STURM RUGER & CO INC 10-K

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm (PCAOB ID 49 ) 45 Consolidated Balance Sheets at December 31, 2022 and 2021 48 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2022, 2021 and 2020 50 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022, 2021 and 2020 51 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 52 Notes to Consolidated Financial Statements 53 44 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders 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, 2022, 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, 2022, 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, 2022 and 2021, 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, 2022, and our report dated February 22, 2023 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 22, 2023 45 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders 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, 2022 and 2021, 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, 2022, and the related notes to the consolidated financial statements and schedule (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 22, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These financial statements 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 audits 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 regarding 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) relate to accounts or disclosures that are material to the financial statements and (2) involved our 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 matters or on the accounts or disclosures to which it relates. 46 Table of Contents Last-In, First-Out Inventory Reserve As described in Notes 1 and 5 to the financial statements, substantially all of the Company’s inventories are valued at the lower of cost, which is principally determined by the last-in, first-out (LIFO) method, or net realizable value, and the Company's consolidated net inventories balance of $65.0 million as of December 31, 2022, included a LIFO inventory reserve of $59.5 million. The Company records its net inventories under the LIFO method at the end of each year based on the inventory levels at the measurement date and the prevailing inventory costs existing at that time which are estimated using a complex manual calculation. We identified the LIFO inventory reserve as a critical audit matter because of the complexities of the manual calculations performed by management to estimate the prevailing inventory costs, which includes calculations to estimate current year price level changes through the development of a prior year and a current year cumulative price index. Auditing management’s estimate of the LIFO inventory reserve was complex and required a high degree of auditor judgement and increased audit effort due to the complexities of management’s manual calculations. Our audit procedures related to the Company’s LIFO inventory reserve included the following, among others: ● We obtained an understanding of the relevant controls related to the LIFO inventory reserve and tested such controls for design and operating effectiveness, including controls related to the review of the calculations related to the estimate of the current year price level changes, the calculation of the cumulative price indexes, and the estimate of the LIFO inventory reserve. ● We tested the completeness, accuracy, and relevance of the underlying data used in management's estimate of the current year price level changes, the calculation of cumulative price index and the LIFO inventory reserve. ● We tested the mathematical accuracy of the Company’s calculation to estimate the LIFO inventory reserve. ● We evaluated the appropriateness of management’s methodologies to develop the estimate of the LIFO inventory reserve. ● We evaluated the reasonableness of management’s estimate of the current year price level changes by comparing management’s estimate to external market data. /s/ RSM US LLP We have served as the Company's auditor since 2005. Stamford, Connecticut February 22, 2023 47 Table of Contents Consolidated Balance Sheets (Dollars in thousands, except per share data) December 31, 2022 2021 Assets Current Assets Cash and cash equivalents $ 65,173 $ 21,044 Short-term investments 159,132 199,971 Trade receivables, net 65,449 57,036 Gross inventories 129,294 100,023 Less LIFO reserve ( 59,489 ) ( 51,826 ) Less excess and obsolescence reserve ( 4,812 ) ( 4,347 ) Net inventories 64,993 43,850 Prepaid expenses and other current assets 7,091 6,832 Total Current Assets 361,838 328,733 Property, Plant, and Equipment 447,126 421,282 Less allowances for depreciation ( 370,273 ) ( 347,651 ) Net property, plant and equipment 76,853 73,631 Deferred income taxes 6,109 536 Other assets 39,963 39,443 Total Assets $ 484,763 $ 442,343 See accompanying notes to consolidated financial statements. 48 Table of Contents December 31, 2022 2021 Liabilities and Stockholders’ Equity Current Liabilities Trade accounts payable and accrued expenses $ 35,658 $ 36,400 Dividends Payable 88,343 — Contract liabilities with customers (Note 3) 1,031 — Product liability 235 795 Employee compensation and benefits 30,160 33,154 Workers’ compensation 6,469 6,760 Income taxes payable 1,171 — Total Current Liabilities 163,067 77,109 Lease liability (Note 8) 3,039 1,476 Employee compensation 1,846 — Product liability accrual 73 97 Contingent liabilities (Note 21) — — 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 2022 – 24,378,568 issued, 17,664,230 outstanding 2021 – 24,306,486 issued, 17,596,588 outstanding 24,378 24,306 Additional paid-in capital 45,075 46,847 Retained earnings 393,097 438,098 Less: Treasury stock – at cost 2022 – 6,714,338 shares 2021 – 6,709,898 shares ( 145,812 ) ( 145,590 ) Total Stockholders’ Equity 316,738 363,661 Total Liabilities and Stockholders’ Equity $ 484,763 $ 442,343 See accompanying notes to consolidated financial statements. 49 Table of Contents Consolidated Statements of Income and Comprehensive Income (In thousands, except per share data) Year ended December 31, 2022 2021 2020 Net firearms sales $ 593,289 $ 728,141 $ 565,863 Net castings sales 2,553 2,595 3,005 Total net sales 595,842 730,736 568,868 Cost of products sold 415,757 451,179 377,427 Gross profit 180,085 279,557 191,441 Operating Expenses (Incomes): Selling 36,114 33,259 33,332 General and administrative 40,551 43,289 39,013 Other operating expense (income), net ( 36 ) ( 127 ) ( 52 ) Total operating expenses 76,629 76,421 72,293 Operating income 103,456 203,136 119,148 Other income: Royalty income 837 1,975 814 Interest income 2,552 49 1,126 Interest expense ( 256 ) ( 164 ) ( 191 ) Other income, net 1,690 1,598 84 Total other income, net 4,823 3,458 1,833 Income before income taxes 108,279 206,594 120,981 Income taxes 19,947 50,695 30,583 Net income and comprehensive income $ 88,332 $ 155,899 $ 90,398 Basic Earnings Per Share $ 5.00 $ 8.87 $ 5.17 Diluted Earnings Per Share $ 4.96 $ 8.78 $ 5.09 Weighted average number of common shares outstanding – Basic 17,648,850 17,585,604 17,486,054 Weighted average number of common shares outstanding – Diluted 17,793,348 17,757,834 17,769,856 Cash Dividends Per Share $ 2.42 $ 3.36 $ 6.51 See accompanying notes to consolidated financial statements. 50 Table of Contents Consolidated Statements of Stockholders’ Equity (Dollars in thousands) Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Balance at December 31, 2019 $ 24,160 $ 38,683 $ 368,205 $ ( 145,590 ) $ 285,458 Net income 90,398 90,398 Dividends paid ( 113,896 ) ( 113,896 ) Stock-based compensation 6,128 6,128 Vesting of RSU’s ( 1,297 ) ( 1,297 ) Common stock issued – compensation plans 46 ( 46 ) — Unpaid dividends accrued ( 2,092 ) ( 2,092 ) Balance at December 31, 2020 24,206 43,468 342,615 ( 145,590 ) 264,699 Net income 155,899 155,899 Dividends paid ( 59,104 ) ( 59,104 ) Stock-based compensation 8,280 8,280 Vesting of RSU’s ( 4,801 ) ( 4,801 ) Common stock issued – compensation plans 100 ( 100 ) — Unpaid dividends accrued ( 1,312 ) ( 1,312 ) Balance at December 31, 2021 24,306 46,847 438,098 ( 145,590 ) 363,661 Net income 88,332 88,332 Dividends paid ( 42,718 ) ( 42,718 ) Stock-based compensation 1,671 1,671 Vesting of RSU’s ( 3,371 ) ( 3,371 ) Common stock issued – compensation plans 72 ( 72 ) — Unpaid dividends accrued ( 90,615 ) ( 90,615 ) Repurchase of 4,440 shares of common stock ( 222 ) ( 222 ) Balance at December 31, 2022 $ 24,378 $ 45,075 $ 393,097 $ ( 145,812 ) $ 316,738 See accompanying notes to consolidated financial statements. 51 Table of Contents Consolidated Statements of Cash Flows (In thousands) Year ended December 31, 2022 2021 2020 Operating Activities Net income $ 88,332 $ 155,899 $ 90,398 Adjustments to reconcile net income to cash provided by operating activities, net of effects of acquisition: Depreciation and amortization 25,789 26,152 27,576 Stock-based compensation 1,671 8,280 6,128 Excess and obsolescence inventory reserve 501 953 — Gain on sale of assets ( 36 ) ( 127 ) ( 52 ) Deferred income taxes ( 5,573 ) 994 3,863 Changes in operating assets and liabilities: Trade receivables ( 8,413 ) 840 ( 5,236 ) Inventories ( 21,644 ) ( 15,726 ) 10,624 Trade accounts payable and accrued expenses ( 640 ) ( 392 ) 7,954 Contract liability with customers 1,031 ( 84 ) ( 9,539 ) Employee compensation and benefits ( 3,420 ) ( 5,433 ) 20,910 Product liability ( 584 ) ( 234 ) 308 Prepaid expenses, other assets and other liabilities ( 954 ) 1,217 ( 7,905 ) Income taxes receivable/payable 1,171 — ( 1,223 ) Cash provided by operating activities 77,231 172,339 143,806 Investing Activities Property, plant, and equipment additions ( 27,730 ) ( 28,776 ) ( 24,229 ) Purchase of Marlin assets — — ( 28,316 ) Purchases of short-term investments ( 365,480 ) ( 681,940 ) ( 369,439 ) Proceeds from maturity of short-term investments 406,319 602,976 377,920 Net proceeds from sale of assets 100 203 178 Cash provided by (used for) investing activities 13,209 ( 107,537 ) ( 43,886 ) Financing Activities Dividends paid ( 42,718 ) ( 59,104 ) ( 113,896 ) Repurchase of common stock ( 222 ) — — Payment of employee withholding tax related to share-based compensation ( 3,371 ) ( 4,801 ) ( 1,297 ) Cash used for financing activities ( 46,311 ) ( 63,905 ) ( 115,193 ) Increase (decrease) in cash and cash equivalents 44,129 897 ( 15,273 ) Cash and cash equivalents at beginning of year 21,044 20,147 35,420 Cash and cash equivalents at end of year $ 65,173 $ 21,044 $ 20,147 See accompanying notes to consolidated financial statements. 52 Table of Contents 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 6 % 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 less than 1 % of the Company’s total sales for the year ended December 31, 2022. 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 Company’s products from the independent distributors. The fulfillment of these no charge products 53 Table of Contents 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. Business Combination On September 26, 2020, the Company entered into an Asset Purchase Agreement (the "Agreement") with the Remington Outdoor Company, Inc. and each of the subsidiaries of the Remington Outdoor Company, Inc. (collectively, “Remington”) to purchase substantially all of the assets (the “Marlin Assets”) used to manufacture Marlin Firearms (the “Marlin Acquisition”). The agreement to purchase these assets emanated from the Remington Outdoor Company, Inc. bankruptcy and was approved by the United States Bankruptcy Court for the Northern District of Alabama on September 30, 2020. The Marlin Acquisition was conducted through a Bankruptcy Court-supervised process, subject to Bankruptcy Court-approved bidding procedures, approval of the transactions by the Bankruptcy Court, and the satisfaction of certain closing conditions. The Company closed on the Marlin Acquisition on November 23, 2020. The Agreement provided that, upon the terms and subject to the conditions set forth therein, Remington sold, transferred and assigned to the Company the Marlin Assets (as defined in the Agreement) for a purchase price of $ 28.3 million in cash. The Marlin Assets include the following assets, among other things, equipment, inventory, and all intellectual property related to Marlin, including the Marlin names and marks, and all derivatives thereof. The primary purpose of the Marlin Acquisition was to manufacture and sell Marlin branded firearms and generate shareholder value. The Marlin brand aligns with the Ruger brand and the Marlin product portfolio will widen the Company’s diverse product offerings. The transaction was funded by the Company with cash on hand and has been accounted for in accordance with ASC 805 - Business Combinations . ASC 805 requires, among other things, an assignment of the acquisition consideration transferred to the sellers for the tangible and intangible assets acquired, using the bottom up approach, to estimate their value at acquisition date. Any excess of the fair value of the purchase consideration over these identified net assets was recorded as goodwill. Our estimates of fair value were based upon assumptions believed to be reasonable, yet were inherently uncertain. During the measurement period, which did not exceed one year from the date of acquisition, we recorded adjustments totaling $2.2 million to the estimated fair values of the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. These adjustments were recorded in the year ended December 31, 2021. 54 Table of Contents 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, 2022, the Company’s short-term investments consist of U.S. Treasury instruments (Level 1), maturing within one year, and investments in a bank-managed money market fund that invests exclusively in United States Treasury obligations and is valued at the net asset value ("NAV") daily closing price, as reported by the fund, based on the amortized cost of the fund’s securities (Level 2) . For the bank-managed money market fund, t he NAV is used as a practical expedient to estimate fair value. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV . 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. The fair value of inventory acquired as part of business combination is based on a third-party valuation utilizing the comparable sales method which is based on Level 2 and Level 3 inputs. The fair value of property, plant and equipment acquired as part of business combination is based on a third-party valuation utilizing the indirect method of cost approach, which is based on Level 2 and Level 3 inputs. The fair value of patents acquired as part of business combination is based on a third-party valuation utilizing the replacement cost method, which is based on Level 2 and Level 3 inputs. The fair value of the remaining intangible assets as part of business combination are based on a third-party valuation utilizing discounted cash flow methods that involves inputs, which are not observable in the market (Level 3). 55 Table of Contents 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. The Company mitigates its credit risk by maintaining credit insurance on most of its significant customers. 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 net realizable value. 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. As of December 31, 2022, the Company does not believe there are any indications of impairment related to long-lived assets. Goodwill Our goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired. We assess goodwill for impairment on an annual basis during the fourth quarter of each year, and between annual tests whenever events or changes in circumstances 56 Table of Contents indicate that the carrying amount may not be recoverable. An impairment exists by the amount the fair value of a reporting unit to which goodwill has been allocated is less than their respective carrying values. The impairment for goodwill is limited to the total amount of goodwill allocated to the reporting unit. Goodwill impairment testing requires significant judgment and management estimates, including, but not limited to, the determination of (i) the number of reporting units, (ii) the goodwill and other assets and liabilities to be allocated to the reporting units and (iii) the fair values of the reporting units. The estimates and assumptions described above, along with other factors such as discount rates, will significantly affect the outcome of the impairment tests and the amounts of any resulting impairment losses. As of December 31, 2022, the Company does not believe there are any indications of impairment related to goodwill. 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. 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 includes advertising costs in selling expenses and these costs are expensed as incurred. Advertising costs for 2022, 2021, and 2020, were $ 2.4 million, $ 2.6 million, and $ 2.7 million, respectively. Shipping Costs Costs incurred related to the shipment of products are included in selling expense. Such costs totaled $ 4.7 million, $ 4.2 million, and $ 3.9 million in 2022, 2021, and 2020, respectively. Research and Development In 2022, 2021, and 2020, the Company spent approximately $ 9.6 million, $ 11.7 million, and $ 8.0 million, respectively, on research and development activities relating to new products and the improvement of existing products. These costs are included in costs of products sold and are expensed as incurred. 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. 57 Table of Contents 2. Acquisition of Marlin Assets As described in Note 1, the Company closed on the Marlin Acquisition on November 23, 2020. The Company paid $ 28.3 million dollars in cash for the Marlin Assets from Remington. The Marlin Acquisition was accounted for in accordance with ASC Topic 805, Business Combinations. Accordingly, the total purchase price has been allocated to tangible assets based on their fair value and the intangibles and goodwill have been allocated on a provisional basis at the date of acquisition. The Company assumed no liabilities in this transaction. These allocations reflect various provisional estimates that were available at the time and are subject to change during the purchase price allocation period until the valuations are finalized. The Company recorded measurement period adjustments in accordance with FASB’s guidance regarding business combinations in the fourth quarter of 2021 based on its valuation and purchase price allocation procedures, to better reflect the facts and circumstances that existed at the acquisition date. The measurement period adjustments, which were completed during the fourth quarter of 2021, resulted in an increase to goodwill of $ 2.4 million, primarily due to a decrease in the estimated fair value of inventory received. The following table summarizes the Company's allocation of the purchase price: Initial Purchase Price Allocation Measurement Period Adjustments Final Purchase Price Allocation Purchase Price Cash paid to sellers $ 28,316 $ — $ 28,316 Purchase Price Allocation Assets Acquired Inventory $ 11,400 $ ( 2,414 ) $ 8,986 Machinery and equipment 5,000 ( 25 ) 4,975 Tradename and trademarks 7,800 7,800 Patents 2,500 2,500 Customer Relationships 1,000 1,000 Goodwill 616 2,439 3,055 Net Assets Acquired $ 28,316 $ — $ 28,316 Identifiable assets acquired were recorded at their estimated fair values based on the methodology described under “Fair Value Measurements” in Note 1 - Significant Accounting Policies. The Machinery and Equipment acquired in the Marlin Acquisition were classified as deposits on capital items in Other Assets on the Company’s Consolidated Balance Sheet at December 31, 58 Table of Contents 2021. Certain of these items were reclassified as Machinery and Equipment when they were placed in service in 2022 and 2021. Intangible assets acquired in the Marlin Acquisition are reflected in Other Assets on the Company’s Consolidated Balance Sheet at December 31, 2022. Intangible assets are amortized over their estimated remaining useful lives using a straight-line methodology. Remaining Economic Useful Life Tradename and trademarks 20 years Patents 20 years Customer Relationships 15 years The excess purchase price over the fair value of the assets acquired was recorded as goodwill in the amount of $ 3.1 million. The Company incurred acquisition related costs of $ 1.7 million, which are included in selling, general and administrative expenses in the Company’s Consolidated Statements of Income and Comprehensive Income for the fiscal year ended December 31, 2020. The pro forma impact of the acquisition and the results of operations attributable to Marlin in 2019 and 2020 have not been presented, as they are not material to the Company’s consolidated results of operations. The impact on sales and gross margin was no more than 5 % of the reported amounts in either period, the trend in annual sales growth was unchanged, and the impact on gross margin percentage was less than 1 %, in both periods. 3. Revenue Recognition and Contracts with Customers The impact of ASC 60 6 on revenue recognized during the years ended December 31, 2022, December 31, 2021, and December 31, 2020 is as follows: 2022 2021 2020 Contract liabilities with customers at January 1, $ — $ 84 $ 9,623 Revenue recognized — ( 84 ) ( 14,570 ) Revenue deferred 1,031 — 5,031 Contract liabilities with customers at December 31, $ 1,031 $ — $ 84 During the year ended December 31, 2022, the Company deferred $ 1.0 million of revenue. There was no offset for the recognition from previously deferred revenue as the Company did not satisfy any performance obligations relating to the shipment of free products during the year. This resulted in a net decrease in firearms sales for the year ended December 31, 2022 of $ 1.0 million and a deferred contract revenue liability at December 31, 2022 of $ 1.0 million. The Company 59 Table of Contents estimates that revenue from this deferred contract liability will be recognized in the first half of 2023. During the year ended December 31, 2021, there were no promotions giving rise to deferred contract liabilities and, therefore, there was no additional deferred revenue. Previously deferred revenue of $ 0.1 million was recognized in the first quarter of 2021. The Company did not have a deferred contract revenue liability at December 31, 2021. During the year ended December 31, 2020, the Company deferred $ 5.0 million of revenue, offset by the recognition of $ 14.6 million of revenue previously deferred as the performance obligations relating to the shipment of free products were satisfied. This resulted in a net increase in firearms sales for the year ended December 31, 2020 of $ 9.6 million and a deferred contract revenue liability at December 31, 2020 of $ 0.1 million. The deferred revenue balance was significantly reduced due to the absence of promotions in the fourth quarter of 2020. 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. 4. Trade Receivables, Net Trade receivables consist of the following: December 31, 2022 2021 Trade receivables $ 67,183 $ 58,605 Allowance for doubtful accounts ( 400 ) ( 400 ) Allowance for discounts ( 1,334 ) ( 1,169 ) $ 65,449 $ 57,036 In 2022, the largest individual trade receivable balances accounted for 26 %, 23 %, and 18 % of total trade receivables, respectively. In 2021, the largest individual trade receivable balances accounted for 34 %, 17 %, and 17 % of total trade receivables, respectively. 60 Table of Contents 5. Inventories Inventories consist of the following: December 31, 2022 2021 Inventory at FIFO Finished goods $ 23,573 $ 7,322 Materials and products in process 105,721 92,701 Gross inventories 129,294 100,023 Less: LIFO reserve ( 59,489 ) ( 51,826 ) Less: excess and obsolescence reserve ( 4,812 ) ( 4,347 ) Net Inventories $ 64,993 $ 43,850 6. Property, Plant and Equipment Property, plant and equipment consist of the following: December 31, 2022 2021 Land and improvements $ 2,826 $ 2,686 Buildings and improvements 72,788 62,781 Machinery and equipment 314,032 302,241 Dies and tools 57,480 53,574 Property, plant and equipment 447,126 421,282 Less allowances for depreciation ( 370,273 ) ( 347,651 ) Net property, plant and equipment $ 76,853 $ 73,631 Depreciation expense totaled $ 24.4 million, $ 25.8 million, and $ 27.3 million in 2022, 2021, and 2020, respectively. 7. Other Assets Other assets consist of the following: December 31, 2022 2021 Patents, at cost $ 10,126 $ 10,024 Accumulated amortization ( 6,318 ) ( 5,360 ) Deposits on capital items 17,106 18,026 Marlin trade name 7,800 7,800 Other 11,249 8,953 $ 39,963 $ 39,443 The capitalized cost of patents is amortized using the straight-line method over their useful lives. Expenses related to patent amortization was $ 0.4 million in 2022 and $ 0.3 million in 2021, and 2020. The estimated annual patent amortization expense for each of the next five years is $ 0.2 61 Table of Contents million. Costs incurred to maintain existing patents are charged to expense in the year incurred. The Marlin trade name will be amortized using the straight-line method over its useful life. The estimated annual trade name amortization cost for each of the next five years is $ 0.4 million. The intangible asset related to Marlin customer relationships are included in Other above and will be amortized using the straight-line method over its useful life. The estimated annual customer relationship name amortization expense for each of the next five years is $ 0.1 million. 8. 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. The Company adopted the provisions of ASU 2016-02 using the effective interest 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, 2022: Balance Sheet Line Item December 31, 2022 December 31, 2021 Right-of-use assets Other assets $ 3,681 $ 1,694 Operating lease liabilities Current portion Trade accounts payable and accrued expenses $ 642 $ 249 Noncurrent portion Lease liabilities 3,039 1,476 Total operating lease liabilities $ 3,681 $ 1,725 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. 62 Table of Contents The Company’s leases generally do not provide an implicit interest rate, and therefore the Company calculates an incremental borrowing rate 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, 2022: 2023 $ 803 2024 808 2025 702 2026 705 2027 229 Thereafter 1,120 Total undiscounted future minimum lease payments 4,367 Less: Difference between undiscounted lease payments & the present value of future lease payments ( 686 ) Total operating lease liabilities $ 3,681 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, 2022 is 8.9 years. 9. Trade Accounts Payable and Accrued Expenses Trade accounts payable and accrued expenses consist of the following: December 31, 2022 2021 Trade accounts payable $ 13,281 $ 12,209 Federal excise taxes payable 13,635 15,734 Accrued other 8,742 8,457 $ 35,658 $ 36,400 10. Accrued Dividends On November 30, 2022, the Company’s Board of Directors declared a $ 5.00 per share special dividend payable on January 5, 2023 to stockholders of record as of December 15, 2022. The dividend, which totaled $ 88.3 million, was paid on January 5, 2023. 11. Line of Credit During 2021 the Company had a $ 40 million unsecured revolving line of credit with a bank. This facility terminated on September 30, 2021. On January 7, 2022, the Company entered into a new $ 40 million unsecured revolving line of credit agreement with a different bank that expires January 7, 2025 . Borrowings under this new facility bear interest at either 1) the Bloomberg short-Term 63 Table of Contents Bank Yield Index – 1 month plus 150 basis points, or 2) a fluctuating rate per annum equal to the greater of (i) the Bank’s prime rate or (ii) the federal funds rate plus 50 basis points. The Company is also charged one-quarter of a percent ( 0.25 %) per year on the unused portion. At December 31, 2022, the Company was in compliance with the terms and covenants of the credit facility. 12. 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 $ 4.1 million, $ 4.0 million, and $ 3.3 million in 2022, 2021, and 2020, respectively. Additionally, in 2022, 2021, and 2020 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 $ 7.4 million, $ 7.4 million, and $ 5.6 million in 2022, 2021, and 2020, respectively. 13. Other Operating Income, Net Other operating income, net consists of the following: Year ended December 31, 2022 2021 2020 Gain on sale of operating assets $ 36 $ 127 $ 52 14. 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 2017. The federal and state income tax provision consisted of the following: Year ended December 31, 2022 2021 2020 Current Deferred Current Deferred Current Deferred Federal $ 21,741 $ ( 4,694 ) $ 42,422 $ 863 $ 20,201 $ 3,696 State 3,779 ( 879 ) 7,279 131 6,519 167 $ 25,520 $ ( 5,573 ) $ 49,701 $ 994 $ 26,720 $ 3,863 64 Table of Contents The effective income tax rate varied from the statutory federal income tax rate as follows: Year ended December 31, 2022 2021 2020 Statutory federal income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 2.7 3.4 4.4 Research and development tax credits ( 4.2 ) ( 0.4 ) — Other ( 1.1 ) 0.5 ( 0.1 ) Effective income tax rate 18.4 % 24.5 % 25.3 % The Company estimates that its effective tax rate in 2023 will approximate 22.4 %. Significant components of the Company’s deferred tax assets and liabilities are as follows: December 31, 2022 2021 Deferred tax assets Product Liability $ 69 $ 224 Capitalized research and development costs 4,838 — Employee compensation and benefits 2,316 2,643 Allowances for doubtful accounts and discounts 637 418 Inventories 1,196 1,224 Stock-based compensation 1,661 1,538 Other 1,636 1,538 Total deferred tax assets 12,353 7,585 Deferred tax liabilities: Depreciation 5,070 6,235 Other 1,174 814 Total deferred tax liabilities 6,244 7,049 Net deferred tax assets $ 6,109 $ 536 Prior to 2022, the Company expensed research and development costs in the period in which they were incurred for both financial accounting and income tax purposes. In 2022 the Company adopted the provisions of the Tax Cuts and Jobs Act of 2017 that relate to IRS Code Section 174. Under these provisions, research and development costs must be capitalized and amortized over five years for income tax purposes. The Company continues to expense these costs in the period incurred for financial accounting purposes. The Company made income tax payments of approximately $ 28.7 million, $ 49.5 million, and $ 30.6 million, during 2022, 2021, and 2020, 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. 65 Table of Contents 15. 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, 2022 2021 2020 Numerator: Net income $ 88,332 $ 155,899 $ 90,398 Denominator: Weighted average number of common shares outstanding – Basic 17,648,850 17,585,604 17,486,054 Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans 144,498 172,230 283,802 Weighted average number of common shares outstanding – Diluted 17,793,348 17,757,834 17,769,856 16. Stock Repurchases In 2022 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 Third Quarter 2022 July 3 to July 30 — — — July 31 to August 27 — — — August 28 to October 1 2,136 $ 49.97 2,136 Fourth Quarter 2022 October 2 to October 29 — — — October 30 to November 26 2,304 $ 49.77 2,304 November 27 to December 31 — — — Total 4,440 $ 49.87 4,440 $ 86,490,000 All of these purchases were made with cash held by the Company and no debt was incurred. No shares were repurchased in 2020 and 2021. 66 Table of Contents At December 31, 2022, approximately $ 86.5 million remained authorized for share repurchases. 17. 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 approximately 120,000 shares remain available for future grants as of December 31, 2022. 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 actual share price or an estimated value using the Monte Carlo valuation model. The total stock-based compensation cost included in the Statements of Income was $ 5.7 million, $ 8.3 million, and $ 6.1 million in 2022, 2021, and 2020, respectively. 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 2022, 5,953 deferred stock awards were issued to non-employee directors that will vest in May 2023, 7,688 deferred stock awards were issued to non-employee directors that will vest in May 2025 and a 1,478 deferred stock award was issued to a non-employee director that will vest in June 2027. In 2021, 5,113 deferred stock awards were issued to non-employee directors that vested in May 2022 and 6,615 deferred stock awards were issued to non-employee directors that will vest in May 2024. In 2020, 6,244 deferred stock awards were issued to non-employee directors that vested in May 2021 and 8,078 deferred stock awards were issued to non-employee directors that will vest in May 2023. Compensation expense related to these awards is amortized ratably over the vesting period. Compensation expense related to these awards was $ 0.8 million in 2022, $ 0.8 million in 2021, and $ 0.8 in 2020. At December 31, 2022, 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. 67 Table of Contents 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 2022, 82,000 restricted stock units were issued. Compensation costs related to these restricted stock units was $ 6.0 million, of which $ 1.7 million was recognized in 2022. The costs are being recognized ratably over the remaining periods required before the units vest, which range from 24 to 26 months. During 2021, 82,000 restricted stock units were issued. Compensation costs related to these restricted stock units was $ 5.6 million, of which $ 1.6 million was recognized in 2021. The costs are being recognized ratably over the remaining periods required before the units vest, which range from 24 to 26 months. During 2020, 95,000 restricted stock units were issued. Compensation costs related to these restricted stock units was $ 5.7 million, of which $ 1.1 million was recognized in 2020. The costs are being recognized ratably over the remaining periods required before the units vest, which range from 24 to 26 months. At December 31, 2022, there was $ 8.1 million of unrecognized compensation cost related to restricted stock units that is expected to be recognized over a period of 3.3 years. 18. 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. 68 Table of Contents Year ended December 31, 2022 2021 2020 Net Sales Firearms $ 593,289 $ 728,141 $ 565,863 Castings Unaffiliated 2,553 2,595 3,005 Intersegment 21,306 24,711 22,254 23,859 27,306 25,259 Eliminations ( 21,306 ) ( 24,711 ) ( 22,254 ) $ 595,842 $ 730,736 $ 568,868 Income (Loss) Before Income Taxes Firearms $ 108,610 $ 207,657 $ 120,732 Castings ( 3,338 ) ( 2,732 ) ( 1,000 ) Corporate 3,007 1,669 1,249 $ 108,279 $ 206,594 $ 120,981 Identifiable Assets Firearms $ 223,301 $ 188,290 $ 174,500 Castings 11,910 13,889 11,959 Corporate 249,552 240,164 161,799 $ 484,763 $ 442,343 $ 348,258 Goodwill Firearms $ 3,055 $ 3,055 $ 616 Castings 209 209 209 $ 3,264 $ 3,264 $ 825 Depreciation Firearms $ 21,992 $ 22,842 $ 25,126 Castings 2,452 2,959 2,158 $ 24,444 $ 25,801 $ 27,284 Capital Expenditures Firearms $ 26,598 $ 25,239 $ 19,253 Castings 1,175 3,537 4,976 $ 27,773 $ 28,776 $ 24,229 In 2022, the Company’s largest customers and the percent of firearms sales they represented were as follows: Lipsey’s - 23 %; Davidson’s - 23 %; and Sports South - 21 %. In 2021, the Company’s largest customers and the percent of firearms sales they represented were as follows: Lipsey’s - 21 %; Sports South - 19 %; and Davidson’s - 19 %. In 2020, the Company’s largest customers and the percent of firearms sales they represented were as follows: Sports South - 22 %; Lipsey’s - 22 %; and Davidson’s - 18 %. The Company’s assets are located entirely in the United States and domestic sales represented at least 94 % of total sales in 2022, 2021, and 2020. 69 Table of Contents 19. Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 2022: Three Months Ended 4/2/22 7/2/22 10/1/22 12/31/22 Net Sales $ 166,575 $ 140,653 $ 139,390 $ 149,224 Gross profit 58,108 43,554 38,869 39,554 Net income 30,232 20,757 18,389 18,954 Basic earnings per share 1.72 1.18 1.04 1.07 Diluted earnings per share $ 1.70 $ 1.17 $ 1.03 $ 1.06 Three Months Ended 4/3/21 7/3/21 10/2/21 12/31/21 Net Sales $ 184,377 $ 200,072 $ 178,246 $ 168,041 Gross profit 72,566 78,757 64,802 63,432 Net income 38,192 44,384 35,202 38,121 Basic earnings per share 2.18 2.52 2.00 2.17 Diluted earnings per share $ 2.16 $ 2.50 $ 1.98 $ 2.14 20. 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 $ 0.7 million, $ 0.5 million and $ 0.6 million in 2022, 2021 and 2020, respectively. One of the Company’s Directors also serves as a Director on the Board of the NRA. The Company is a member of the National Shooting Sports Foundation (“NSSF”), the firearm industry trade association. The Company paid the NSSF $ 0.3 million, $ 0.4 million and $ 0.5 million in 2022, 2021 and 2020, respectively. One of the Company’s Directors also serves on the Board of the NSSF. 21. Contingent Liabilities As of December 31, 2022, the Company was a defendant in eight (8) lawsuits and is aware of certain other such claims. The lawsuits generally fall into three categories: traditional product liability litigation, municipal litigation and negligence . Each is discussed in turn below. Traditional Product Liability Litigation One lawsuit mentioned above involves a claim for damages related to an allegedly defective product due to its design and/or manufacture. The 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. 70 Table of Contents 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. 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 are four (4) lawsuits of this type, as follows: (i) City of Gary v. Smith & Wesson Corp., et al , filed in Indiana State Court in 1999; (ii) Estados Unidos Mexicanos v. Smith & Wesson Brands, Inc., et al. , filed in August 2021 in the U.S. District Court for the District of Massachusetts; (iii) The City of Buffalo v. Smith & Wesson Brands, Inc., et al. , filed in December 2022 in the New York State Supreme Court for Erie County, New York and presently pending in the U.S. District Court for the Western District of New York; and (iv) The City of Rochester v. Smith & Wesson Brands, Inc., et al. , filed in December 2022 in the New York State Supreme Court for Monroe County, New York and presently pending in the U.S. District Court for the Western District of New York. The Complaint in City of Gary v. Smith & Wesson Corp., et al . was filed in 1999 and 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 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. 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. 71 Table of Contents 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 was remanded to the trial court for further proceedings. During the quarter ended April 3, 2021, the City initiated discovery and the Manufacturer Defendants reciprocated. Discovery is ongoing. Estados Unidos Mexicanos v. Smith & Wesson Brands, Inc., et al. was filed by the Country of Mexico and names seven defendants, mostly U.S.-based firearms manufacturers, including the Company. The Complaint advances a variety of legal theories including negligence, public nuisance, unjust enrichment, restitution, and others. Plaintiff essentially alleges that the defendants design, manufacture, distribute, market and sell firearms in a way that they know results in the illegal trafficking of firearms into Mexico, where they are used by Mexican drug cartels for criminal activities. Plaintiff seeks injunctive relief and monetary damages. On November 22, 2021, Defendants filed a joint Rule 12(b)(6) motion to dismiss the Mexican Government’s complaint based on the Government’s lack of Article III standing, Protection of Lawful Commerce in Arms Act immunity, and lack of proximate cause. The Company, along with other non-Massachusetts defendants, also filed a Rule 12(b)(2) motion to dismiss based on lack of specific personal jurisdiction. The motions were fully briefed and the court heard oral argument on April 12, 2022. On September 30, 2022, the court entered an order granting the defendants’ joint Rule 12(b)(6) motion. The Company’s Rule 12(b)(2) motion was denied as moot, without prejudice. On October 26, 2022, the plaintiff filed a Notice of Appeal and the Court has entered a briefing schedule. On December 20, 2022, the City of Buffalo, New York filed a lawsuit captioned The City of Buffalo v. Smith & Wesson Brands, Inc., et al. in the New York State Supreme Court for Erie County, New York. The suit names a number of firearm manufacturers, distributors, and retailers as defendants, including the Company, and purports to state causes of action for violations of Sections 898, 349 and 350 of the New York General Business Law, as well as common law public nuisance. Generally, plaintiff alleges that the criminal misuse of firearms in the City of Buffalo is the result of the manufacturing, sales, marketing, and distribution practices of the defendants. The 72 Table of Contents defendants timely removed the matter to the U.S. District Court for the Western District of New York. On December 21, 2022, the City of Rochester, New York filed a lawsuit captioned The City of Rochester v. Smith & Wesson Brands, Inc., et al. in the New York State Supreme Court for Monroe County, New York. The suit names a number of firearm manufacturers, distributors, and retailers as defendants, including the Company, and purports to state causes of action for violations of Sections 898, 349 and 350 of the New York General Business Law, as well as common law public nuisance. The allegations essentially mirror those in The City of Buffalo , discussed in the preceding paragraph, as plaintiff claims that the criminal misuse of firearms in Rochester, New York is the result of the manufacturing, sales, marketing, and distribution practices of the defendants. The defendants timely removed the matter to the U.S. District Court for the Western District of New York. Negligence Rossiter v. Sturm, Ruger, et al. is a lawsuit arising out of a slip and fall accident by a contract security officer in December 2019. The Complaint was filed in the Superior Court for Sullivan County, New Hampshire on December 13, 2022 and names Pine Hill Construction, a snow removal contractor, as a co-defendant. The Company has tendered the defense of this matter to its insurance carrier and is assisting as required. The Company was named in two purported class action lawsuits arising out of a data breach at Freestyle Solutions, Inc., the vendor who was hosting the Company ShopRuger.com website at the time of the breach. Jones v. Sturm, Ruger & Co., was filed in the U.S. District Court for Connecticut on October 4, 2022 and Copeland v. Sturm, Ruger & Company, et al. was filed in the U.S. District Court for New Jersey on October 27, 2022. Copeland also named Freestyle Solutions, Inc. as a defendant. By agreement of the parties, Copeland was dismissed, without prejudice, and consolidated with Jones in the pending Connecticut case. On January 20, 2023, five plaintiffs filed an Amended Complaint naming the Company and Freestyle Software, Inc. as defendants. The Complaint alleges causes of action for negligence, breach of implied warranties, and unjust enrichment. 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 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 73 Table of Contents 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 $ 1.1 million at December 31, 2021, is 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. At December 31, 2022, the total amount claimed specifically in these cases was de minimis. During 2022, no traditional product liability lawsuit was filed against the Company and one ( 1 ) was resolved. As of December 31, 2022, the Company was a defendant five lawsuits involving its products, including one ( 1 ) traditional product liability lawsuit and four ( 4 ) municipal lawsuits. The Company also was a defendant in three ( 3 ) negligence lawsuits though, as discussed above, that number has since been reduced to two (2) lawsuits with the consolidation of the Jones and Copeland matters. During 2021, one ( 1 ) traditional product liability lawsuit was filed against the Company. As of December 31, 2021, the Company was a defendant in four ( 4 ) lawsuits involving its products, including two ( 2 ) traditional lawsuits and two ( 2 ) municipal lawsuits. During 2020, one ( 1 ) traditional product liability lawsuit was filed against the Company and one ( 1 ) was resolved. As of December 31, 2020, the Company was a defendant in three ( 3 ) lawsuits involving its products, including two ( 2 ) traditional lawsuits and one ( 1 ) municipal lawsuit. 74 Table of Contents The Company’s product liability expense was $ 1.3 million in 2022, $ 1.1 million in 2021, and $ 1.1 million in 2020. This expense includes the cost of outside legal fees, 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, 2022 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) 2020 $ 818 800 ( 492 ) — $ 1,126 2021 $ 1,126 ( 7 ) ( 227 ) — $ 892 2022 $ 892 ( 417 ) ( 167 ) — $ 308 Income Statement Detail for Product Liability Expense Accrued Legal Expense (b) Insurance Premium Expense (e) Total Product Liability Expense 2020 $ 800 839 $ 1,639 2021 $ ( 7 ) 1,119 $ 1,112 2022 $ ( 417 ) 1,524 $ 1,107 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 2022 and 2021, 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. 75 Table of Contents (e) Insurance expense represents the cost of insurance premiums. There were no insurance recoveries during any of the above years. 22. 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, 2022 and 2021 balance sheets approximate carrying values at those dates. 23. Subsequent Events On February 17, 2023, the Company’s Board of Directors authorized a dividend of 42 ¢ per share to shareholders of record on March 10, 2023. The Company’s management has evaluated transactions occurring subsequent to December 31, 2022 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. 76 Table of Contents ITEM 9— CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.