What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-03 compared with 2022-11-02 · 399 added, 440 removed, 161 unchanged (84% of the section changed)

3 unchanged sentences

(Dollars in thousands)

October 1, 2022

April 1, 2023

December 31, 2022

12 unchanged sentences

Deferred income taxes

The Condensed Consolidated Balance Sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The Condensed Consolidated Balance Sheet at December

31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all the information and

footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

See notes to condensed consolidated financial statements.

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except per share data )

October 1, 2022

Decembe 31 2021

Liabilities and Stockholders’

April 1, 2023

December 31, 2022

Liabilities and Stockholders’ Equity

Current Liabilities

Trade accounts payable and accrued expenses

Dividends payable

Contract liabilities with customers (Note 3)

1 unchanged sentence

Employee compensation and benefits

Workers’

Workers’ compensation

Income taxes payable

Total Current Liabilities

Employee compensation

Product liability accrual

1 unchanged sentence

Contingent liabilities (Note 13)

Stockholders’

Stockholders’ Equity

Common Stock, non-voting, par value $ 1 :

1 unchanged sentence

Common Stock, par value $ 1 :

Authorized shares –

2022 –

24,378,568 issued, 17,666,534 outstanding

2021 –

24,306,486 issued, 17,596,588 outstanding

Authorized shares – 40,000,000

2023 – 24,422,419 issued,

17,708,081 outstanding

2022 – 24,378,568 issued,

17,664,230 outstanding

Additional paid-in capital

Retained earnings

Treasury stock –

2022 –

Treasury stock – at cost

2023 – 6,714,338 shares

2021 –

2022 – 6,714,338 shares

Total Stockholders’

Total Liabilities and Stockholders’

Total Stockholders’ Equity

Total Liabilities and Stockholders’ Equity

The Condensed Consolidated Balance Sheet at December

31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all the information and

footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

See notes to condensed consolidated financial statements.

3 unchanged sentences

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

April 1, 2023

April 2, 2022

Net firearms sales

20 unchanged sentences

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’

EQUITY (UNAUDITED)

1 unchanged sentence

Balance at December 31, 2022

$ ( 145,812 )

Net income and comprehensive income

Common stock issued –

compensation plans

Common stock issued – compensation plans

Vesting of RSUs

2 unchanged sentences

Recognition of stock-based compensation expense

Repurchase of 2,136 shares of common stock

Balance at October 1, 2022

Balance at April 1, 2023

$ ( 145,812 )

See notes to condensed consolidated financial statements.

2 unchanged sentences

( Dollars in thousands)

Nine Months Ended

October 1, 2022

October 2, 2021

Three Months Ended

April 1, 2023

April 2, 2022

Operating Activities

18 unchanged sentences

Proceeds from maturities of short-term investments

Cash provided by (used for) investing activities

Cash provided by investing activities

Financing Activities

Remittance of taxes withheld from employees related to share-based compensation

Repurchase of common stock

Dividends paid

Cash used for financing activities

Increase in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

4 unchanged sentences

(Dollars in thousands, except per share)

NOTE 1 —

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results of the interim periods.

Operating results for the nine months ended October 1, 2022 may not be indicative of the results to be expected for the full year ending December 31, 2022.

These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

NOTE 2 —

SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed

consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States

for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.

Accordingly, they do not include

all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete

financial statements.

In the opinion of management,

the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals,

considered necessary for a fair presentation of the results of the interim periods.

Operating results for the three months ended April

1, 2023 may not be indicative of the results to be expected for the full year ending December 31, 2023.

These financial statements have

been prepared on a basis that is substantially consistent with the accounting principles applied in the Company’s Annual Report

on Form 10-K for the year ended December 31, 2022.

NOTE 2 - 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 are from firearms.

Export sales typically represent no more than 5% of total sales, although they accounted for 7 % of total sales for the nine month period ended October 1, 2022.

Export sales accounted for 5 % of total sales for the three month period ended October 1, 2022.

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.

(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 typically represent no more than 5 % of total sales, although they accounted for 7 % of total

sales for the three month period ended April 1, 2023.

Export sales accounted for 5 % of total sales for the three month period ended April

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

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.

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.

The consolidated financial statements

include the accounts of the Company and its wholly-owned subsidiary.

All significant intercompany accounts and transactions have been

Revenue Recognition:

The Company recognizes revenue in accordance with the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).

The Company recognizes revenue

in accordance with the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC

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.

Customary payment terms are 2% 30 days, net

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 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 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 is the Company’s responsibility.

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.

is recognized proportionally as each performance obligation is satisfied, based on the relative customary price of each product.

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.

Fair Value of Financial Instruments:

The carrying amounts of financial instruments, including cash, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short-term maturity of these items.

The Company’s short-term investments consist of 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.

The 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.

Business Combination:

On November 23, 2020, the Company acquired substantially all of the assets used to manufacture Marlin Firearms from the Remington Outdoor Company, Inc.

and each of the subsidiaries of the Remington Outdoor Company, Inc.

for a purchase price of $ 28.3 million in cash.

The transaction was funded by the Company with cash on hand and has been accounted for in accordance with ASC 805 - Business Combinations, which 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.

The Company’s 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, the Company 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.

The carrying amounts of financial

instruments, including cash, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value

due to the short-term maturity of these items.

The Company’s short-term

investments consist of United States Treasury instruments, which mature 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.

The 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.

Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

The preparation of financial statements

in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts

reported in the financial statements and accompanying notes.

Actual results could differ from those estimates.

NOTE 3 —

REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

The impact of ASC 606 on revenue recognized during the three and nine months ended October 1, 2022 and October 2, 2021 is as follows:

NOTE 3 - REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

The impact of ASC 606 on revenue

recognized during the three months ended April 1, 2023 and April 2, 2022 is as follows:

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

April 1, 2023

April 2, 2022

Contract liabilities with customers at beginning of period

2 unchanged sentences

Contract liabilities with customers at end of period

As more fully described in the Revenue Recognition section of Note 2, the deferral of revenue and subsequent recognition thereof relates to certain of the Company’s sales promotion programs that include the future shipment of free products.

The Company has not been responsible for the shipment of any free products arising from such sales promotion programs since April 3, 2021.

As more fully described in the

Revenue Recognition section of Note 2, the deferral of revenue and subsequent recognition thereof relates to certain of the Company’s

sales promotion programs that include the future shipment of free products.

The Company expects the deferred revenue from this contract

liability with customers to be recognized in the second quarter of 2023.

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.

NOTE 4 —

Inventories are valued using the last-in, first-out (LIFO) method.

An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs existing at that time.

Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs.

Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation.

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.

NOTE 4 - INVENTORIES

Inventories are valued using the

last-in, first-out (LIFO) method.

An actual valuation of inventory under the LIFO method can be made only at the end of each year based

on the inventory levels and costs existing at that time.

Accordingly, interim LIFO calculations must necessarily be based on management's

estimates of expected year-end inventory levels and costs.

Because these are subject to many factors beyond management's control, interim

results are subject to the final year-end LIFO inventory valuation.

During the three month period ended

April 1, 2023, inventory quantities were reduced.

If this reduction remains through year-end, it will result in a liquidation of

LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases.

the effect of such a liquidation cannot be precisely quantified at the present time, management believes that if a LIFO liquidation occurs

in 2023, the impact may be material to the Company’s results of operations for the period but will not have a material impact on

the financial position of the Company.

Inventories consist of the following:

October 1, 2022

April 1, 2023

December 31, 2022

5 unchanged sentences

Net inventories

NOTE 5 —

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, Leases (Topic 842) .

The Company’s lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.

Under the provisions of ASU 2016-02, the Company records 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 October 1, 2022:

NOTE 5 - 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, Leases (Topic 842) .

The Company’s lease agreements generally do not require material variable

lease payments, residual value guarantees or restrictive covenants.

Under the provisions of ASU 2016-02,

the Company records 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 April 1, 2023:

Balance Sheet Line Item

October 1, 2022

April 1, 2023

Right-of-use assets

5 unchanged sentences

Total operating lease liabilities

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 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 October 1, 2022:

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 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 April 1, 2023:

Remainder of 2023

2 unchanged sentences

Total operating lease liabilities

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 October 1, 2022 is 9.4 years.

NOTE 6 —

LINE OF CREDIT

On January 7, 2022, the Company entered into a $ 40 million unsecured revolving line of credit agreement with a bank that expires January 7, 2024 .

Borrowings under this new facility bear interest at either 1) the Bloomberg short-Term 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 October 1, 2022, the Company was in compliance with the terms and covenants of the credit facility and the line of credit was unused.

NOTE 7 —

EMPLOYEE BENEFIT PLANS

The Company sponsors a 401(k) plan that covers substantially all employees.

The Company matches a certain portion of employee contributions using the safe harbor guidelines contained in the Internal Revenue Code.

Expenses related to these matching contributions totaled $ 0.9 million and $ 3.1 million for the three and nine months ended October 1, 2022, respectively, and $ 0.9 million and $ 3.1 million for the three and nine months ended October 2, 2021, respectively.

The Company plans to contribute approximately $ 0.9 million to the plan in matching employee contributions during the remainder of 2022.

In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $ 1.5 million and $ 5.4 million for the three and nine months ended October 1, 2022, respectively, and $ 1.6 million and $ 5.6 million for the three and nine months ended October 2, 2021, respectively.

The Company plans to contribute approximately $ 1.5 million in supplemental contributions to the plan during the remainder of 2022.

NOTE 8 —

The Company's 2022 and 2021 effective tax rates differ from the statutory federal tax rate due principally to the availability of research and development tax credits, state income taxes, and the nondeductibility of certain executive compensation.

The Company’s effective income tax rate was 12.3 % and 19.9 % for the three and nine months ended October 1, 2022, respectively.

The Company’s effective income tax rate was 26.7 % for both the three and nine months ended October 2, 2021.

The decrease in the 2022 effective tax rates was primarily attributable to research and development tax credits, some of which related to amended returns from prior years.

The impact related to research and development tax credits on the effective tax rate is expected to decline in future years.

Income tax payments for the three and nine months ended October 1, 2022 totaled $ 6.0 million and $ 26.6 million, respectively.

Income tax payments for the three and nine months ended October 2, 2021 totaled $ 13.8 and $ 36.3 million, respectively.

The Company files income tax returns in the U.S.

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 April 1, 2023 is 8.6 years.

NOTE 6 - LINE OF CREDIT

On January 7, 2022, the Company

entered into a $ 40 million unsecured revolving line of credit agreement with a bank that expires January 7, 2025 .

Borrowings under this

new facility bear interest at either 1) the Bloomberg short-Term 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.

is also charged one-quarter of a percent ( 0.25 %) per year on the unused portion.

At April 1, 2023, the Company was in compliance with

the terms and covenants of the credit facility and the line of credit was unused.

NOTE 7 - EMPLOYEE BENEFIT PLANS

The Company sponsors a 401(k)

plan that covers substantially all employees.

The Company matches a certain portion of employee contributions using the safe harbor guidelines

contained in the Internal Revenue Code.

Expenses related to these matching contributions totaled $ 1.7 million and $ 1.3 million for the

three months ended April 1, 2023 and April 2, 2022, respectively.

The Company plans to contribute approximately $ 4.0 million to the plan

in matching employee contributions during the remainder of 2023.

In addition, the Company provided

supplemental discretionary contributions to the 401(k) plan totaling $ 2.2 million and $ 2.4 million for the three months ended April 1,

2023 and April 2, 2022, respectively.

The Company plans to contribute approximately $ 5.0 million in supplemental contributions to the

plan during the remainder of 2023.

NOTE 8 - INCOME TAXES

The Company's 2023 and 2022 effective

tax rates differ from the statutory federal tax rate due principally to the availability of research and development tax credits, state

income taxes, and the nondeductibility of certain executive compensation.

The Company’s effective income tax rate was 22.4 % and

23.5 % for the three months ended April 1, 2023 and April 1, 2022, respectively.

Income tax payments for the three

months ended April 1, 2023 and April 2, 2022 totaled $ 3.0 million and $ 3.1 million, respectively.

The Company files income tax returns

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 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.

NOTE 9 —

EARNINGS PER SHARE

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

and state income tax examinations by tax authorities for years before 2017.

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

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.

NOTE 9 - EARNINGS PER SHARE

Set forth below is a reconciliation

of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

Weighted average number of common shares outstanding –

Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans

Weighted average number of common shares outstanding –

The dilutive effect of outstanding options and restricted stock units is calculated using the treasury stock method.

There were no stock options that were anti-dilutive and therefore not included in the diluted earnings per share calculation.

NOTE 10 —

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 reserved 750,000 shares for issuance under the 2017 SIP, of which 121,000 shares remain available for future grants as of October 1, 2022.

April 1, 2023

April 2, 2022

Weighted average number of common shares outstanding – Basic

Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans

Weighted average number of common shares outstanding – Diluted

The dilutive effect of outstanding

options and restricted stock units is calculated using the treasury stock method.

There were no stock options that were anti-dilutive

and therefore not included in the diluted earnings per share calculation.

NOTE 10 - 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 reserved 750,000 shares for issuance under the 2017 SIP, of which approximately 100,000 shares remain

available for future grants as of April 1, 2023.

Restricted Stock Units

The Company grants performance-based and retention-based restricted stock units to senior employees.

The vesting of the performance-based awards is dependent on the achievement of corporate objectives established by the Compensation Committee of the Board of Directors and a three-year vesting period.

The retention-based awards are subject only to the three-year vesting period.

There were 96,893 restricted stock units issued during the nine months ended October 1, 2022.

Total compensation costs related to these restricted stock units are $ 7.0 million.

Compensation costs related to all outstanding restricted stock units recognized in the statements of income aggregated $ 1.7 million and $ 5.1 million for the three and nine months ended October 1, 2022, respectively, and $ 1.6 million and $ 6.7 million for the three and nine months ended October 2, 2021, respectively.

NOTE 11 —

OPERATING SEGMENT INFORMATION

The Company has two reportable segments:

The Company grants performance-based

and retention-based restricted stock units to senior employees.

The vesting of the performance-based awards is dependent on the achievement

of corporate objectives established by the Compensation Committee of the Board of Directors and a three-year vesting period.

The retention-based

awards are subject only to the three-year vesting period.

There were no restricted stock units issued during the three months ended April

Compensation costs related to

all outstanding restricted stock units recognized in the statements of income aggregated $ 1.1 million and $ 1.7 million for the three months

ended April 1, 2023 and April 2, 2022, respectively.

NOTE 11 - OPERATING SEGMENT INFORMATION

The Company has two reportable

firearms and castings.

The firearms segment manufactures and sells rifles, pistols, and revolvers principally to a select number of independent wholesale distributors primarily located in the United States.

The castings segment manufactures and sells steel investment castings and metal injection molding parts.

The firearms segment manufactures and sells rifles, pistols, and revolvers principally to a select number

of independent wholesale distributors primarily located in the United States.

The castings segment manufactures and sells steel investment

castings and metal injection molding parts.

Selected operating segment financial information follows:

Three Months Ended

Nine Months Ended

(in thousands)

Three Months Ended

Income (Loss) Before Income Taxes

Capital Expenditures

October 1, 2022

April 1, 2023

December 31, 2022

Identifiable Assets

NOTE 12 —

RELATED PARTY TRANSACTIONS

The Company contracts with the National Rifle Association (“NRA”) for some of its promotional and advertising activities.

Payments made to the NRA in the three and nine months ended October 1, 2022 totaled $ 0.2 million and $ 0.4 million, respectively.

Payments made to the NRA in the three and nine months ended October 2, 2021 totaled $ 0.1 million and $ 0.3 million, 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.

Payments made to the NSSF in the three and nine months ended October 1, 2022 totaled $ 0.1 million and $ 0.2 million, respectively.

Payments made to the NSSF in the three and nine months ended October 2, 2021 totaled $ 0.1 million and $ 0.3 million, respectively.

One of the Company’s Directors also serves on the Board of the NSSF.

NOTE 13 —

CONTINGENT LIABILITIES

As of October 1, 2022, the Company was a defendant in three (3) lawsuits and is aware of certain other such claims.

The lawsuits fall into two categories:

traditional product liability litigation and municipal litigation.

NOTE 12 - RELATED PARTY TRANSACTIONS

The Company contracts with the

National Rifle Association (“NRA”) for some of its promotional and advertising activities.

Payments made to the NRA totaled

$ 0.1 million in each of the three months ended April 1, 2023 and April 1, 2022.

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.

Payments made to the NSSF totaled

$ 0.1 million in each of the three months ended April 1, 2023 and April 2, 2022.

One of the Company’s Directors also serves

on the Board of the NSSF.

NOTE 13 - CONTINGENT LIABILITIES

As of April 1, 2023, the Company

was a defendant in eight (8) lawsuits and is aware of certain other such claims.

The lawsuits fall into three categories:

municipal litigation,

negligence, and unfair trade practices.

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 a traditional product liability theory such as strict liability, negligence, and/or breach of warranty.

The Company management believes that the allegations in this case are unfounded, that the incident is 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 two lawsuits of this type:

The City of Gary case, filed in Indiana State Court in 1999, and Estados Unidos Mexicanos v.

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 lawsuits of this type:

of Gary , filed in Indiana State Court in 1999:

Estados Unidos Mexicanos v.

Smith & Wesson, et al.

, which was filed in August 2021.

The City of Gary Complaint 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.

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.

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.

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 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 the 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.

, filed in August 2021;

The City of Buffalo , filed in the Supreme Court of the State of New York for Erie County on December 20, 2022;

of Rochester , filed in the Supreme Court for the State of New York for Monroe County on December 21, 2022, each of which is described

in more detail below.

The City of Gary Complaint

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.

procedural history , during the quarter ended April 3, 2021, the City initiated discovery and

the manufacturer defendants reciprocated.

Discovery is ongoing.

Estados Unidos Mexicanos

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 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.

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 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

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.

The plaintiff filed a Notice of Appeal on October 26, 2022.

On November 22, 2021, defendants filed a joint Rule 12(b)(6) motion

to dismiss the Mexican Government’s complaint.

On September 30, 2022, the court entered an order granting defendants’ motion.

On October 26, 2022, plaintiff filed a Notice of Appeal and the matter is being briefed.

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.

Defendants timely removed the matter

District Court for the Western District of New York.

The matter was transferred to the New York Supreme Court for Monroe County

and consolidated with The City of Rochester v.

Smith & Wesson Brands, Inc., et al., discussed below.

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 allegations essentially mirror those in The City of Buffalo , discussed in

the preceding paragraph.

Defendants timely removed the matter to the U.S.

District Court for the Western District of New York and the

matter was consolidated with The City of Buffalo .

Defendants moved to stay the consolidated

Buffalo/Rochester case pending a decision by the Second Circuit Court of Appeals in National Shooting Sports Foundation, Inc.

James , which challenges the constitutionality of the recently enacted N.Y.

Law §§ 898-a–e.

The motion is pending.

Sturm, Ruger, et

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 hosted the Company’s ShopRuger.com

website at the time of the breach.

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.

The Company filed a Motion to Dismiss on a variety of grounds, and a briefing schedule was entered

by the court.

Unfair Trade Practices

Estate of Suzanne Fountain

Sturm, Ruger & Co., Inc., arises out of the criminal shootings at the King Soopers supermarket in Boulder, Colorado on March

On that date, plaintiff’s decedent, Suzanne Fountain, was murdered by 21-year-old Ahmad

Al Aliwi Al-Issa.

The Complaint alleges that the Company’s advertising and marketing of the Ruger AR-556 pistol involved in the

criminal shootings violate the Connecticut Unfair Trade Practices Act and were a substantial factor in bringing about the wrongful death

of Suzanne Fountain.

On April 24, 2023, the Connecticut Superior Court in Stamford sua sponte transferred the case to the Connecticut

Superior Court in Bridgeport.

Estate of Neven Stanisic et

Sturm, Ruger & Co., Inc., was filed on behalf of five plaintiffs.

Like Estate of Suzanne Fountain , the claims arise

from the criminal shootings at the King Soopers supermarket in Boulder, Colorado on March 22, 2021.

Plaintiffs’ decedents were

murdered by Ahmad Al Aliwi Al-Issa and plaintiffs allege that the Company’s

advertising and marketing of the Ruger AR-556 pistol involved in the criminal shootings violate the Connecticut Unfair Trade Practices

Act and were a substantial factor in causing the wrongful death of plaintiffs’ decedents.

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 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;

, 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 $ 0.9 million and $ 1.1 million at December 31, 2021 and 2020, 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.

NOTE 14 —

SUBSEQUENT EVENTS

On October 28, 2022, the Board of Directors authorized a dividend of 41 ¢

per share, for shareholders of record as of November 16, 2022, payable on November 30, 2022.

On October 3, 2022 the Company purchased a 225,000 square foot facility, which it had previously been leasing, in Mayodan, North Carolina for $ 8.3 million for use in its manufacturing and warehousing operations.

On October 4, 2022, a purported class action complaint was filed against the Company in the U.S.

District Court for the District of Connecticut.

The Complaint is styled as Mark Jones, Individually and on Behalf of All Others Similarly Situated v.

Sturm, Ruger & Company., Inc .

and alleges damages arising from a reported data breach of the third-party software vendor that owns and manages the server hosting ShopRuger.com.

The Complaint alleges negligence, breach of implied contract, and unjust enrichment and seeks a variety of damages.

The Company has evaluated events and transactions occurring subsequent to October 1, 2022 and determined that there were no other unreported events or transactions that would have a material impact on the Company’s results of operations or financial position.

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 typically represent no more than 5% of total sales, although they did account for 7% of total sales for the nine month period ended October 1, 2022.

Export sales accounted for 5% of total sales for the three month period ended October 1, 2022.

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.

Less than 1% of sales are from the castings segment.

Orders for 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.

Impact of Covid-19

The global outbreak of the coronavirus disease 2019 (“COVID-19”) was declared a pandemic by the World Health Organization and a national emergency by the U.S.

Government in March 2020.

The COVID-19 pandemic created significant uncertainty and adversely impacted many industries throughout the global economy.

During the nine month period ended October 1, 2022, the Company did not experience a significant adverse impact on its business from COVID-19 or related government restrictions.

The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, the Company cannot predict the extent to which its business, results of operations, financial condition, or cash flows will ultimately be impacted.

Management continues to monitor and assess the situation and to prepare for potential implications for the Company’s business, supply chain and customer demand.

The Company has taken many proactive steps to maintain the health and safety of its employees and to mitigate the impact on its business and believes it remains well positioned to continue to manage through this global crisis.

At the end of the third quarter of 2022, the Company was debt-free, and had cash and short-term investments totaling $215 million.

The ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.

Results of Operations

The estimated unit sell-through of the Company’s products from the independent distributors to retailers decreased 29% in the first nine months of 2022 compared to the prior year period.

For the same period, NICS background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) decreased 14%.

These decreases are attributable to decreased consumer demand for firearms from the unprecedented levels of the surge that began in 2020 and remained for most of 2021.

Estimated sell-through from the independent distributors to retailers and total adjusted NICS background checks for the trailing seven quarters follow:

Estimated Units Sold from Distributors to Retailers (1)

Total adjusted NICS Background Checks (thousands) (2)

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.

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 out 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.

The adjusted NICS checks represent less than half of the total NICS checks.

Adjusted NICS data can be impacted by changes in state laws and regulations and any directives and interpretations issued by governmental agencies.

Orders Received and Ending Backlog

The Company uses the estimated unit sell-through of its 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.

The Company generally does not use the orders received or ending backlog for planning production levels.

The units ordered, value of orders received, average sales price of units ordered, and ending backlog for the trailing seven quarters are as follows (dollars in millions, except average sales price):

(All amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns.)

Units Ordered

Orders Received

Average Sales Price of Units Ordered

Ending Backlog

Average Sales Price of Ending Unit Backlog

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.

The Company’s overall production in the first nine months of 2022 decreased by 19% from the first nine months of 2021.

Summary Unit Data

Firearms unit data for the trailing seven quarters are as follows (dollar amounts shown are net of Federal Excise Tax of 10% for handguns and 11% for long guns):

Units Ordered

Units Produced

Units Shipped

Average Sales Price of Units Shipped

Ending Unit Backlog

During the third quarter of 2022, the Company’s finished goods inventory increased by 8,900 units and distributor inventories of the Company’s products increased by 30,300 units.

Inventory data for the trailing seven quarters follows:

Units —

Company Inventory

Units —

Distributor Inventory (1)

Total Inventory (2)

Distributor ending inventory is provided by the Company’s independent distributors.

These numbers do not include goods-in-transit inventory that has been shipped from the Company but not yet received by the distributors.

This total does not include inventory at retailers.

The Company does not have access to data on retailer inventories of the Company’s products.

Net Sales, Cost of Products Sold, and Gross Profit

Net sales, cost of products sold, and gross profit data for the three months ended (dollars in millions):

Net firearms sales

Net castings sales

Total net sales

Cost of products sold

Net sales, cost of products sold, and gross profit data for the nine months ended (dollars in millions):

Net firearms sales

Net castings sales

Total net sales

Cost of products sold

The decrease in total consolidated net sales and net firearms sales for the three and nine months ended October 1, 2022 is attributable to decreased consumer demand for firearms from the unprecedented levels of the surge that began in 2020 and remained for most of 2021.

Sales of new products, including the PC Charger, MAX-9 pistol, LCP MAX pistol, Marlin 1895 lever-action rifles, LC Carbine, and Small-Frame Autoloading Rifle represented $54.9 million or 13% of firearm sales in the first nine months of 2022.

New product sales include only major new products that were introduced in the past two years.

Several popular firearms that were considered new products in 2021, including the Wrangler revolver, Ruger-5.7 pistol, and LCP II in .22 LR pistol, have now been in production for over two years and are no longer included in new product sales for 2022.

The decreased gross profit for the three and nine months ended October 1, 2022 is attributable to the decrease in sales and inflationary cost increases in materials, commodities, services, energy, fuel and transportation.

The decrease in gross margin for the three and nine months ended October 1, 2022 is attributable to unfavorable deleveraging of fixed costs, including depreciation, engineering and other indirect labor, resulting from decreased sales and production and decreased labor efficiencies.

In addition to unfavorable deleveraging of fixed costs, the aforementioned inflationary cost increases, partially offset by increased pricing, resulted in lower margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $19.0 million for the three months ended October 1, 2022, an increase of $0.9 million or 5.2% from $18.1 million in the comparable prior year period.

As a percentage of sales, selling, general, and administrative expenses increased to 13.6% in the three months ended October 1, 2022 from 10.1% in the prior year period.

Selling, general and administrative expenses were $56.8 million for the nine months ended October 1, 2022, a decrease of $1.0 million or 1.8% from $57.8 million in the comparable prior year period.

As a percentage of sales, selling, general, and administrative expenses increased to 12.7% in the nine months ended October 1, 2022 from 10.3% in the prior year period.

The increase in these expenses for the three months ended October 1, 2022 was primarily attributable to the resumption of trade show participation costs, travel expenditures, and advertising that had been deferred during the height of the COVID-19 restrictions, partially offset by decreased sales volume and decreased incentive compensation expenses.

For the nine months ended October 1, 2022, the decrease in these expenses was primarily attributable to decreased sales volume and decreased incentive compensation expenses, partially offset by the resumption of trade show participation costs, travel expenditures, and advertising that had been deferred during the height of the COVID-19 restrictions.

The increase of expenses as a percentage of sales was attributable to the decrease in sales and higher freight expenses.

Other income, net

Other income, net of $1.1 million and $2.8 million for the three and nine months ended October 1, 2022, respectively, decreased from $1.3 million and increased from $2.3 million for the three and nine months ended October 2, 2021, respectively.

For the three months ended October 1, 2022, the decrease is the result of decreases in royalty and miscellaneous income, partially offset by increased interest income in 2022 compared to 2021.

For the nine months ended October 1, 2022, the increase is the result of increased interest income, partially offset by reduced royalty and miscellaneous income in 2022 compared to 2021.

Income Taxes and Net Income

The Company's 2022 and 2021 effective tax rates differ from the statutory federal tax rate due principally to the availability of research and development tax credits, state income taxes and the nondeductibility of certain executive compensation.

The Company’s effective income tax rate was 12.3% and 19.9% for the three and nine months ended October 1, 2022, respectively.

The Company’s effective income tax rate was 26.7% for both the three and nine months ended October 2, 2021, respectively.

The decrease in the 2022 effective tax rates was primarily attributable to research and development tax credits, some of which related to amended prior year income tax returns.

The impact related to research and development tax credits on the effective tax rate is expected to decline in future years.

The substantial reduction in the effective tax rate for the three months ended October 1, 2022 was primarily due to a favorable provision-to-return adjustment related to research and development credits.

As a result of the foregoing factors, consolidated net income was $18.4 million and $69.4 million for the three and nine months ended October 1, 2022.

This represents a decrease of 47.8% and 41.1% from $35.2 million and $117.8 million in the comparable prior year periods.

Non-GAAP Financial Measures

In an effort to provide investors with additional information regarding its financial results, the Company refers to various United States generally accepted accounting principles (“GAAP”) financial measures and two non-GAAP financial measures, EBITDA and EBITDA margin, which management believes provides useful information to investors.

These non-GAAP financial measures may not be comparable to similarly titled financial measures being disclosed by other companies.

In addition, the Company believes that the non-GAAP financial measures should be considered in addition to, and not in lieu of, GAAP financial measures.

The Company believes that EBITDA and EBITDA margin are 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 the Company’s financial performance.

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 calculates EBITDA margin by dividing EBITDA by total net sales.

EBITDA was $27.0 million for the three months ended October 1, 2022, a decrease of 51.2% from $55.4 million in the comparable prior year period.

For the nine months ended October 1, 2022 EBITDA was $106.0 million, a decrease of 42.0% from $182.8 million in the comparable prior year period.

Non-GAAP Reconciliation —

(Unaudited, dollars in thousands)

Three Months Ended

Nine Months Ended

Income tax expense

Depreciation and amortization expense

Interest income

Interest expense

EBITDA margin

Financial Condition

Liquidity and Capital Resources

At the end of the third quarter of 2022, the Company’s cash and short-term investments totaled $215.2 million.

Pre-LIFO working capital of $338.9 million, less the LIFO reserve of $54.4 million, resulted in working capital of $284.5 million and a current ratio of 5.8 to 1.

Cash provided by operating activities was $50.3 million for the nine months ended October 1, 2022, compared to $117.0 million for the comparable prior year period.

The decrease in cash provided in the nine months ended October 1, 2022 is primarily attributable to the decrease in net income, reduced annual incentive compensation, and the increase in inventory in the nine months ended October 1, 2022.

Third parties supply the Company with various raw materials for its firearms and castings, such as steel, 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.

In the nine months ended October 1, 2022, the Company’s manufacturing operations were impacted by limited deliveries of raw materials.

A limited supply of these materials in the marketplace can result in increases to purchase prices and adversely affect production levels.

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 for the nine months ended October 1, 2022 totaled $17.2 million, an increase from $15.6 million in the comparable prior year period.

In 2022, the Company expects capital expenditures related to new product introductions and upgrades to our manufacturing equipment and facilities to total approximately $25 million.

In addition to these investments, in the fourth quarter of 2022 the Company purchased a 225,000 square foot facility, which it had previously been leasing, in Mayodan, North Carolina for $8.3 million for use in its manufacturing and warehousing operations.

Due to market conditions and business circumstances, actual capital expenditures could vary significantly from the projected amount.

The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash.

Dividends of $35.5 million were paid during the nine months ended October 1, 2022.

The Company has financed its dividends with cash provided by operations and current cash.

The quarterly 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 October 28, 2022, the Company’s Board of Directors authorized a dividend of 41¢

per share to shareholders of record on November 16, 2022, payable on November 30, 2022.

The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash and short-term investments, and the Company’s need for funds.

The Company invests in a bank-managed money market fund that invests exclusively in United States Treasury instruments which mature within one year with available cash.

At October 1, 2022, the Company’s investment in these instruments totaled $165.3 million.

During the three months ended October 1, 2022, the Company purchased 2,136 shares of its common stock for $0.1 million in the open market.

The average price per share purchased was $49.97.

These purchases were funded with cash on hand.

The Company did not purchase any shares of its common stock in the nine months ended October 2, 2021.

As of October 1, 2022, $86.6 million remained authorized for future stock repurchases.

Based on its unencumbered assets, the Company believes it has the ability to raise cash through the issuance of short-term or long-term debt.

The Company’s unsecured $40 million credit facility, which expires on January 7, 2024, was unused at October 1, 2022.

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 the Company is not able to comply with them, such noncompliance could have a material adverse impact on the Company.

The Company has 14 independent distributors that service the domestic commercial market.

Additionally, the Company has 45 and 25 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.

Adjustments to Critical Accounting Policies

The Company has not made any adjustments to its critical accounting estimates and assumptions described in the Company’s 2021 Annual Report on Form 10-K filed on February 23, 2022, or the judgments affecting the application of those estimates and assumptions.

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, the impact of COVID-19, and accounting estimates, any one or more of which could cause actual results to differ materially from those projected.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made.

The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.

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 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.

costs are paid as 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 .

NOTE 14 - SUBSEQUENT EVENTS

On April 28, 2023,

the Board of Directors authorized a dividend of 32 ¢ per share, for shareholders of record as of May 15, 2023, payable on May 31,

The Company has evaluated

events and transactions occurring subsequent to April 1, 2023 and determined that there were no other unreported events or transactions

that would have a material impact on the Company’s results of operations or financial position.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements