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 ) 47 Consolidated Balance Sheets at December 31, 2023 and 2022 50 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2023, 2022 and 2021 52 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023, 2022 and 2021 53 Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021 54 Notes to Consolidated Financial Statements 55 46 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, 2023, 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, 2023, 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, 2023 and 2022, 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, 2023, and our report dated February 21, 2024 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 21, 2024 47 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also 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, 2023, 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 21, 2024 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 U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence 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) relates 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 matter or on the accounts or disclosures to which it relates. 48 Last-In, First-Out Inventory Reserve As described in Notes 1 and 4 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 $79.8 million as of December 31, 2023, included a LIFO inventory reserve of $64.3 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 21, 2024 49 Consolidated Balance Sheets (Dollars in thousands, except per share data) December 31, 2023 2022 Assets Current Assets Cash and cash equivalents $ 15,174 $ 65,173 Short-term investments 102,485 159,132 Trade receivables, net 59,864 65,449 Gross inventories 150,192 129,294 Less LIFO reserve ( 64,262 ) ( 59,489 ) Less excess and obsolescence reserve ( 6,120 ) ( 4,812 ) Net inventories 79,810 64,993 Prepaid expenses and other current assets 14,062 7,091 Total Current Assets 271,395 361,838 Property, plant and equipment 462,397 447,126 Less allowances for depreciation ( 390,863 ) ( 370,273 ) Net property, plant and equipment 71,534 76,853 Deferred income taxes 11,976 6,109 Other assets 43,912 39,963 Total Assets $ 398,817 $ 484,763 See accompanying notes to consolidated financial statements. 50 December 31, 2023 2022 Liabilities and Stockholders’ Equity Current Liabilities Trade accounts payable and accrued expenses $ 31,708 $ 35,658 Dividends payable — 88,343 Contract liabilities with customers (Note 2) 149 1,031 Product liability 634 235 Employee compensation and benefits 24,660 30,160 Workers’ compensation 6,044 6,469 Income taxes payable — 1,171 Total Current Liabilities 63,195 163,067 Lease liability (Note 7) 2,170 3,039 Employee compensation 1,685 1,846 Product liability accrual 46 73 Contingent liabilities (Note 20) — — 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 2023 – 24,437,020 issued, 17,458,620 outstanding 2022 – 24,378,568 issued, 17,664,230 outstanding 24,437 24,378 Additional paid-in capital 46,849 45,075 Retained earnings 418,058 393,097 Less: Treasury stock – at cost 2023 – 6,978,400 shares 2022 – 6,714,338 shares ( 157,623 ) ( 145,812 ) Total Stockholders’ Equity 331,721 316,738 Total Liabilities and Stockholders’ Equity $ 398,817 $ 484,763 See accompanying notes to consolidated financial statements. 51 Consolidated Statements of Income and Comprehensive Income (In thousands, except per share data) Year ended December 31, 2023 2022 2021 Net firearms sales $ 540,746 $ 593,289 $ 728,141 Net castings sales 3,021 2,553 2,595 Total net sales 543,767 595,842 730,736 Cost of products sold 410,148 415,757 451,179 Gross profit 133,619 180,085 279,557 Operating Expenses (Incomes): Selling 38,788 36,114 33,259 General and administrative 42,752 40,551 43,289 Other operating income, net ( 5 ) ( 36 ) ( 127 ) Total operating expenses 81,535 76,629 76,421 Operating income 52,084 103,456 203,136 Other income: Royalty income 658 837 1,975 Interest income 5,465 2,552 49 Interest expense ( 205 ) ( 256 ) ( 164 ) Other income, net 822 1,690 1,598 Total other income, net 6,740 4,823 3,458 Income before income taxes 58,824 108,279 206,594 Income taxes 10,609 19,947 50,695 Net income and comprehensive income $ 48,215 $ 88,332 $ 155,899 Basic Earnings Per Share $ 2.73 $ 5.00 $ 8.87 Diluted Earnings Per Share $ 2.71 $ 4.96 $ 8.78 Weighted average number of common shares outstanding – Basic 17,676,955 17,648,850 17,585,604 Weighted average number of common shares outstanding – Diluted 17,811,218 17,793,348 17,757,834 Cash Dividends Per Share $ 6.27 $ 2.42 $ 3.36 See accompanying notes to consolidated financial statements. 52 Consolidated Statements of Stockholders’ Equity (Dollars in thousands) Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total 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 Net income 48,215 48,215 Dividends paid ( 22,446 ) ( 22,446 ) Stock-based compensation 3,989 3,989 Vesting of RSU’s ( 2,156 ) ( 2,156 ) Common stock issued – compensation plans 59 ( 59 ) — Unpaid dividends accrued ( 808 ) ( 808 ) Repurchase of 264,062 shares of common stock ( 11,811 ) ( 11,811 ) Balance at December 31, 2023 $ 24,437 $ 46,849 $ 418,058 $ ( 157,623 ) $ 331,721 See accompanying notes to consolidated financial statements. 53 Consolidated Statements of Cash Flows (In thousands) Year ended December 31, 2023 2022 2021 Operating Activities Net income $ 48,215 $ 88,332 $ 155,899 Adjustments to reconcile net income to cash provided by operating activities, net of effects of acquisition: Depreciation and amortization 22,383 25,789 26,152 Stock-based compensation 3,989 1,671 8,280 Excess and obsolescence inventory reserve 1,308 501 953 Gain on sale of assets ( 5 ) ( 36 ) ( 127 ) Deferred income taxes ( 5,867 ) ( 5,573 ) 994 Changes in operating assets and liabilities: Trade receivables 5,585 ( 8,413 ) 840 Inventories ( 16,125 ) ( 21,644 ) ( 15,726 ) Trade accounts payable and accrued expenses ( 4,406 ) ( 640 ) ( 392 ) Contract liability with customers ( 882 ) 1,031 ( 84 ) Employee compensation and benefits ( 6,469 ) ( 3,420 ) ( 5,433 ) Product liability 372 ( 584 ) ( 234 ) Prepaid expenses, other assets and other liabilities ( 13,026 ) ( 954 ) 1,217 Income taxes receivable/payable ( 1,171 ) 1,171 — Cash provided by operating activities 33,901 77,231 172,339 Investing Activities Property, plant and equipment additions ( 15,796 ) ( 27,730 ) ( 28,776 ) Purchases of short-term investments ( 192,627 ) ( 365,480 ) ( 681,940 ) Proceeds from maturity of short-term investments 249,274 406,319 602,976 Net proceeds from sale of assets 5 100 203 Cash provided by (used for) investing activities 40,856 13,209 ( 107,537 ) Financing Activities Dividends paid ( 110,789 ) ( 42,718 ) ( 59,104 ) Repurchase of common stock ( 11,811 ) ( 222 ) — Payment of employee withholding tax related to share-based compensation ( 2,156 ) ( 3,371 ) ( 4,801 ) Cash used for financing activities ( 124,756 ) ( 46,311 ) ( 63,905 ) (Decrease) increase in cash and cash equivalents ( 49,999 ) 44,129 897 Cash and cash equivalents at beginning of year 65,173 21,044 20,147 Cash and cash equivalents at end of year $ 15,174 $ 65,173 $ 21,044 See accompanying notes to consolidated financial statements. 54 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, 2023. 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 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. 55 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, 2023, 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. 56 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). 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, 57 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, 2023, the Company does not believe there are any indications of impairment related to long-lived assets. Goodwill The Company’s 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 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, 2023, 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 2023, 2022, and 2021, were $ 3.1 million, $ 2.4 million, and $ 2.6 million, respectively. Shipping Costs Costs incurred related to the shipment of products are included in selling expense. Such costs totaled $ 4.4 million, $ 4.7 million, and $ 4.2 million in 2023, 2022, and 2021, respectively. 58 Research and Development In 2023, 2022, and 2021, the Company spent approximately $ 9.8 million, $ 9.6 million, and $ 11.7 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. These costs are capitalized for tax purposes under the provisions of the Tax Cuts and Jobs Act of 2017 that relate to IRS Code Section 174, as discussed in Note 13. Earnings per Share Basic earnings per share is based upon the weighted-average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the impact of options, restricted stock units, and deferred stock outstanding using the treasury stock method. Recent Accounting Pronouncements In November of 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The updated accounting guidance requires enhanced reportable segment disclosures, primarily related to significant segment expenses which are regularly provided to the chief operating decision maker. The guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Retrospective application is required and early adoption is permitted. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures. In December of 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The updated accounting guidance requires expanded income tax disclosures, including the disaggregation of existing disclosures related to the effective tax rate reconciliation and income taxes paid. The guidance is effective for fiscal years beginning after December 15, 2024. Prospective application is required, with retrospective application permitted. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures. 2. Revenue Recognition and Contracts with Customers The impact of ASC 60 6 on revenue recognized during the years ended December 31, 2023, December 31, 2022, and December 31, 2021 is as follows: 2023 2022 2021 Contract liabilities with customers at January 1, $ 1,031 $ — $ 84 Revenue recognized ( 4,084 ) — ( 84 ) Revenue deferred 3,202 1,031 — Contract liabilities with customers at December 31, $ 149 $ 1,031 $ — 59 During the year ended December 31, 2023, the Company deferred $ 3.2 million of revenue, offset by the recognition of $ 4.1 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, 2023 of $ 0.9 million and a deferred contract revenue liability at December 31, 2023 of $ 0.1 million. The Company estimates that revenue from this deferred contract liability will be recognized in the first quarter of 2024. 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. 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. Practical Expedients and Exemptions The Company has elected to account for shipping and handling activities that occur after control of the related product transfers to the customer as fulfillment activities that are recognized upon shipment of the goods. 3. Trade Receivables, Net Trade receivables consist of the following: December 31, 2023 2022 Trade receivables $ 61,428 $ 67,183 Allowance for doubtful accounts ( 400 ) ( 400 ) Allowance for discounts ( 1,164 ) ( 1,334 ) $ 59,864 $ 65,449 In 2023, the largest individual trade receivable balances accounted for 22 %, 20 %, and 17 % of total trade receivables, respectively. In 2022, the largest individual trade receivable balances accounted for 26 %, 23 %, and 18 % of total trade receivables, respectively. 60 4. Inventories Inventories consist of the following: December 31, 2023 2022 Inventory at FIFO Finished goods $ 30,989 $ 23,573 Materials and products in process 119,203 105,721 Gross inventories 150,192 129,294 Less: LIFO reserve ( 64,262 ) ( 59,489 ) Less: excess and obsolescence reserve ( 6,120 ) ( 4,812 ) Net inventories $ 79,810 $ 64,993 5. Property, Plant and Equipment Property, plant and equipment consist of the following: December 31, 2023 2022 Land and improvements $ 2,826 $ 2,826 Buildings and improvements 74,650 72,788 Machinery and equipment 322,730 314,032 Dies and tools 62,191 57,480 Property, plant and equipment 462,397 447,126 Less allowances for depreciation ( 390,863 ) ( 370,273 ) Net property, plant and equipment $ 71,534 $ 76,853 Depreciation expense totaled $ 21.1 million, $ 24.4 million, and $ 25.8 million in 2023, 2022, and 2021, respectively. 6. Other Assets Other assets consist of the following: December 31, 2023 2022 Patents, at cost $ 10,280 $ 10,126 Accumulated amortization ( 7,171 ) ( 6,318 ) Deposits on capital items 23,045 17,106 Marlin trade name 7,800 7,800 Other 9,958 11,249 $ 43,912 $ 39,963 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 2023, $ 0.4 million in 2022, and $ 0.3 million in 2021. The estimated annual patent amortization expense for each of the next five years is $ 0.3 million. Costs incurred to maintain existing patents are charged to expense in the year incurred. 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. 61 7. Leased Assets The Company leases certain of its real estate and equipment. The Company has evaluated all its leases and determined that all are operating leases under the definitions of the guidance of ASU 2016-02. The Company’s lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants. The Company uses the effective interest method to record 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, 2023: Balance Sheet Line Item December 31, 2023 December 31, 2022 Right-of-use assets Other assets $ 2,781 $ 3,681 Operating lease liabilities Current portion Trade accounts payable and accrued expenses $ 611 $ 642 Noncurrent portion Lease liabilities 2,170 3,039 Total operating lease liabilities $ 2,781 $ 3,681 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 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, 2023: 2024 $ 808 2025 702 2026 705 2027 229 2028 160 Thereafter 960 Total undiscounted future minimum lease payments 3,564 Less: Difference between undiscounted lease payments & the present value of future lease payments ( 783 ) Total operating lease liabilities $ 2,781 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, 2023 is 7.9 years. 8. Trade Accounts Payable and Accrued Expenses Trade accounts payable and accrued expenses consist of the following: December 31, 2023 2022 Trade accounts payable $ 11,100 $ 13,281 Federal excise taxes payable 11,954 13,635 Accrued other 8,654 8,742 $ 31,708 $ 35,658 9. 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. 10. 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 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, 2023, the Company was in compliance with the terms and covenants of the credit facility. 63 11. 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 $ 4.7 million, $ 4.1 million, and $ 4.0 million in 2023, 2022, and 2021, respectively. Additionally, in 2023, 2022, and 2021 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 $ 6.9 million, $ 7.4 million, and $ 7.4 million in 2023, 2022, and 2021, respectively. 12. Other Operating Income, Net Other operating income, net consists of the following: Year ended December 31, 2023 2022 2021 Gain on sale of operating assets $ 5 $ 36 $ 127 13. 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, 2023 2022 2021 Current Deferred Current Deferred Current Deferred Federal $ 14,763 $ ( 5,285 ) $ 21,741 $ ( 4,694 ) $ 42,422 $ 863 State 1,713 ( 582 ) 3,779 ( 879 ) 7,279 131 $ 16,476 $ ( 5,867 ) $ 25,520 $ ( 5,573 ) $ 49,701 $ 994 64 The effective income tax rate varied from the statutory federal income tax rate as follows: Year ended December 31, 2023 2022 2021 Statutory federal income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 2.2 2.7 3.4 Research and development tax credits ( 2.7 ) ( 4.2 ) ( 0.4 ) Other ( 2.5 ) ( 1.1 ) 0.5 Effective income tax rate 18.0 % 18.4 % 24.5 % The Company estimates that its effective tax rate in 2024 will approximate 21 %. Significant components of the Company’s deferred tax assets and liabilities are as follows: December 31, 2023 2022 Deferred tax assets Capitalized research and development costs 9,144 4,838 Employee compensation and benefits 2,452 2,316 Allowances for doubtful accounts and discounts 431 637 Inventories 1,635 1,196 Stock-based compensation 1,698 1,661 Other 1,608 1,705 Total deferred tax assets 16,968 12,353 Deferred tax liabilities: Depreciation 3,578 5,070 Other 1,414 1,174 Total deferred tax liabilities 4,992 6,244 Net deferred tax assets $ 11,976 $ 6,109 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 $ 26.0 million, $ 28.7 million, and $ 49.5 million, during 2023, 2022, and 2021, 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 14. 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, 2023 2022 2021 Numerator: Net income $ 48,215 $ 88,332 $ 155,899 Denominator: Weighted average number of common shares outstanding – Basic 17,676,955 17,648,850 17,585,604 Dilutive effect of options and restricted stock units outstanding under the Company’s employee compensation plans 134,263 144,498 172,230 Weighted average number of common shares outstanding – Diluted 17,811,218 17,793,348 17,757,834 15. Stock Repurchases In 2023 and 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 — — — Fourth Quarter 2023 October 1 to October 28 — — — October 29 to November 25 179,341 $ 45.20 179,341 November 26 to December 31 84,721 $ 43.67 84,721 Total 268,502 $ 44.79 268,502 $ 74,680,000 66 All of these purchases were made with cash held by the Company and no debt was incurred. No shares were repurchased in 2021. At December 31, 2023, approximately $ 74.7 million remained authorized for share repurchases. 16. 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. In June 2023, the Company’s shareholders approved the 2023 Stock Incentive Plan (the “2023 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 1,000,000 shares for issuance under the 2023 SIP, of which 869,000 shares remain available for future grants as of December 31, 2023. Any shares remaining from the 2017 SIP will be available for future grants under the terms of the 2023 SIP. As of December 31, 2023, 121,034 shares remained unawarded from the 2017 SIP. Since the shareholder approval of the 2023 SIP, no additional awards have been or will be granted under the 2017 SIP. Previously granted and outstanding awards under the 2017 SIP will remain subject to the terms of the 2017 SIP. Compensation expense related to deferred stock, restricted stock, and restricted stock units is recognized based on the grant-date fair value of the Company’s common stock, using either the 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 $ 6.2 million, $ 5.7 million, and $ 8.3 million in 2023, 2022, and 2021, 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 2023, 7,566 deferred stock awards were issued to non-employee directors that will vest in June 2024 and 9,760 deferred stock awards were issued to non-employee directors that will vest in June 2026. In 2022, 5,953 deferred stock awards were issued to non-employee directors that vested 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. 67 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. Compensation expense related to these awards is amortized ratably over the vesting period. Compensation expense related to these awards was $ 0.9 million in 2023, $ 0.8 million in 2022, and $ 0.8 million in 2021. At December 31, 2023, there was $ 1.0 million of unrecognized compensation cost related to deferred stock that is expected to be recognized over a period of three years. Restricted Stock Units The Company grants restricted stock units (RSU’s) to senior employees. Some of these RSU’s are retention awards and have only time-based vesting. Other RSU’s have a vesting “double trigger.” The vesting of these RSU’s is dependent on the achievement of corporate objectives established by the Compensation Committee of the Board of Directors, including return on net operating assets, stock performance, and the passage of time. During 2023, 114,000 restricted stock units were issued. Compensation costs related to these restricted stock units was $ 6.1 million, of which $ 1.3 million was recognized in 2023. The costs are being recognized ratably over the remaining periods required before the units vest, which range from 24 to 26 months. 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. At December 31, 2023, there was $ 7.5 million of unrecognized compensation cost related to restricted stock units that is expected to be recognized over a period of 3.3 years. 17. 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. 68 The Company evaluates performance and allocates resources, in part, based on income (loss) before taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 1). Intersegment sales are recorded at the Company’s cost plus a fixed profit percentage. Year ended December 31, 2023 2022 2021 Net Sales Firearms $ 540,746 $ 593,289 $ 728,141 Castings Unaffiliated 3,021 2,553 2,595 Intersegment 33,086 21,306 24,711 36,107 23,859 27,306 Eliminations ( 33,086 ) ( 21,306 ) ( 24,711 ) $ 543,767 $ 595,842 $ 730,736 Income (Loss) Before Income Taxes Firearms $ 53,723 $ 108,610 $ 207,657 Castings ( 798 ) ( 3,338 ) ( 2,732 ) Corporate 5,899 3,007 1,669 $ 58,824 $ 108,279 $ 206,594 Identifiable Assets Firearms $ 228,699 $ 223,301 $ 188,290 Castings 11,144 11,910 13,889 Corporate 158,974 249,552 240,164 $ 398,817 $ 484,763 $ 442,343 Goodwill Firearms $ 3,055 $ 3,055 $ 3,055 Castings 209 209 209 $ 3,264 $ 3,264 $ 3,264 Depreciation Firearms $ 19,301 $ 21,992 $ 22,842 Castings 1,814 2,452 2,959 $ 21,115 $ 24,444 $ 25,801 Capital Expenditures Firearms $ 15,395 $ 26,598 $ 25,239 Castings 401 1,175 3,537 $ 15,796 $ 27,773 $ 28,776 In 2023, the Company’s largest customers and the percent of firearms sales they represented were as follows: Lipsey’s - 24 %; Davidson’s - 19 %; and Sports South - 15 %. 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 %. 69 The Company’s assets are located entirely in the United States and domestic sales represented at least 94 % of total sales in 2023, 2022, and 2021. 18. Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of operations for the two years ended December 31, 2023: Three Months Ended 4/1/23 7/1/23 9/30/23 12/31/23 Net Sales $ 149,453 $ 142,804 $ 120,893 $ 130,617 Gross profit 38,486 38,148 24,728 32,257 Net income 14,350 16,185 7,431 10,249 Basic earnings per share 0.81 0.91 0.42 0.58 Diluted earnings per share $ 0.81 $ 0.91 $ 0.42 $ 0.58 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 19. 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 $ 0.5 million, $ 0.7 million and $ 0.5 million in 2023, 2022, and 2021, 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, $ 0.3 million and $ 0.4 million in 2023, 2022, and 2021, respectively. One of the Company’s Directors also serves on the Board of the NSSF. 20. Contingent Liabilities As of December 31, 2023, the Company was a defendant in nine (9) lawsuits and is aware of certain other such claims. The lawsuits generally fall into four (4) categories: traditional product liability litigation, municipal litigation , negligence, and unfair trade practices . Each is discussed in turn below. 70 Traditional Product Liability Litigation One lawsuit 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. The Company believes that the allegations in this case are unfounded, that the incident is unrelated to the design or manufacture of the firearm 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 criminal misuse of firearms by third parties. There are four (4) lawsuits of this type, as follows: The Complaint in City of Gary v. Smith & Wesson Corp., et al . was filed in Indiana State Court 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 th e design , manufacture , mark e ting and distribution practices of th e 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, 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 in August 2021 in the U.S. District Court for the District of Massachusetts 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. Plaintiff seeks injunctive relief and monetary damages. On November 22, 2021, Defendants filed a joint motion to dismiss the Complaint for, among other things, failure to state a claim on which relief may be granted. 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 was briefed before the First Circuit Court of Appeals. Oral argument was held on July 24, 2023. On January 22, 2024, the First Circuit Court of Appeals issued an opinion reversing the District Court’s dismissal case and remanding the case for further proceedings. 71 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 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 Buffalo , discussed in the preceding paragraph. Defendants timely removed the matter to the U.S. District Court for the Western District of New York. Defendants moved to consolidate the Buffalo and Rochester cases for pretrial purposes only. Defendants also moved to stay the cases pending a decision by the Second Circuit Court of Appeals in National Shooting Sports Foundation, Inc. et al. v. James , which challenges the constitutionality of the recently enacted N.Y. Gen. Bus. Law §§ 898-a–e. On June 8, 2023, the court granted Defendants’ motions and the cases were consolidated for pretrial purposes and stayed. 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 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’s 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 Solutions, Inc. as defendants. The Complaint alleges causes of action for negligence, breach of implied warranties, and unjust enrichment. The Company moved to dismiss the Amended Complaint, the motion has been briefed fully, and the parties are awaiting a ruling. 72 Unfair Trade Practices Estate of Suzanne Fountain v. Sturm, Ruger & Co., Inc., was filed in the Connecticut Superior Court in Stamford and arises out of the criminal shootings at the King Soopers supermarket in Boulder, Colorado on March 22, 2021. On that date, Plaintiff’s decedent, Suzanne Fountain, was murdered by 21-year-old Ahmad Al Aliwi Al-Issa. The Complaint alleged that the Company’s advertising and marketing of the Ruger AR-556 pistol violate the Connecticut Unfair Trade Practices Act and were a substantial factor in bringing about the wrongful death of Suzanne Fountain. Estate of Neven Stanisic et al. v. Sturm, Ruger & Co., Inc., was filed in the Connecticut Superior Court in Stamford 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 alleged that the Company’s advertising and marketing of the Ruger AR-556 pistol violate the Connecticut Unfair Trade Practices Act and were a substantial factor in causing the wrongful death of Plaintiffs’ decedents. The Fountain and Stanisic cases were consolidated for discovery purposes only and transferred by the court to the Complex Litigation Docket. Plaintiffs then sought leave to file an Amended Complaint, essentially abandoning their negligent marketing allegations and advancing a new theory predicated upon alleged violations of the Gun Control Act and National Firearms Act. Over the Company’s objections, Plaintiffs were permitted to file the Amended Complaint. The matter was timely removed to the U.S. District Court for the District of Connecticut based upon the new allegations and federal question jurisdiction. Plaintiffs moved to remand the case to state court, the matter has been briefed fully, and the parties are awaiting a ruling. 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 Compan y, but may have a material impact on the Company’ s financial results for a particular period. 73 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 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. Often, a Complaint does not specify the amount of damages being sought and a range of reasonably possible losses relating to unfavorable outcomes cannot be made. The dollar amount of damages claimed at December 31, 2023 and December 31, 2022 was de minimis . The amount claimed at December 31, 2021 was $ 1.1 million and 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. During 2023, one ( 1 ) traditional product liability lawsuit was filed against the Company and one (1) was resolved. As of December 31, 2023, the Company was a defendant in seven ( 7 ) lawsuits involving its products, including one ( 1 ) traditional product liability lawsuit, four ( 4 ) municipal lawsuits and two ( 2 ) lawsuits based upon alleged unfair trade practices. The Company was also a defendant in two ( 2 ) negligence lawsuits. During 2022, no traditional product liability lawsuits were filed against the Company and one ( 1 ) was resolved. As of December 31, 2022, the Company was a defendant in five ( 5 ) 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. 74 The Company’s product liability expense was $ 1.5 million in 2023, $ 1.3 million in 2022, and $ 1.1 million in 2021. This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. A roll-forward of the product liability reserve and detail of product liability expense for the three years ended December 31, 2023 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) 2021 $ 1,126 ( 7 ) ( 227 ) — $ 892 2022 $ 892 ( 417 ) ( 167 ) — $ 308 2023 $ 308 500 ( 129 ) — $ 679 Income Statement Detail for Product Liability Expense Accrued Legal Expense (b) Insurance Premium Expense (e) Total Product Liability Expense 2021 $ ( 7 ) 1,119 $ 1,112 2022 $ ( 417 ) 1,524 $ 1,107 2023 $ 500 1,226 $ 1,726 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. (e) Insurance expense represents the cost of insurance premiums. 75 There were no insurance recoveries during any of the above years. 21. 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, 2023 and 2022 balance sheets approximate carrying values at those dates. 22. Subsequent Events On February 16, 2024, the Company’s Board of Directors authorized a dividend of 23 ¢ per share to shareholders of record on March 15, 2024. The Company’s management has evaluated transactions occurring subsequent to December 31, 2023 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 ITEM 9— CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.