly all existing revenue recognition guidance. As more fully discussed in Note 2, the Company adopted ASC 606 using the modified retrospective method on January 1, 2018.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The most significant change in the new compensation guidance is that all excess tax benefits and tax deficiencies (including tax benefits of dividends) on share-based compensation awards should be recognized in the Statement of Income as income tax expense. Previously such benefits or deficiencies were recognized in the Balance Sheet as adjustments to additional paid-in capital. The new guidance was effective in fiscal years beginning after December 15, 2016 and interim periods thereafter. The Company adopted ASU 2016-09 in the first quarter of 2017. The impact of adopting this change in accounting principle reduced the Company’s effective tax rate by 2% for the period ending December 31, 2017 and did not impact the effective tax rate for the period ended December 31, 2018. The adoption of this pronouncement did not have a material impact on the Company’s results of operations or financial position in any year.

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Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. ASC 842 is effective for years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied using either a modified retrospective approach, or an optional transition method which allows an entity to apply the new standard at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASC 842 in the first quarter of 2019 using this optional transition method. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualified. The Company elected the practical expedient to not separate lease and non-lease components for all of its leases. The right-of-use assets and lease liabilities for the lease portfolio recorded on its consolidated balance sheet as of January 1, 2019 was about $2 million, primarily related to real estate. The adoption of this pronouncement did not impact the Company’s consolidated statements of operations or its consolidated statement of cash flows.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new guidance requires financial instruments measured at amortized cost basis to be presented at the net amount expected to be collected through application of the current expected credit losses model. The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This pronouncement is effective for fiscal years beginning after Dec. 15, 2019. Early adoption is permitted. The Company has completed its assessment and will adopt the new guidance effective January 1, 2020. The adoption of the new guidance will not have a material impact to the Company.

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, the impact of future firearms control and environmental legislation and accounting estimates, any one or more of which could cause actual results to differ materially from those projected. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other words and terms of similar meaning, typically identify such forward-looking statements. 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.

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ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changing interest rates on its investments, which consist primarily of United States Treasury instruments with short-term (less than one year) maturities and cash. The interest rate market risk implicit in the Company's investments at any given time is low, as the investments mature within short periods and the Company does not have significant exposure to changing interest rates on invested cash.

The Company has not undertaken any actions to cover interest rate market risk and is not a party to any interest rate market risk management activities.

A hypothetical 100 basis point change in market interest rates over the next year would not materially impact the Company’s earnings or cash flows. A hypothetical 100 basis point change in market interest rates would not have a material effect on the fair value of the Company’s investments.

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ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Reports of Independent Registered Public Accounting Firm	48
Consolidated Balance Sheets at December 31, 2019 and 2018	51
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2019, 2018 and 2017	53
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2019, 2018 and 2017	54
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017	55
Notes to Consolidated Financial Statements	56

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Sturm, Ruger & Company, Inc. and Subsidiary

Opinion on the Internal Control Over Financial Reporting

We have audited Sturm, Ruger & Company, Inc. and Subsidiary's (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and our report dated February 19, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/RSM US LLP

Stamford, Connecticut

February 19, 2020

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Sturm, Ruger & Company, Inc. and Subsidiary

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Sturm, Ruger & Company, Inc. and Subsidiary (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedule (collectively, the financial statements). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 19, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventory Reserves

As described in Notes 1 and 4 to the consolidated financial statements, the Company's consolidated net inventories balance was $28.3 million as of December 31, 2019. The Company’s inventories are valued at

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the lower of cost, determined by the last-in, first-out (LIFO) method, or market. The Company values its inventory under the LIFO method at the end of each year based on the inventory levels and the prevailing inventory costs existing at that time. The Company also determines a reserve for excess and obsolete inventory based on historical usage, and projecting the year in which inventory will be consumed into a finished product. The valuation of inventories requires management to make significant assumptions, including the assessment of market value by inventory category considering historical usage, future usage and market demand for their products, and qualitative judgments related to discontinued, slow moving and obsolete inventories.

We identified inventory reserves as a critical audit matter because of the significant assumptions, manual calculations and judgements used by management in the LIFO and excess and obsolete reserves. Auditing management’s assumptions was complex and required a high degree of auditor judgement and subjectivity when performing audit procedures and evaluating the audit evidence obtained.

Our audit procedures related to the Company’s inventory reserves included the following, among others:

•

We obtained an understanding of the relevant controls related to the inventory reserves and tested such controls for operating effectiveness, including controls related to the review of the significant assumptions related to expected future demand and historical sales.

•

We tested management's process for determining the inventory reserves, including:

◦

Evaluated the reasonableness of the significant assumptions used by management including those related to forecasted inventory usage by considering historic sales activity and sales forecast

◦

Tested the completeness, accuracy, and relevance of the underlying data used in management's estimates of slow-moving and obsolete inventory and the LIFO reserve

◦

Tested the calculations and application of management’s methodologies related to the valuation estimates of slow-moving and obsolete inventory and the LIFO reserve.

◦

Developed an independent expectation of inventory write-downs at year-end based on historical trends and compared it to management's estimate.

/s/RSM US LLP

We have served as the Company's auditor since 2005.

Stamford, Connecticut

February 19, 2020

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Consolidated Balance Sheets

(Dollars in thousands, except per share data)

December 31,		2019			2018

Assets

Current Assets
Cash and cash equivalents	$	35,420		$	38,492
Short-term investments		129,488			114,326
Trade receivables, net		52,640			45,031

Gross inventories		79,011			80,288
Less LIFO reserve		(47,137	)		(46,341	)
Less excess and obsolescence reserve		(3,573	)		(2,527	)
Net inventories		28,301			31,420

Prepaid expenses and other current assets		3,467			2,920
Total Current Assets		249,316			232,189

Property, Plant, and Equipment		372,482			358,756
Less allowances for depreciation		(298,568	)		(276,045	)
Net property, plant and equipment		73,914			82,711

Deferred income taxes		5,393			2,969
Other assets		20,338			17,663
Total Assets	$	348,961		$	335,532

See accompanying notes to consolidated financial statements.

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December 31,		2019			2018

Liabilities and Stockholders’ Equity

Current Liabilities

Trade accounts payable and accrued expenses	$	29,771		$	33,021
Contract liabilities with customers (Note 2)		9,623			7,477
Product liability		735			1,073
Employee compensation and benefits		14,273			20,729
Workers’ compensation		5,619			5,551
Income taxes payable		1,223			3,340
Total Current Liabilities		61,244			71,191

Lease liability (Note 7)		2,176			—
Product liability accrual		83			99

Contingent liabilities (Note 19)		—			—

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
2019 – 24,160,424 issued,
17,450,526 outstanding
2018 – 24,123,418 issued,
17,458,020 outstanding		24,160			24,123
Additional paid-in capital		38,683			33,291
Retained earnings		368,205			350,423
Less: Treasury stock – at cost
2019 – 6,709,898 shares
2018 – 6,665,398 shares		(145,590	)		(143,595	)
Total Stockholders’ Equity		285,458			264,242
Total Liabilities and Stockholders’ Equity	$	348,961		$	335,532

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)

Year ended December 31,		2019			2018			2017

Net firearms sales	$	406,326		$	490,607		$	517,701
Net castings sales		4,180			5,028			4,555
Total net sales		410,506			495,635			522,256

Cost of products sold		310,958			361,277			368,248

Gross profit		99,548			134,358			154,008

Operating Expenses:
Selling		29,775			35,111			49,232
General and administrative		30,344			32,248			28,396
Other operating expense (income), net		54			(10	)		31
Total operating expenses		60,173			67,349			77,659

Operating income		39,375			67,009			76,349

Other income:
Royalty income		698			804			506
Interest income		2,594			211			27
Interest expense		(192	)		(330	)		(152	)
Other income, net		552			1,020			916
Total other income, net		3,652			1,705			1,297

Income before income taxes		43,027			68,714			77,646

Income taxes		10,736			17,781			25,504

Net income and comprehensive income	$	32,291		$	50,933		$	52,142


Basic Earnings Per Share	$	1.85		$	2.92		$	2.94

Diluted Earnings Per Share	$	1.82		$	2.88		$	2.91

Cash Dividends Per Share	$	0.82		$	1.10		$	1.36

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

		Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Total

Balance at December 31, 2016	$	24,034	$	27,211		$	293,400		$	(78,745	)	$	265,900
Net income							52,142						52,142
Dividends paid							(23,905	)					(23,905)
Stock-based compensation				3,659									3,659
Exercise of stock options and vesting of RSU’s				(2,483	)								(2,483	)
Common stock issued – compensation plans		58		(58	)								—
Unpaid dividends accrued							(314	)					(314	)
Repurchase of 1,319,708 shares of common stock										(64,850	)		(64,850	)
Balance at December 31, 2017		24,092		28,329			321,323			(143,595	)		230,149
Net income							50,933						50,933
Dividends paid							(19,201	)					(19,201	)
Stock-based compensation				5,809									5,809
Vesting of RSU’s				(816	)								(816)
Common stock issued – compensation plans		31		(31	)								—
Unpaid dividends accrued							(405	)					(405	)
Adoption of ASC 606 (Note 2)							(2,227	)					(2,227	)
Balance at December 31, 2018		24,123		33,291			350,423			(143,595	)		264,242
Net income							32,291						32,291
Dividends paid							(14,319	)					(14,319	)
Stock-based compensation				6,330									6,330
Vesting of RSU’s				(901	)								(901)
Common stock issued – compensation plans		37		(37	)								—
Unpaid dividends accrued							(190	)					(190	)
Repurchase of 44,500 shares of common stock										(1,995	)		(1,995	)
Balance at December 31, 2019	$	24,160	$	38,683		$	368,205		$	(145,590	)	$	285,458

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

(In thousands)

Year ended December 31,		2019			2018			2017

Operating Activities
Net income	$	32,291		$	50,933		$	52,142
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		29,331			31,972			34,264
Stock-based compensation		6,330			5,809			3,659
Excess and obsolescence inventory reserve		1,046			(185	)		358
Loss (gain) on sale of assets		54			(10	)		31
Deferred income taxes		(2,424	)		(4,371	)		1,736
Changes in operating assets and liabilities:
Trade receivables		(7,609	)		15,051			9,360
Inventories		2,073			8,479			14,463
Trade accounts payable and accrued expenses		(3,646	)		939			(16,060	)
Contract liability to customers		2,146			5,250			—
Employee compensation and benefits		(6,646	)		6,009			(11,466	)
Product liability		(354	)		353			(1,000	)
Prepaid expenses, other assets and other liabilities		(888	)		(3,757	)		13,704
Income taxes payable		(2,117	)		3,340			—
Cash provided by operating activities		49,587			119,812			101,191

Investing Activities
Property, plant, and equipment additions		(20,296	)		(10,541	)		(33,596	)
Purchases of short-term investments		(282,738	)		(114,259	)		—
Proceeds from maturity of short-term investments		267,576			—			—
Net proceeds from sale of assets		14			10			3
Cash used for investing activities		(35,444	)		(124,790	)		(33,593	)

Financing Activities
Dividends paid		(14,319	)		(19,201	)		(23,905	)
Repurchase of common stock		(1,995	)		—			(64,850	)
Payment of employee withholding tax related to share-based compensation		(901	)		(816	)		(2,482	)
Cash used for financing activities		(17,215	)		(20,017	)		(91,237	)

Decrease in cash and cash equivalents		(3,072	)		(24,995	)		(23,639	)
Cash and cash equivalents at beginning of year		38,492			63,487			87,126
Cash and cash equivalents at end of year	$	35,420		$	38,492		$	63,487

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

(Dollars in thousands, except per share)

1.Summary of Significant Accounting Policies

Organization

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of sales were from firearms. Export sales represented approximately 5% of firearms sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors principally to the commercial sporting market.

The Company manufactures investment castings made from steel alloys and metal injection molding (“MIM”) parts for internal use in its firearms and utilizes available capacity to manufacture and sell investment castings and MIM parts to unaffiliated, third-party customers. Castings were approximately 1% of the Company’s total sales for the year ended December 31, 2019.

Preparation of Financial Statements

The Company follows United States generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The significant accounting policies described below, together with the notes that follow, are an integral part of the consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

The Company recognizes revenue in accordance with the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), which became effective January 1, 2018. Substantially all product sales are sold FOB (free on board) shipping point. Customary payment terms are 2% 30 days, net 40 days. Generally, all performance obligations are satisfied when product is shipped and the customer takes ownership and assumes the risk of loss. In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which downstream customers are entitled to receive no charge products based on their purchases of certain of the

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Company’s products from the independent distributors. The fulfillment of these no charge products is the Company’s responsibility. In such instances, the Company allocates the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the firearms included in the promotional program, including the no charge firearms. Revenue is recognized proportionally as each performance obligation is satisfied, based on the relative customary price of each product. Customary prices are generally determined based on the prices charged to the independent distributors. The net change in contract liabilities for a given period is reported as an increase or decrease to sales. The Company accounts for cash sales discounts as a reduction in sales. Amounts billed to customers for shipping and handling fees are included in net sales and costs incurred by the Company for the delivery of goods are classified as selling expenses. Federal excise taxes are excluded from net sales.

Cash and 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.

Fair Value Measurements of Short-term Investments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market at the measurement date. Fair value is established according to a hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

	Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

	Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

	Level 3: Unobservable inputs are used when little or no market data is available. Level 3 inputs are given the lowest priority in the fair value hierarchy.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

As of December 31, 2019, all of the Company’s short-term investments are U.S. Treasury instruments (Level 1), maturing within one year. Such securities are classified as held to maturity, since the Company has the intent and ability to do so, and are carried at cost plus accrued interest, which approximates fair value.

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Accounts Receivable

The Company establishes an allowance for doubtful accounts based on the creditworthiness of its customers and historical experience. While the Company uses the best information available to make its evaluation, future adjustments to the allowance for doubtful accounts may be necessary if there are significant changes in economic and industry conditions or any other factors considered in the Company’s evaluation. Bad debt expense has been immaterial during each of the last three years.

Inventories

Substantially all of the Company’s inventories are valued at the lower of cost, principally determined by the last-in, first-out (LIFO) method, or market. Elements of cost in inventories include raw materials, direct labor and manufacturing overhead.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost. Depreciation is computed over useful lives using the straight-line and declining balance methods predominately over 15 years for buildings, 7 years for machinery and equipment and 3 years for tools and dies. When assets are retired, sold or otherwise disposed of, their gross carrying values and related accumulated depreciation are removed from the accounts and a gain or loss on such disposals is recognized when appropriate.

Maintenance and repairs are charged to operations; replacements and improvements are capitalized.

Long-lived Assets

The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value 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 their fair value. The Company bases fair value of the assets on quoted market prices if available or, if not available, quoted market prices of similar assets. Where quoted market prices are not available, the Company estimates fair value using the estimated future cash flows generated by the assets discounted at a rate commensurate with the risks associated with the recovery of the assets.

Income Taxes

Income taxes are accounted for using the asset and liability method. 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 temporary differences between the financial statement carrying amounts and the tax basis of the Company’s assets and liabilities.

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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 2019, 2018, and 2017, were $2.6 million, $2.9 million, and $3.1 million, respectively.

Shipping Costs

Costs incurred related to the shipment of products are included in selling expense. Such costs totaled $3.9 million, $4.8 million, and $4.8 million in 2019, 2018, and 2017, respectively.

Research and Development

Earnings per Share

Basic earnings per share is based upon the weighted-average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the impact of options, restricted stock units, and deferred stock outstanding using the treasury stock method.

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The most significant change in the new compensation guidance is that all excess tax benefits and tax deficiencies (including tax benefits of dividends) on share-based compensation awards should be recognized in the Statement of Income as income tax expense. Previously such benefits or deficiencies were recognized in the Balance Sheet as adjustments to additional paid-in capital. The new guidance was effective in fiscal years beginning after December 15, 2016 and interim periods thereafter. The Company adopted ASU 2016-09 in the first quarter of 2017. The impact of adopting this change in accounting principle reduced the Company’s effective tax rate by 2% for the period ending December 31, 2017 and did not impact the effective tax rate for the periods ended December 31, 2018 and 2019. The adoption of this pronouncement did not have a material impact on the Company’s results of operations or financial position in any year.

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In February 2016, the FASB issued ASU 2016-02, Leases Topic 842 (“ASC 842”), which amends the existing accounting standards for leases. ASC 842 requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet for all leases (with the exception of short-term leases) and disclose key information about leasing arrangements, whereas under current standards, the Company’s operating leases were not recognized on its consolidated balance sheet. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. ASC 842 is effective for years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied using either a modified retrospective approach, or an optional transition method which allows an entity to apply the new standard at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASC 842 in the first quarter of 2019 using this optional transition method. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualified. The Company elected the practical expedient to not separate lease and non-lease components for all of its leases. The right-of-use assets and lease liabilities for the lease portfolio recorded on its consolidated balance sheet as of January 1, 2019 was about $2 million, primarily related to real estate. The adoption of this pronouncement did not impact the Company’s consolidated statements of operations or its consolidated statement of cash flows.

2.Revenue Recognition and Contracts with Customers

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, applied to those contracts for which all performance obligations were not completed as of that date. Under the modified retrospective method, results for reporting periods beginning after January 1, 2018 are presented using the guidance of ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the previous guidance provided in ASC Topic 605, Revenue Recognition.

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The effects of adjustments to the December 31, 2017 consolidated balance sheet for the adoption of ASC 606 were as follows:

	Balance at December 31, 2017		ASC 606 Adjustments			Opening Balance January 1, 2018
Trade accounts payable and accrued expenses	$	32,422	$	(4,000	)	$	28,422
Deferred revenue from contracts with customers		—		6,950			6,950
Deferred taxes		1,402		(723	)		679
Retained earnings	$	321,323	$	(2,227	)	$	319,096

At December 31, 2017, the Company had accrued $4.0 million related to certain of its sales promotion activities that included the shipment of no charge firearms. Using the new accounting guidance, a deferred contract liability of $6.9 million was required at December 31, 2017 and an entry for $6.9 million to increase the deferred contract liability, a decrease to accounts payable and accrued expenses by $4.0 million, an increase to deferred tax assets by $0.7 million, and a reduction to beginning retained earnings of $2.2 million was recorded on January 1, 2018 (the “transition entry”).

The impact of the adoption of ASC 606 on revenue recognized during the years ended December 31, 2019 and December 31, 2018 is as follows:

		2019			2018
Contract liabilities with customers at January 1,	$	7,477		$	6,950
Revenue recognized		(16,352	)		(20,653	)
Revenue deferred		18,498			21,180
Contract liabilities with customers at December 31,	$	9,623		$	7,477

During the year ended December 31, 2019, the Company deferred $18.5 million of revenue, offset by the recognition of $16.4 million of revenue previously deferred as the performance obligations relating to the shipment of free products were satisfied. This resulted in a net decrease in firearms sales for the year ended December 31, 2019 of $2.1 million and a deferred contract revenue liability at December 31, 2019 of $9.6 million. The Company estimates that revenue from this deferred contract liability will be recognized in the first two quarters of 2020.

During the year ended December 31, 2018, the Company deferred $21.2 million of revenue, offset by the recognition of $20.7 million of revenue previously deferred as the performance obligations relating to the shipment of free products were satisfied. This resulted in a net decrease in firearms sales for the year ended December 31, 2018 of $0.5 million and a deferred contract revenue liability at December 31, 2018 of $7.4 million.

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As a result, approximately $9.6 million and $12.1 million of promotional expenses that had been classified as selling expenses in prior years were recorded as cost of products sold in 2019 and 2018, respectively.

As a result of the adoption of ASC 606, for the years ended December 31, 2019 and 2018, the gross margin percentage was reduced by 3% and 3%, respectively, and earnings per share decreased by approximately 4¢ and 1¢, respectively, as compared with the revenue recognition methodology used in earlier comparable reporting periods.

Practical Expedients and Exemptions

The Company has elected to account for shipping and handling activities that occur after control of the related product transfers to the customer as fulfillment activities that are recognized upon shipment of the goods.

3.Trade Receivables, Net

Trade receivables consist of the following:

December 31,		2019			2018

Trade receivables	$	54,110		$	46,360
Allowance for doubtful accounts		(400	)		(400	)
Allowance for discounts		(1,070	)		(929	)
	$	52,640		$	45,031

In 2019, the largest individual trade receivable balances accounted for 31%, 18%, and 12% of total trade receivables, respectively.

In 2018, the largest individual trade receivable balances accounted for 20%, 20%, and 14% of total trade receivables, respectively.

4.Inventories

Inventories consist of the following:

December 31,	2019			2018
Inventory at FIFO
Finished goods	$	13,131		$	17,313
Materials and products in process		65,880			62,975
Gross inventories		79,011			80,288
Less: LIFO reserve		(47,137	)		(46,341	)
Less: excess and obsolescence reserve		(3,573	)		(2,527	)
Net Inventories	$	28,301		$	31,420

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In 2019 and 2018, inventory quantities were reduced. These reductions resulted in liquidations 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 2019 and 2018 costs of products sold by approximately $0.2 million and $0.6 million, respectively.

5.Property, Plant and Equipment

Property, plant and equipment consist of the following:

December 31,	2019		2018

Land and improvements	$	2,671	$	2,020
Buildings and improvements		53,692		52,518
Machinery and equipment		270,426		262,821
Dies and tools		45,693		41,397
	$	372,482	$	358,756

6.Other Assets

Other assets consist of the following:

December 31,	2019			2018

Patents, at cost	$	7,181		$	6,955
Accumulated amortization		(4,780	)		(4,491	)
Deposits on capital items		11,886			12,106
Right-of-use assets		2,610			—
Other		3,441			3,093
	$	20,338		$	17,663

The capitalized cost of patents is amortized using the straight-line method over their useful lives. The cost of patent amortization was $0.3 million in 2019, 2018, and 2017. The estimated annual patent amortization cost for each of the next five years is $0.3 million. Costs incurred to maintain existing patents are charged to expense in the year incurred.

7.Leased Assets

The Company leases certain of its real estate and equipment. The Company has evaluated all its leases and determined that all are operating leases under the definitions of the guidance of ASU 2016-02. The Company’s lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.

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The Company adopted the provisions of ASU 2016-02 using the effective date method on January 1, 2019 and recorded right-of-use assets equal to the present value of the contractual liability for future lease payments. The table below presents the right-of-use assets and related lease liabilities recognized on the condensed consolidated balance sheet as of December 31, 2019:

	Balance Sheet Line Item	December 31, 2019

Right-of-use assets	Other assets	$	2,610
Operating lease liabilities
Current portion	Trade accounts payable and accrued expenses	$	464
Noncurrent portion	Lease liabilities		2,176
Total operating lease liabilities		$	2,640

The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight line basis over the life of the lease.

The Company’s leases generally do not provide an implicit interest rate, and therefore the Company uses its incremental borrowing rate enumerated in its revolving line of credit (see Note 9) to determine the present value of its operating lease liabilities. The following table reconciles the undiscounted future minimum lease payments to the total operating lease liabilities recognized on the condensed consolidated balance sheet as of December 31, 2019:

2020	$	589
2021		559
2022		244
2023		213
2024		215
Thereafter		1,600
Total undiscounted future minimum lease payments		3,420
Less: Difference between undiscounted lease payments & the present value of future lease payments		(780	)
Total operating lease liabilities	$	2,640

Certain of the Company’s lease agreements contain renewal options at the Company’s discretion. The Company does not recognize right-of-use assets or lease liabilities for leases of one year or less or for renewal periods unless it is reasonably certain that the Company will exercise the renewal option at the inception of the lease or when a triggering event occurs. The Company’s weighted average remaining lease term for operating leases as of December 31, 2019 is 11.6 years.

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8. Trade Accounts Payable and Accrued Expenses

Trade accounts payable and accrued expenses consist of the following:

December 31,	2019		2018

Trade accounts payable	$	8,339	$	11,675
Federal excise taxes payable		10,670		11,690
Accrued other		10,762		9,656
	$	29,771	$	33,021

9. Line of Credit

The Company has a $40 million unsecured revolving line of credit with a bank. This facility is renewable annually and terminates on September 30, 2020. Borrowings under this facility bear interest at the one-month LIBOR rate (1.754% at December 31, 2019) plus 150 basis points. The Company is charged one-quarter of a percent (0.25%) per year on the unused portion. At December 31, 2019, the Company was in compliance with the terms and covenants of the credit facility, which remains unused. At December 31, 2018, the Company was in compliance with the terms and covenants of a previous credit facility.

10. Employee Benefit Plans

The Company sponsors a qualified defined-contribution 401(k) plan that covers substantially all of its employees. Under the terms of the 401(k) plan, the Company matches a certain portion of employee contributions to their individual 401(k) accounts using the “safe harbor” guidelines provided in the Internal Revenue Code. Expenses related to matching employee contributions to the 401(k) plan were $3.2 million, $3.1 million, and $3.5 million in 2019, 2018, and 2017, respectively.

Additionally, in 2019, 2018, and 2017 the Company provided discretionary supplemental contributions to the individual 401(k) accounts of substantially all employees. Each employee received a supplemental contribution to their account based on a uniform percentage of qualifying compensation established annually. The cost of these supplemental contributions totaled $5.0 million, $5.3 million, and $5.6 million in 2019, 2018, and 2017, respectively.

11.Other Operating Income, Net

Other operating income, net consists of the following:

Year ended December 31,		2019			2018		2017

(Loss) gain on sale of operating assets	$	(54	)	$	10	$	(31	)

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12. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2016.

The federal and state income tax provision consisted of the following:

Year ended December 31,		2019					2018					2017
		Current		Deferred			Current		Deferred			Current		Deferred
Federal	$	10,705	$	(1,911	)	$	17,574	$	(3,265	)	$	20,232	$	1,865
State		2,455		(513	)		3,859		(387	)		3,987		(580	)
	$	13,160	$	(2,424	)	$	21,433	$	(3,652	)	$	24,219	$	1,285

Changes in deferred tax assets relating to the adoption of ASC 606 are not charged to expense and are therefore not included in the deferred tax provision; instead they are charged to retained earnings.

The effective income tax rate varied from the statutory federal income tax rate as follows:

Year ended December 31,	2019		2018		2017
Statutory federal income tax rate	21.0	%	21.0	%	35.0	%
State income taxes, net of federal tax benefit	3.6		4.0		2.9
Domestic production activities deduction	—		—		(2.6	)
Impact of Accounting Standard Update 2016-09	—		—		(0.9	)
Impact of Tax Cuts and Jobs Act on deferred taxes	—		—		(0.7	)
Other items	0.4		0.9		(0.9	)
Effective income tax rate	25.0	%	25.9	%	32.8	%

The Tax Cuts and Jobs Act of 2017 lowered the statutory corporate tax rate from 35% to 21 % for years beginning after December 31, 2017. The Company estimates that its effective tax rate in 2020 will approximate 24.8 %.

As discussed in the Recent Accounting Pronouncements section of Note 1 to the Consolidated Financial Statements, the Company adopted ASU 2016-09 in the first quarter of 2017. The impact of adopting this change in accounting principle reduced the Company’s effective tax rate by 0.9% for the period ending December 31, 2017 and did not impact the effective tax rate for the periods ended December 31, 2018 and December 31, 2019. The adoption of this pronouncement did not have a material impact on the Company’s results of operations or financial position in any year.

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Significant components of the Company’s deferred tax assets and liabilities are as follows:

December 31,	2019		2018
Deferred tax assets
Product Liability	$	203	$	294
Employee compensation and benefits		2,263		2,356
Allowances for doubtful accounts and discounts		3,761		2,750
Inventories		978		729
Stock-based compensation		3,064		2,292
Other		1,637		1,113
Total deferred tax assets		11,906		9,534
Deferred tax liabilities:
Depreciation		5,631		6,256
Other		882		309
Total deferred tax liabilities		6,513		6,565
Net deferred tax assets	$	5,393	$	2,969

The Company made income tax payments of approximately $16.0 million, $18.1 million, and $23.4 million, during 2019, 2018, and 2017, respectively. The Company expects to realize its deferred tax assets through tax deductions against future taxable income.

The Company does not believe it has included any “uncertain tax positions” in its federal income tax return or any of the state income tax returns it is currently filing. The Company has made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. The Company does not anticipate that such additional taxes, if any, would result in a material change to its financial position.

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13.Earnings Per Share

Set forth below is a reconciliation of the numerator and denominator for the basic and diluted earnings per share calculations for the periods indicated:

Year ended December 31,	2019		2018		2017

Numerator:
Net income	$	32,291	$	50,933	$	52,142
Denominator:
Weighted average number of common shares outstanding – Basic		17,461,421		17,450,658		17,725,494
Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans		317,411		203,973		213,596
Weighted average number of common shares outstanding – Diluted		17,778,832		17,654,631		17,939,090

The dilutive effect of outstanding options and restricted stock units is calculated using the treasury stock method. There are no anti-dilutive stock options in 2019, 2018, and 2017 because the closing price of the Company’s stock on December 31, 2019, 2018, and 2017 exceeded the strike price of all outstanding options on each of those dates.

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14.Stock Repurchases

In 2017 and 2019 the Company repurchased shares of its common stock. Details of these purchases are as follows:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program

First Quarter 2017
January 29 to February 25		900,997	$	49.70		900,997
February 26 to April 1		173,288	$	49.92		173,288
Third Quarter 2017
July 30 to August 26		4,490	$	47.92		4,490
August 27 to September 30		240,933	$	46.30		240,933
Third Quarter 2019
July 28 to August 24		44,500	$	44.83		44,500
Total		1,364,208	$	48.96		1,364,208	$	86,710,000

All of these purchases were made with cash held by the Company and no debt was incurred. No shares were repurchased in 2018.

At December 31, 2019, approximately $87 million remained authorized for share repurchases.

15.Compensation Plans

In May 2017, the Company’s shareholders approved the 2017 Stock Incentive Plan (the “2017 SIP”) under which employees, independent contractors, and non-employee directors may be granted stock options, restricted stock, deferred stock awards, and stock appreciation rights, any of which may or may not require the satisfaction of performance objectives. Vesting requirements are determined by the Compensation Committee of the Board of Directors. The Company has reserved 750,000 shares for issuance under the 2017 SIP, of which 461,000 shares remain available for future grants as of December 31, 2019.

In April 2007, the Company adopted and the shareholders approved the 2007 Stock Incentive Plan (the “2007 SIP”), which had similar provisions as the 2017 SIP. The 2007 SIP plan expired April 24, 2017. The Company had reserved 2,550,000 shares for issuance under the 2007 SIP, of which 2,182,000 shares were issued. No further grants will be made from the 2007 SIP.

Compensation expense related to deferred stock, restricted stock, and restricted stock units is recognized based on the grant-date fair value of the Company’s common stock, using either the

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actual share price or an estimated value using the Monte Carlo valuation model. Compensation expense related to stock options is recognized based on the grant-date fair value of the awards estimated using the Black-Scholes option pricing model. The total stock-based compensation cost included in the Statements of Income was $6.3 million, $5.8 million, and $3.7 million in 2019, 2018, and 2017, respectively.

Stock Options

There were no stock options granted in 2019, 2018, or 2017 and no stock options outstanding at December 31, 2019.

The following table summarizes the stock option activity of the 2007 SIP:

	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (Years)
Outstanding at December 31, 2016		11,838		$	8.95	$	6.69		2.3
Granted		—			—		—		—
Exercised		—			—		—		—
Canceled		—			—		—		—
Outstanding at December 31, 2017		11,838			8.95		6.69		1.3
Granted		—			—		—		—
Exercised		(4,616	)		8.28		6.90		—
Canceled		(1,750	)		8.69		4.57		0.3
Outstanding at December 31, 2018		5,472			9.60		7.20		0.9
Granted		—			—		—		—
Exercised		(5,472	)		9.60		7.20		—
Canceled		—			—		—		—
Outstanding at December 31, 2019		—			—		—		—
Exercisable Options Outstanding at December 31, 2019		—			—		—		—
Non-Vested Options Outstanding at December 31, 2019		—		$	—	$	—		—

Deferred Stock

Deferred stock awards vest based on the passage of time or the Company’s attainment of performance objectives. Upon vesting, these awards convert one-for-one to common stock.

In 2019, 6,336 deferred stock awards were issued to non-employee directors that will vest in May 2020 and 7,719 deferred stock awards were issued to non-employee directors that will vest in May 2022.

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In 2018, 5,767 deferred stock awards were issued to non-employee directors that vested in May 2019 and 6,751 deferred stock awards were issued to non-employee directors that will vest in May 2021.

In 2017, 5,432 deferred stock awards were issued to non-employee directors that vested in May 2018 and 6,360 deferred stock awards were issued to non-employee directors that will vest in May 2020.

Compensation expense related to these awards is amortized ratably over the vesting period. Compensation expense related to these awards was $0.7 million in 2019, 2018, and 2017.

At December 31, 2019, there was $0.9 million of unrecognized compensation cost related to deferred stock that is expected to be recognized over a period of three years.

Restricted Stock Units

The Company grants restricted stock units RSU’s to senior employees. Some of these RSU’s are retention awards and have only time-based vesting. Other RSU’s have a vesting “double trigger.” The vesting of these RSU’s is dependent on the achievement of corporate objectives established by the Compensation Committee of the Board of Directors, including stock performance relative to industry indices, return on net operating assets, and the passage of time.

During 2019, 68,000 restricted stock units were issued. Compensation costs related to these restricted stock units was $3.7 million, of which $1.0 million was recognized in 2019. The costs are being recognized ratably over the remaining periods required before the units vest, which range from 24 to 26 months.

During 2018, 172,000 restricted stock units were issued. Compensation costs related to these restricted stock units was $8.1 million, of which $2.2 million was recognized in 2018. The costs are being recognized ratably over the remaining periods required before the units vest, which ranged from 24 to 26 months.

During 2017, 114,000 restricted stock units were issued. Compensation costs related to these restricted stock units was $4.3 million, of which $1.2 million was recognized in 2017. The costs are being recognized ratably over the remaining periods required before the units vest, which ranged from 24 to 26 months.

At December 31, 2019, there was $5.8 million of unrecognized compensation cost related to restricted stock units that is expected to be recognized over a period of 2.3 years.

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16.Operating Segment Information

The Company has two reportable operating segments: firearms and castings. The firearms segment manufactures and sells rifles, pistols, and revolvers principally to a number of federally-licensed, independent wholesale distributors primarily located in the United States. The castings segment manufactures and sells steel investment castings and metal injection molding parts.

Corporate segment income relates to interest income, the sale of non-operating assets, and other non-operating activities. Corporate segment assets consist of cash and other non-operating assets.

The Company evaluates performance and allocates resources, in part, based on income (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.

Year ended December 31,	2019			2018			2017
Net Sales
Firearms	$	406,326		$	490,607		$	517,701
Castings
Unaffiliated		4,180			5,028			4,555
Intersegment		18,425			22,946			24,436
		22,605			27,974			28,991
Eliminations		(18,425	)		(22,946	)		(24,436	)
	$	410,506		$	495,635		$	522,256
Income (Loss) Before Income Taxes
Firearms	$	40,814		$	70,311		$	77,368
Castings		(797	)		(2,240	)		(53	)
Corporate		3,010			643			331
	$	43,027		$	68,714		$	77,646
Identifiable Assets
Firearms	$	163,792		$	166,975		$	206,091
Castings		11,332			10,850			12,524
Corporate		173,837			157,707			65,703
	$	348,961		$	335,532		$	284,318
Depreciation
Firearms	$	27,149		$	29,542		$	31,701
Castings		1,875			2,083			2,118
	$	29,024		$	31,625		$	33,819
Capital Expenditures
Firearms	$	19,570		$	9,689		$	32,710
Castings		726			852			886
	$	20,296		$	10,541		$	33,596

In 2019, the Company’s largest customers and the percent of firearms sales they represented were as follows: Lipsey’s-26%; Sports South-22%; and Davidson’s-15%.

In 2018, the Company’s largest customers and the percent of firearms sales they represented were as follows: Davidson’s-21%; Lipsey’s-20%; and Sports South-16%.

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In 2017, the Company’s largest customers and the percent of firearms sales they represented were as follows: Davidson’s-21%; Lipsey’s-18%; Sports South-13%; and Jerry’s/Ellett Brothers-12%.

The Company’s assets are located entirely in the United States and domestic sales represented at least 95% of total sales in 2019, 2018, and 2017.

17.Quarterly Results of Operations (Unaudited)

The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 2019:

Three Months Ended

	3/30/19		6/29/19		9/28/19		12/31/19
Net Sales	$	114,039	$	96,329	$	94,999	$	105,139
Gross profit		32,597		22,302		19,867		24,782
Net income		13,033		6,233		4,817		8,208
Basic earnings per share		0.75		0.36		0.28		0.47
Diluted earnings per share	$	0.74	$	0.35	$	0.27	$	0.46

Three Months Ended

	3/31/18		6/30/18		9/29/18		12/31/18
Net Sales	$	131,159	$	128,411	$	114,945	$	121,121
Gross profit		35,820		36,599		28,092		33,848
Net income		14,264		15,189		9,206		12,274
Basic earnings per share		0.82		0.87		0.53		0.70
Diluted earnings per share	$	0.81	$	0.86	$	0.52	$	0.69

18.Related Party Transactions

From time to time, the Company contracts with the National Rifle Association (“NRA”) for some of its promotional and advertising activities. The Company paid the NRA $0.8 million, $0.7 million and $0.8 million in 2019, 2018 and 2017, respectively.

The Company has contracted with Symbolic, Inc. (“Symbolic”) to assist in its marketing efforts. Payments to Symbolic were insignificant in 2019 and 2018. During the year ended December 31, 2017, the Company paid Symbolic $1.4 million, which amount included $0.9 million for the reimbursement of expenses paid by Symbolic on the Company’s behalf. Symbolic’s principal and founder has been the Company’s Vice President of Marketing since June 2017 and remains a partner of Symbolic.

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19.Contingent Liabilities

As of December 31, 2019, the Company was a defendant in five (5) lawsuits and is aware of certain other such claims. The lawsuits fall into three categories: traditional product liability litigation, non-product litigation, and municipal litigation. Each is discussed in turn below.

Traditional Product Liability Litigation

Two lawsuits mentioned above involve a claim for damages related to an allegedly defective product due to its design and/or manufacture. Each lawsuit stems from a specific incident of personal injury and is based on traditional product liability theories such as strict liability, negligence, and/or breach of warranty.

The Company management believes that the allegations in these cases are unfounded, that the incidents are unrelated to the design or manufacture of the firearms involved, and that there should be no recovery against the Company.

Non-Product Litigation

David S. Palmer, on behalf of himself and all others similarly situated vs. Sturm, Ruger & Co. is a putative class-action suit filed in Florida state court on behalf of Florida consumers. The suit alleges breach of warranty and deceptive trade practices related to the sale of 10/22 Target Rifles. The Company has denied all material allegations and the dispute between the parties has been resolved. The matter remains pending until an order of dismissal can be obtained from the court.

Primus Group LLC v. Smith and Wesson, et al. is a putative class action filed in the United States District Court for the Southern District of Ohio on August 8, 2019. Plaintiff alleges that the defendants’ lawful sale of modern sporting rifles violates the Racketeer Influenced Corrupt Organizations Act and seeks a temporary restraining order (“TRO”) and permanent injunction. On August 20, 2019, the court denied plaintiff’s request for a TRO. On September 3, 2019, defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). On September 16, 2019, plaintiff filed an Amended Complaint. On October 9, 2019, the court dismissed plaintiff’s Amended Complaint, with prejudice. Plaintiff filed a Notice of Appeal on October 15, 2019 and has since sought two extensions of time to file its initial brief.

Municipal Litigation

Municipal litigation generally includes those cases brought by cities or other governmental entities against firearms manufacturers, distributors and retailers seeking to recover damages allegedly arising out of the misuse of firearms by third parties.

There is only one remaining lawsuit of this type, filed by the City of Gary in Indiana State Court in 1999. The complaint in that case seeks damages, among other things, for the costs of medical care, police and emergency services, public health services, and other services as well as punitive damages. In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacture, marketing and distribution practices of the various defendants. The

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suit alleges, among other claims, negligence in the design of products, public nuisance, negligent distribution and marketing, negligence per se and deceptive advertising. The case does not allege a specific injury to a specific individual as a result of the misuse or use of any of the Company's products.

After a long procedural history, the case was scheduled for trial on June 15, 2009. The case was not tried on that date and was largely dormant until a status conference was held on July 27, 2015. At that time, the court entered a scheduling order setting deadlines for plaintiff to file a Second Amended Complaint, for defendants to answer, and for defendants to file dispositive motions. The plaintiff did not file a Second Amended Complaint by the deadline.

In 2015, Indiana passed a new law such that Indiana Code §34-12-3-1 became applicable to the City's case. The defendants filed a joint motion for judgment on the pleadings, asserting immunity under §34-12-3-1 and asking the court to revisit the Court of Appeals' decision holding the Protection of Lawful Commerce in Arms Act inapplicable to the City's claims. The motion was fully briefed by the parties.

On September 29, 2016, the court entered an order staying the case pending a decision by the Indiana Supreme Court in KS&E Sports v. Runnels, which presented related issues. The Indiana Supreme Court decided KS&E Sports on April 24, 2017, and the City of Gary court lifted the stay. The City of Gary court also entered an order setting a supplemental briefing schedule under which the parties addressed the impact of the KS&E Sports decision on defendants' motion for judgment on the pleadings.

A hearing on the motion for judgment on the pleadings was held on December 12, 2017. On January 2, 2018, the court issued an order granting defendants’ motion for judgment on the pleadings, but denying defendants’ request for attorney’s fees and costs. On January 8, 2018, the court entered judgment for the defendants. The City filed a Notice of Appeal on February 1, 2018. Defendants cross-appealed the order denying attorney’s fees and costs.

Briefing in the Indiana Court of Appeals was completed on the City’s appeal and Defendants’ cross appeal on September 10, 2018. The Court of Appeals issued its ruling on May 23, 2019, affirming dismissal of the City’s negligent design and warnings count on the basis that the City had not alleged that Manufacturer Defendants’ conduct was unlawful. However, the court reversed dismissal of the City’s negligent sale and distribution and related public nuisance counts for damages and injunctive relief.

The Manufacturer Defendants filed a Petition to Transfer the case to the Indiana Supreme Court on July 8, 2019. The Petition was denied on November 26, 2019. The case has been remanded to the trial court for further proceedings.

Summary of Claimed Damages and Explanation of Product Liability Accruals

Punitive damages, as well as compensatory damages, are demanded in certain of the lawsuits and claims. In many instances, the plaintiff does not seek a specified amount of money, though

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aggregate amounts ultimately sought may exceed product liability accruals and applicable insurance coverage. For product liability claims made after July 10, 2000, coverage is provided on an annual basis for losses exceeding $5 million per claim, or an aggregate maximum loss of $10 million annually, except for certain new claims which might be brought by governments or municipalities after July 10, 2000, which are excluded from coverage.

The Company management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims. While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company’s financial results for a particular period.

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.

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 losses relating to unfavorable outcomes cannot be made. However, in product liability cases in which a dollar amount of damages is claimed, the amount of damages claimed, which totaled $0.1 million and $0.1 million at December 31, 2019 and 2018, respectively, are set forth as an indication of possible maximum liability 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.

As of December 31, 2019 and 2018, the Company was a defendant in 3 and 4 lawsuits, respectively, involving its products and is aware of other such claims. During 2019 and 2018, respectively, 2 and 3 product-related lawsuits were filed against the Company, 2 and 1 lawsuits were settled, and 1 and 0 lawsuits were dismissed without payment.

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The Company’s product liability expense was $ 0.7 million in 2019, $1.5 million in 2018, and $0.4 million in 2017. This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters.

A roll-forward of the product liability reserve and detail of product liability expense for the three years ended December 31, 2019 follows:

Balance Sheet Roll-forward for Product Liability Reserve

						Cash Payments
	Balance Beginning of Year (a)		Accrued Legal Expense (Income) (b)			Legal Fees (c)			Settlements (d)			Balance End of Year (a)

2017	$	1,819		(477	)		(290	)		(233	)	$	819

2018	$	819		731			(183	)		(195	)	$	1,172

2019	$	1,172		(37	)		(240	)		(77	)	$	818

Income Statement Detail for Product Liability Expense

	Accrued Legal Expense (b)			Insurance Premium Expense (e)		Total Product Liability Expense

2017	$	(477	)		837	$	360

2018	$	731			783	$	1,514

2019	$	(37	)		755	$	718

Notes

(a)	The beginning and ending liability balances represent accrued legal fees only. Settlements and administrative costs are expensed as incurred. Only in rare instances is an accrual established for settlements.

(b)	The expense accrued in the liability is for legal fees only. In 2017 and 2019, the costs incurred related to cases that were settled or dismissed were less than the amounts accrued for these cases in prior years.

(c)	Legal fees represent payments to outside counsel related to product liability matters.

(d)	Settlements represent payments made to plaintiffs or allegedly injured parties in exchange for a full and complete release of liability.

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(e)	Insurance expense represents the cost of insurance premiums.

There were no insurance recoveries during any of the above years.

20.Financial Instruments

The Company does not hold or issue financial instruments for trading or hedging purposes, nor does it hold interest rate, leveraged, or other types of derivative financial instruments. Fair values of accounts receivable, accounts payable, accrued expenses and income taxes payable reflected in the December 31, 2019 and 2018 balance sheets approximate carrying values at those dates.

21.Subsequent Events

On February 14, 2020, the Company’s Board of Directors authorized a dividend of 18¢ per share to shareholders of record on March 13, 2020.

The Company’s management has evaluated transactions occurring subsequent to December 31, 2019 and determined that there were no events or transactions during that period that would have a material impact on the Company’s results of operations or financial position.

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ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A — CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company conducted an evaluation, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2019. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2019, the Company’s disclosure controls and procedures over financial reporting were effective.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company conducted an evaluation, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of December 31, 2019. This evaluation was performed based on the criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013.

Management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in “Internal Control — Integrated Framework” issued by the COSO in 2013.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report which is included in this Form 10-K.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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New York Stock Exchange Certification

Pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, the Company submitted an unqualified certification of our Chief Executive Officer to the New York Stock Exchange in 2019. The Company has also filed, as exhibits to this Annual Report on Form 10-K, the Chief Executive Officer and Chief Financial Officer Certifications required under the Sarbanes-Oxley Act of 2002.

ITEM 9B — OTHER INFORMATION

None.

PART III

ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning the Company’s directors, including the Company’s separately designated standing audit committee, and on the Company’s code of business conduct and ethics required by this Item is incorporated by reference from the Company’s Proxy Statement relating to the 2020 Annual Meeting of Stockholders scheduled to be held May 13, 2020, which will be filed with the SEC in April 2020.

Information concerning the Company’s executive officers required by this Item is set forth in Item 1 of this Annual Report on Form 10-K under the caption “Executive Officers of the Company.”

Information concerning beneficial ownership reporting compliance required by this Item is incorporated by reference from the Company’s Proxy Statement relating to the 2020 Annual Meeting of Stockholders scheduled to be held May 13, 2020, which will be filed with the SEC in April 2020.

ITEM 11—EXECUTIVE COMPENSATION

Information concerning director and executive compensation required by this Item is incorporated by reference from the Company’s Proxy Statement relating to the 2020 Annual Meeting of Stockholders scheduled to be held May 13, 2020, which will be filed with the SEC in April 2020.

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning the security ownership of certain beneficial owners and management and related stockholder matters required by this Item is incorporated by reference from the Company’s Proxy Statement relating to the 2020 Annual Meeting of Stockholders scheduled to be held May 13, 2020, which will be filed with the SEC in April 2020.

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ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information concerning certain relationships and related transactions required by this Item is incorporated by reference from the Company’s Proxy Statement relating to the 2020 Annual Meeting of Stockholders scheduled to be held May 13, 2020.

ITEM 14—PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning the Company’s principal accountant fees and services and the pre-approval policies and procedures of the audit committee of the board of directors required by this Item is incorporated by reference from the Company’s Proxy Statement relating to the 2020 Annual Meeting of Stockholders scheduled to be held May 13, 2020, which will be filed with the SEC in April 2020.

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PART IV

ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a)	Exhibits and Financial Statement Schedule

	(1)	Financial Statements can be found under Item 8 of Part II of this Form 10-K

	(2)	Schedule can be found on Page 83 of this Form 10-K

	(3)	Listing of Exhibits:

		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 through November 12, 2019.

		Exhibit 4.1	Description of the Company’s Securities.

		Exhibit 10.1	Severance Agreement, dated as of April 10, 2008, by and between the Company and Thomas A. Dineen (Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on April 11, 2008).

		Exhibit 10.2	Severance Agreement, dated as of April 10, 2008, by and between the Company and Thomas P. Sullivan (Incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed with the SEC on April 11, 2008).

		Exhibit 10.3	Severance Agreement, dated as of May 2, 2008 by and between the Company and Kevin B. Reid, Sr. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2008).

		Exhibit 10.4	Transition Services and Consulting Agreement, dated August 1, 2016, by and between the Company and Michael O. Fifer (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on August 2, 2016).

		Exhibit 10.5	Agreement, dated August 1, 2016, by and between the Company and Christopher J. Killoy(Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on August 2, 2016).

		Exhibit 10.6	Executive Severance Agreement, dated August 1, 2016, by and between the Company and Shawn C. Leska (Incorporated by

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			reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on August 2, 2016).
		Exhibit 10.7	Credit Agreement, dated September 27, 2018, by and between the Company and Wells Fargo Bank, NA (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on October 2, 2018).

		Exhibit 10.8	The Sturm, Ruger & Company, Inc. 2017 Stock Incentive Plan (incorporated by reference to Annex A of the Company’s Definitive Proxy Statement of Schedule 14A, filed with the SEC on March 27, 2017)

		Exhibit 23.1	Consent of RSM US LLP

		Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.

		Exhibit 31.2	Certification of Treasurer and Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.

		Exhibit 32.1	Certification of the Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		Exhibit 32.2	Certification of the Treasurer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		Exhibit 101.INS*	XBRL Instance Document– the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

		Exhibit 101.SCH*	Inline XBRL Taxonomy Extension Schema Document

		Exhibit 101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document

		Exhibit 101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document

		Exhibit 101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document

		Exhibit 101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document

		Exhibit 104*	Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

		*Filed herewith

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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/ THOMAS A. DINEEN
	Thomas A. Dineen
	Principal Financial Officer
	Principal Accounting Officer, Senior Vice President,
	Treasurer, and Chief Financial Officer


	February 19, 2020
	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/CHRISTOPHER J. KILLOY	2/19/20	S/JOHN A. COSENTINO, JR.	2/19/20
Christopher J. Killoy Chief Executive Officer, Director (Principal Executive Officer)		John A. Cosentino, Jr. Director

S/C. MICHAEL JACOBI	2/19/20	S/RONALD C. WHITAKER	2/19/20
C. Michael Jacobi Director		Ronald C. Whitaker Director

S/AMIR P. ROSENTHAL	2/19/20	S/PHILLIP C. WIDMAN	2/19/20
Amir P. Rosenthal Director		Phillip C. Widman Director

S/TERRENCE G. O’CONNOR	2/19/20	S/SANDRA S. FROMAN	2/19/20
Terrence G. O’Connor Director		Sandra S. Froman Director

S/MICHAEL O. FIFER	2/19/20	S/THOMAS A. DINEEN	2/19/20
Michael O. Fifer Director		Thomas A. Dineen Principal Financial Officer Principal Accounting Officer, Senior Vice President, Treasurer, and Chief Financial Officer

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YEAR ENDED DECEMBER 31, 2019

STURM, RUGER & COMPANY, INC.

ITEMS 15(a)

FINANCIAL STATEMENT SCHEDULE

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Sturm, Ruger & Company, Inc.

Item 15(a)--Financial Statement Schedule

Schedule II—Valuation and Qualifying Accounts

(In Thousands)

COL. A		COL. B		COL. C			COL. D			COL. E
				ADDITIONS
Description		Balance at Beginning of Period		(1) Charged (Credited) to Costs and Expenses	(2) Charged to Other Accounts –Describe		Deductions			Balance at End of Period

Deductions from asset accounts:
Allowance for doubtful accounts:
Year ended December 31, 2019	$	400	$	—		$	—		$	400
Year ended December 31, 2018	$	400	$	—		$	—		$	400
Year ended December 31, 2017	$	400	$	—		$	—		$	400

Allowance for discounts:
Year ended December 31, 2019	$	929	$	9,222		$	9,081	(a)	$	1,070
Year ended December 31, 2018	$	1,225	$	10,704		$	11,000	(a)	$	929
Year ended December 31, 2017	$	1,405	$	11,795		$	11,975	(a)	$	1,225

Excess and obsolete inventory reserve:
Year ended December 31, 2019	$	2,527	$	1,199		$	153	(b)	$	3,573
Year ended December 31, 2018	$	2,698	$	1,377		$	1,548	(b)	$	2,527
Year ended December 31, 2017	$	2,340	$	1,247		$	889	(b)	$	2,698

(a)	Discounts taken
(b)	Inventory written off