UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________

FORM 10-Q

(Mark One)

For the quarterly period endedJune 30, 2018

OR

For the transition period from_______________ to _______________

Commission file number1-10435

(203) 259-7843

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yesx      Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)submit). Yesx      Noo

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso      Nox

Securities registered pursuant to Section 12(b) of the Act:

The number of shares outstanding of the issuer's common stock as of July 31, 2018: Common Stock, $1 par value –17,458,020.April 25, 2019: 17,458,020.

Page 1 of 3230

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

Note:

The consolidated balance sheet at December 31, 20172018 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)

(Dollars in thousands, except per share data)

The consolidated balance sheet at December 31, 20172018 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 STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

See notes to condensed consolidated financial statements.

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)

See notes to condensed consolidated financial statements.

STURM, RUGER & COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

See notes to condensed consolidated financial statements.

STURM, RUGER & COMPANY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(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 sixthree months ended JuneMarch 30, 20182019 may not be indicative of the results to be expected for the full year ending December 31, 2018.2019. These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.

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 represent approximately 4% of total sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.

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

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 relatesrelate 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.

Fair Value of Financial Instruments:

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

Use of Estimates:

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

Reclassifications:

Certain prior period balances have been reclassified to conform to current year presentation.

Recent Accounting Pronouncements:

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, an update to Accounting Standards Codification Topic 606,Revenue from Contracts with Customers (“ASC 606”), which supersedes nearly all existing revenue recognition guidance. As more fully discussed in Note 3, the Company adopted ASC 606 using the modified retrospective method on January 1, 2018.

On March 30, 2016, the FASB issued ASU 2016-09,Compensation - Stock Compensation (Topic 718). The most significant change in the new compensation guidance is that all excess tax benefits and tax deficiencies (including tax benefits of dividends) on share-based compensation awards should be recognized in the Statement of Income as income tax expense. Previously such benefits or deficiencies were recognized in the Balance Sheet as adjustments to additional paid-in capital. The new guidance was effective in fiscal years beginning after December 15, 2016 and interim periods thereafter. The Company adopted ASU 2016-09 in the first quarter of 2017. Adopting this change in accounting principle reduced the Company’s effective tax rate by 2% for the period ending September 30, 2017. This did not have a material impact on the Company’s results of operations or financial position.

On February 25, 2016, the FASB issued ASU 2016-02,Leases (Topic 842), its long-awaited final standard on the accounting for leases. The most significant change in the new lease guidance requires lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. This change will resultresults in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as

operating leases under legacy U.S. GAAP. The new lease guidance iswas effective in fiscal years beginning after December 15, 2018 and interim periods thereafter. Early application is permittedThe company adopted ASU 2016-02 effective January 1, 2019. As more fully discussed in Note 5, as a result of adopting ASU 2016-02 the Company recorded right-of-use assets totaling $2.7 million and lease liabilities of $2.7 million on its Consolidated Balance Sheets for all entities. The Company is currently evaluating the effect that the standard will havequarter ended March 30, 2019. There was no impact on the consolidated financial statements.Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Stockholders’ Equity, or Condensed Consolidated Statements of Cash Flows as a result of this adoption.

NOTE 3 – REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, applied to those contracts for which all performance obligations were not completed as of that date. Under the modified retrospective method, results for reporting periods beginning after January 1, 2018 will beare presented using the guidance of ASC 606, while prior period amounts arewere not adjusted and will

continue to be reportedpresented in accordance with the previous guidance provided in ASC Topic 605,Revenue Recognition,.

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

At December 31, 2017, the Company had accrued $4.0 million related to certain of its sales promotion activities that included the shipment of no charge firearms. Using the new accounting guidance, a deferred contract liability of $6.9 million was required at December 31, 2017 and an entry for $2.9 million to increase the deferred contract liability, increase deferred tax assets by $0.7 million, and reduce beginning retained earnings by $2.2 million was recorded on January 1, 2018 (the “transition entry”).when those periods are reported.

The impact of the adoption of ASC 606 on revenue recognized during the three and six months ended JuneMarch 30, 2019 and March 31, 2018 is as follows:

DuringAs more fully described in the six months ended June 30, 2018,Revenue Recognition section of Note 1, the Company deferred $9.4 milliondeferral of revenue offset byand subsequent recognition thereof relates to certain of the recognition of $9.7 million of revenue previously deferred asCompany’s sales promotion programs that include the performance obligation

relating to thefuture shipment of free products was satisfied. This resulted in a net increase in firearms sales for the three and six months ended June 30, 2018 of $2.6 million, and $0.3 million, respectively, and a deferred contract revenue liability at June 30, 2018 of $6.7 million.products. The Company estimates thatexpects the deferred revenue from this deferred contract liability willwith customers to be recognized in the thirdsecond quarter of 2018. As a result of the adoption of ASC 606, for the three months ended June 30, 2018 the gross margin percentage was unchanged and earnings per share increased by approximately 5¢ over the comparable prior year period. As a result of the adoption of ASC 606, for the six months ended June 30, 2018 the gross margin percentage was reduced by 2% and earnings per share was unchanged as compared to the comparable prior year period.2019.

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

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 six month period ended June 30, 2018, 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.  Although the effect of such a liquidation cannot be precisely quantified at the present time, management believes that if a LIFO liquidation occurs in 2018, 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:

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

The Company adopted the provisions of ASU 2016-02 using the effective date method on January 1, 2019 and recorded right-of-use assets equal to the present value of the contractual liability for future lease payments. The table below presents the right-of-use assets and related lease liabilities recognized on the condensed consolidated balance sheet as of March 30, 2019:

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

The Company’s leases generally do not provide an implicit interest rate, and therefore the Company uses its incremental borrowing rate enumerated in its revolving line of credit (see Note 6) 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 March 30, 2019:

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 March 30, 2019 is 11.85 years.

NOTE 6 - LINE OF CREDIT

The Company’sCompany has a $40 million revolving line of credit expiredwith a bank. This facility is renewable annually and terminates on June 15, 2018. ThroughoutAugust 31, 2019. Borrowings under this facility bear interest at the one-month LIBOR rate (2.501% at March 30, 2019) plus 150 basis points. The Company is charged one-quarter of a percent (0.25%) per year on the unused portion. At March 30, 2019 and December 31, 2018, the Company was in compliance with the terms and covenants of the credit facility, which was not used.remains unused.

NOTE 67 - 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 $0.8 million and $1.6$1.2 million for the three and six months ended JuneMarch 30, 2018, respectively,2019, and $0.8 million and $1.8 million for the three and six months ended July 1, 2017, respectively.March 31, 2018. The Company plans to contribute approximately $1.6$3.2 million to the plan in matching employee contributions during the remainder of 2018.2019.

In addition, the Company provided supplemental discretionary contributions to the 401(k) plan totaling $1.3 million and $2.6$1.7 million for the three and six months ended JuneMarch 30, 2018, respectively,2019, and $1.3 million and $3.2 million for the three and six monthmonths ended July 1, 2017, respectively.March 31, 2018. The Company plans to contribute approximately $1.3$5.0 million in supplemental contributions to the plan during the remainder of 2018.2019.

NOTE 78 - INCOME TAXES

The Company's 20182019 and 20172018 effective tax rates differ from the statutory federal tax rate due principally to state income taxes. The Company’s effective income tax rate was 24.2%25.1% and 24.4%24.5% for the three and six months ended JuneMarch 30, 2019 and March 31, 2018, respectively. The Company’s effective income tax rate for the three and six months ended July 1, 2017 was 35.0%. This reduction is primarily the result of the Tax Cuts and Job Act of 2017, which reduced the statutory Federal tax rate from 35% to 21% effective January 1, 2018, partially offset by the loss of tax benefits available in the prior period related to the American Jobs Creation Act of 2004 that expired effective December 31, 2017. The reduced effective tax rate resulting from the Tax Cuts and Job Act of 2017 increased earnings per share by 12¢ and 24¢ for the three and six months ended June 30, 2018.

Income tax payments for the three and six months ended JuneMarch 30, 20182019 totaled $8.0 million and $8.0 million, respectively. Income$4.0 million. There were no income tax payments forduring the three and six months ended July 1, 2017 totaled $16.2 million and $16.3 million, respectively.March 31, 2018.

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 2015.

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 89 - 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:

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 910 - COMPENSATION PLANS

In May 2017, the Company’s shareholders approved the 2017 Stock Incentive Plan (the “2017 SIP”) under which employees, independent contractors, and non-employee directors may be granted stock options, restricted stock, deferred stock awards, and stock appreciation rights, any of which may or may not require the satisfaction of performance objectives. Vesting requirements are determined by the Compensation Committee of the Board of Directors.The Company has reserved 750,000 shares for issuance under the 2017 SIP, of which 543,000475,000 shares remain available for future grants as of JuneMarch 30, 2018.

In April 2007, the Company adopted and the shareholders approved the 2007 Stock Incentive Plan (the “2007 SIP”), which had similar provisions as the 2017 SIP. The 2007 SIP plan expired April 24, 2017. The Company had reserved 2,550,000 shares for issuance under the 2007 SIP, of which 2,181,000 shares were issued.2019.

Restricted Stock Units

Beginning in 2009, theThe Company began grantinggrants performance-based and retention-based restricted stock units to senior employees in lieu of incentive stock options. 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 184,20067,900 restricted stock units issued during the sixthree months ended JuneMarch 30, 2018.2019. Total compensation costs related to these restricted stock units are $8.8$3.7 million.

Compensation costs related to all outstanding restricted stock units recognized in the statements of income aggregated $1.5 million and $2.7$1.1 million for the three and six months ended JuneMarch 30, 2018, respectively,2019 and $0.9 million and $1.6 million for the three and six months ended July 1, 2017,March 31, 2018, respectively.

Stock Options

A summary of changes in options outstanding under the 2007 SIPa prior plan is summarizeddetailed below:

The aggregate intrinsic value (mean market price at JuneMarch 30, 20182019 less the weighted average exercise price) of options outstanding under the 2007 SIPprior plan was approximately $0.3$0.2 million.

NOTE 1011 - OPERATING SEGMENT INFORMATION

The Company has two reportable segments: 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.

Selected operating segment financial information follows:

NOTE 1112 – RELATED PARTY TRANSACTIONS

The Company contracts with the National Rifle Association (“NRA”) for some of its promotional and advertising activities, including the 2016 “Ruger $5 Million Match Campaign” and the 2015-16 “2.5 Million Gun Challenge”.activities. Payments made to the NRA in the three and six months ended JuneMarch 30, 2019 and March 31, 2018 totaled $132,000$147,000 and $211,000, respectively. Payments made to the NRA in the three and six months ended July 1, 2017 were $127,000 and $302,000,$79,000, respectively. One of the Company’s Directors also serves as a Director on the Board of the NRA.

The Company has contracted with Symbolic, Inc. (“Symbolic”) to assist in its marketing efforts. Payments made to Symbolic during the three and six months ended June 30, 2018 were de minimis. During the three and six months ended July 1, 2017, the Company paid Symbolic $0.3 million and $1.0 million, respectively, which amounts included $0.1 million and $0.4 million, respectively, for the reimbursement of expenses paid by Symbolic on the Company’s behalf. Symbolic’s principal and founder was named the Company’s Vice President of Marketing in June 2017, and remains the president of Symbolic.

NOTE 1213 - CONTINGENT LIABILITIES

As of JuneMarch 30, 2018,2019, the Company was a defendant in three (3)seven (7) lawsuits and is aware of certain other such claims. The lawsuits fall into three categories: traditional product liability litigation, non-product litigation, and municipal litigation, discussed in turn below.

Traditional Product Liability Litigation

OneFive of the threeseven lawsuits mentioned above involvesinvolve claims for damages related to an allegedly defective product due to its design and/or manufacture. This lawsuit stemsThese lawsuits stem from a specific incidentincidents of personal injury and isare based on a traditional product liability theorytheories such as strict liability, negligence and/or breach of warranty.

The Company management believes that the allegationallegations in this case isthese cases are unfounded, that the incident wasincidents are unrelated to the design or manufacture of the firearm, and that there should be no recoveryrecoveries against the Company.

Non-Product Liability

David S. Palmer, on behalf of himself and all others similarly situated vs. Sturm, Ruger & Co. is a putative class-action suit filed in Florida state court on behalf of Florida consumers. The suit alleges breach of warranty and deceptive trade practices related to the sale of 10/22 Target Rifles. The Company filed an Answer denying all material allegations and a Motion to Strike the putative class representative’s claims. That motion remains pending.

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.third parties.

There is only one remaining lawsuit of this type, filed by the City of Gary in Indiana State Court in 1999. The complaint in that case seeks damages, among other things, for the costs ofmedical 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 thedesign,manufacture,marketing and distribution practices of thevarious defendants. The suit alleges,among other claims,negligence in the design of products,public nuisance,negligent distribution and marketing,negligence per se and deceptive advertising. The case does not allege a specific injury to a specific individual as a result of the misuse or use of any of the Company's products.

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

In 2015,Indiana passed a new law such that Indiana Code §34-12-3-1 became applicable to the City's case. The defendants have 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 inapplicableto the City's claims. The motion was fully briefed by the parties.

On September 29, 2016, the court entered an order staying the case pending a decision by the Indiana Supreme Court inKS&E Sports v.Runnels, which presentspresented related issues. The Indiana Supreme Court decidedKS&E Sports on April 24,2017,and theCity of Gary court lifted the stay. TheCity of Gary court also entered an order setting a supplemental briefing schedule under which the parties addressed the impact of theKS&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 enteredcourt issued an order dismissinggranting defendants’ motion for judgment on the case in its entirety.pleadings, but denying defendants’ request for attorney’s fees and costs. On January 8, 2018, the court entered judgment for the defendants. The City filed a Notice of Appeal on February 1, 2018. Defendants cross-appealed the order denying attorney’s fees and costs. The matter is inhas been briefed fully and the process of being briefed by the parties.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 Company,but may have a material impact on the Company’sfinancial results for a particular period.

Product liability claim payments are made when appropriate if, as, and when claimants and the Company reach agreement upon an amount to finally resolve all claims. Legal costs are paid as the lawsuits and claims develop, the timing of which may vary greatly from case to case. A time schedule cannot be determined in advance with any reliability concerning when payments will be made in any given case.

Provision is made for product liability claims based upon many factors related to the severity of the alleged injury and potential liability exposure, based upon prior claim experience. Because the Company's experience in defending these lawsuits and claims is that unfavorable outcomes are typically not probable or estimable, only in rare cases is an accrual established for such costs.

In most cases, an accrual is established only for estimated legal defense costs. Product liability accruals are periodically reviewed to reflect then-current estimates of possible liabilities

and expenses incurred to date and reasonably anticipated in the future. Threatened product liability claims are reflected in the Company's product liability accrual on the same basis as actual claims;i.e., an accrual is made for reasonably anticipated possible liability and claims handling expenses on an ongoing basis.

A range of reasonably possible losses relating to unfavorable outcomes cannot be made. However, in product liability cases in which a dollar amount of damages is claimed, the amount of damages claimed, which totaled $0.1$ 0.1 million and $0.1 million at December 31, 20172018 and 2016,2017, respectively, are set forth as an indication of possible maximum liability the Company might be required to incur in these cases (regardless of the likelihood or reasonable probability of any or all of this amount being awarded to claimants) as a result of adverse judgments that are sustained on appeal.

As of December 31, 2017 and 2016, the Company was a defendant in 3 and 5 lawsuits, respectively, involving its products and is aware of other such claims. During 2017 and 2016, respectively, 0 and 3 product-related claims were filed against the Company, 0 and 1 claims were settled, and 2 and 0 claims were dismissed.

The Company’s product liability expense was $0.4 million in 2017, $2.1 million in 2016, and $0.9 million in 2015. This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters.

NOTE 1314 - SUBSEQUENT EVENTS

On July 31, 2018,May 7, 2019, the Company’s Board of Directors authorized a dividend of 34¢29¢ per share, for shareholders of record as of AugustMay 17, 2018,2019, payable on AugustMay 31, 2018.2019.

The Company has evaluated events and transactions occurring subsequent to JuneMarch 30, 20182019 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.

Company Overview

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of sales are from firearms. Export sales represent approximately 4% of total sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.

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

Orders 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.

Results of Operations

Demand

The estimated unit sell-through of the Company’s products from the independent distributors to retailers decreased 1%32% in the first halfquarter of 20182019 compared to the prior year period. For the same periods,period, the National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) decreased 3%8%. The slight decrease in estimated sell-through of the Company’s products from the independent distributors to retailers is attributable to decreased overall consumer demand in the first half of 2018, partially offset by increased demand for some of the Company’s recently introduced products.

Sales of new products, including the Pistol Caliber Carbine, the Mark IVEC9s pistol, the LCP II pistol, the EC9s pistols, the Security-9 pistol, and the Precision Rimfire Rifle, represented $75.5$20.9 million or 29%20% of firearm sales in the first halfquarter of 2018.2019. New product sales include only major new products that were introduced in the past two years.

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

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.

Orders Received and Ending Backlog

The Company uses the estimated unit sell-through of our products from the independent distributors to retailers, along with inventory levels at the independent distributors and at the Company, as the key metrics for planning production levels. The Company generally does not use the orders received or ending backlog for planning production levels.

The units ordered, value of orders received and ending backlog, net of excise tax, for the trailing sixfive 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.)

Production

The Company reviews the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, semi-monthly to plan production levels. Despite the 7% increase in unit production in the second quarter of 2018 from the

first quarter of 2018, total unit production decreased 4% and 17% for the three and six months ended June 30, 2018, respectively, from the comparable prior year periods.

Summary Unit Data

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

Inventories

During the secondfirst quarter of 2018,2019, the Company’s finished goods inventory increased by 3,70052,000 units and distributor inventories of the Company’s products decreased by 25,000 units. In the aggregate, total Company and distributor inventories increased by 30,40027,000 units. during the first quarter of 2018.

Inventory data for the trailing sixfive quarters follows:

Net Sales

Consolidated net sales were $128.4$114.0 million for the three months ended JuneMarch 30, 2018,2019, a decrease of 2.6%13.1% from $131.9$131.2 million in the comparable prior year period.

Firearms net sales were $127.0$112.9 million for the three months ended JuneMarch 30, 2018,2019, a decrease of 2.7%13.1% from $130.5$129.9 million in the comparable prior year period. Effective January 1, 2018, the Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which modified the timing of revenue recognition related to certain sales promotion activities that include the shipment of no charge firearms. Consequently, net sales in the three months ended JuneMarch 30, 20182019 were increased by $2.6$3.5 million and net sales in the three months ended March 31, 2018 were decreased by $2.4 million.

Firearms unit shipments decreased 26.9% for the three months ended March 30, 2019 from the comparable prior year period.

For the six months ended June 30, 2018, firearms net sales were $256.9 million, a decrease of 13.5% from $296.9 million in the comparable prior year period. As a result of the adoption of ASC 606, net sales in the six months ended June 30, 2018 were increased by $0.3 million from the comparable prior year period.

Firearms unit shipments decreased 5% and 11% for the three and six months ended June 30, 2018, respectively, from the comparable prior year periods.

Casting net sales were $1.4$1.1 million for the three months ended JuneMarch 30, 2018, an increase2019, a decrease of 3.7%13.3% from $1.3 million in the comparable prior year period.

For the six months ended June 30, 2018, castings net sales were $2.7 million, an increase of 14.4% from $2.3 million in the comparable prior year period.

Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $91.8$81.4 million for the three months ended JuneMarch 30, 2018,2019, a decrease of 5.3%14.6% from $96.9 million in the comparable prior year period.

Consolidated cost of products sold was $187.2 million for the six months ended June 30, 2018, a decrease of 10.2% from $208.5$95.3 million in the comparable prior year period.

Gross margin was 28.5% and 27.9%28.6% for the three and six months ended JuneMarch 30, 2018, respectively,2019, compared to 26.5% and 30.3%27.3% in the comparable prior year periods. Effective January 1, 2018, the Company adopted ASC 606, which modified the timing of revenue recognition related to certain sales promotion activities involving the shipment of no charge firearms. As a result, net sales in the three and six months ended June 30, 2018 were increased by $2.6 million and $0.3 million, respectively. In addition, certain promotional expenses that had been classified as selling expenses in prior years were included in cost of products sold in 2018. As a result, the gross margin for the three and six months ended June 30, 2018 was reduced by approximately 1% and 2%, respectively.

period.

Gross margin for the three and six months ended JuneMarch 30, 20182019 and July 1, 2017March 31, 2018 is illustrated below (in thousands):