Edgar Filing: STURM RUGER & CO INC

Unassociated Document

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

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

(Mark One)

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

For the fiscal year ended December 31, 2011

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

For the transition period from ____________ to ___________

Commission File Number 0-4776

STURM, RUGER & COMPANY, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

Lacey Place, Southport, Connecticut	06890
(Address of Principal Executive Offices)	(Zip Code)

(203) 259-7843

(Registrant’s telephone number, including area code)

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $1 par value	New York Stock Exchange

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

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES oNO þ

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

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 filing requirements for the past 90 days. YES þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ.

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

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

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).

YES þ NO o

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2011:

Common Stock, $1 par value - $405,197,000

The number of shares outstanding of the registrant's common stock as of February 15, 2012:

Common Stock, $1 par value –19,117,900 shares

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the registrant’s Proxy Statement relating to the 2012 Annual Meeting of Stockholders to be held May 2, 2012 are incorporated by reference into Part III (Items 10 through 14) of this Report.

TABLE OF CONTENTS

	PART I

Item 1.	Business	4

Item 1A.	Risk Factors	10

Item 1B.	Unresolved Staff Comments	12

Item 2.	Properties	12

Item 3.	Legal Proceedings	13

Item 4.	Mine Safety Disclosures	13

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13

Item 6.	Selected Financial Data	17

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 8.	Financial Statements and Supplementary Data	41

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	69

Item 9A.	Controls and Procedures	69

Item 9B.	Other Information	70

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	71

Item 11.	Executive Compensation	71

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71

Item 13.	Certain Relationships and Related Transactions, and Director Independence	71

Item 14.	Principal Accountant Fees and Services	71

	PART IV

Item 15.	Exhibits and Financial Statement Schedules	72

Signature		77
Exhibit Index		78
Financial Statement Schedule		83
Exhibits

EXPLANATORY NOTE:

In this Annual Report on Form 10-K, Sturm, Ruger & Company, Inc. (the “Company”) makes forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company, the impact of future firearms control and environmental legislation, and accounting estimates, any one or more of which could cause actual results to differ materially from those projected. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other words and terms of similar meaning, typically identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.

PART I

ITEM 1—BUSINESS

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 the Company’s total sales for the year ended December 31, 2011 were from the firearms segment, and approximately 1% was from investment castings. Export sales represent approximately 5% of firearms sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic.

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

The Company manufactures and sells investment castings made from steel alloys for both outside customers and internal use in the firearms segment. Investment castings sold to outside customers, either directly to or through manufacturers’ representatives, represented approximately 1% of the Company’s total sales for the year ended December 31, 2011.

For the years ended December 31, 2011, 2010, and 2009, net sales attributable to the Company's firearms operations were approximately $324.2 million, $251.7 million and $266.6 million or approximately 99%, 99%, and 98%, respectively, of total net sales. The balance of the Company's net sales for the aforementioned periods was attributable to its investment castings operations.

Firearms Products

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

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

Pistols

●	Rimfire autoloading

●	Centerfire autoloading

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

Rifles

A rifle is a long gun with spiral grooves cut into the interior of the barrel to give the bullet a stabilizing spin after it leaves the barrel. Sales of rifles by the Company accounted for approximately $83.4 million, $63.5 million, and $102.2 million of revenues for the years 2011, 2010, and 2009, respectively.

Shotguns

A shotgun is a long gun with a smooth barrel interior which fires lead or steel pellets. Sales of shotguns by the Company were insignificant in the past three years.

Pistols

A pistol is a handgun in which the ammunition chamber is an integral part of the barrel and which typically is fed ammunition from a magazine contained in the grip. Sales of pistols by the Company accounted for approximately $150.0 million, $108.1 million, and $87.5 million of revenues for the years 2011, 2010, and 2009, respectively.

Revolvers

A revolver is a handgun that has a cylinder that holds the ammunition in a series of chambers which are successively aligned with the barrel of the gun during each firing cycle. There are two general types of revolvers, single-action and double-action. To fire a single-action revolver, the hammer is pulled back to cock the gun and align the cylinder before the trigger is pulled. To fire a double-action revolver, a single trigger pull advances the cylinder and cocks and releases the hammer. Sales of revolvers by the Company accounted for approximately $69.9 million, $67.1 million, and $58.3 million of revenues for the years 2011, 2010, and 2009, respectively.

Accessories

The Company also manufactures and sells accessories and replacement parts for its firearms. These sales accounted for approximately $20.2 million, $11.5 million, and $17.4 million of revenues for the years 2011, 2010 and 2009, respectively.

Investment Casting Products

Net sales attributable to the Company’s investment casting operations (excluding intercompany transactions) accounted for approximately $4.6 million, $3.5 million, and $4.4 million, or approximately 1%, 1%, and 2% of revenues for 2011, 2010, and 2009, respectively.

Manufacturing

Firearms

The Company produces one model of pistol and all of its rifles, shotguns, and revolvers at the Newport, New Hampshire facility. All other pistols are produced at the Prescott, Arizona facility.

Many of the basic metal component parts of the firearms manufactured by the Company are produced by the Company's castings facility through a process known as precision investment casting. See "Manufacturing-Investment Castings" for a description of the investment casting process. The Company initiated the use of this process in the production of component parts for firearms in 1953. The Company believes that the investment casting process provides greater design flexibility and results in component parts which are generally close to their ultimate shape and, therefore, require less machining than processes requiring machining a solid billet of metal to obtain a part. Through the use of investment castings, the Company endeavors to produce durable and less costly component parts for its firearms.

All assembly, inspection, and testing of firearms manufactured by the Company are performed at the Company's manufacturing facilities. Every firearm, including every chamber of every revolver manufactured by the Company, is test-fired prior to shipment.

Investment Castings

To produce a product by the investment casting method, a wax model of the part is created and coated (“invested”) with several layers of ceramic material. The shell is then heated to melt the interior wax, which is poured off, leaving a hollow mold. To cast the desired part, molten metal is poured into the mold and allowed to cool and solidify. The mold is then broken off to reveal a near net shape cast metal part.

Marketing and Distribution

Firearms

The Company's firearms are primarily marketed through a network of selected, federally licensed, independent wholesale distributors who purchase the products directly from the Company. They resell to federally licensed, independent retail firearms dealers who in turn resell to legally authorized end users. All retail purchasers are subject to a point-of-sale background check by law enforcement. These end users include sportsmen, hunters, people interested in self-defense, law enforcement and other governmental organizations, and gun collectors. Each distributor carries the entire line of firearms manufactured by the Company for the commercial market. Currently, 14 distributors service the domestic commercial market, with an additional 20 distributors servicing the domestic law enforcement market and two distributors servicing the Canadian market.

In 2011, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-15%; Davidson’s-14%; Sports South-12%; and Lipsey’s-12%. In 2010, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-16%; Davidson’s-12%; Lipsey’s-11%; and Sports South-11%. In 2009, the Company’s largest customers and the percent of total sales they represented were as follows: Jerry’s/Ellett Brothers-16%; Davidson’s-11%, Lipsey’s-11%; Sports South-11% and Big Rock-10%.

The Company employs nine employees and one independent contractor who service these distributors and call on retailers and law enforcement agencies. Because the ultimate demand for the Company's firearms comes from end users rather than from the independent wholesale distributors, the Company believes that the loss of any distributor would not have a material, long-term adverse effect on the Company, but may have a material adverse effect on the Company’s financial results for a particular period. The Company considers its relationships with its distributors to be satisfactory.

The Company also exports its firearms through a network of selected commercial distributors and directly to certain foreign customers, consisting primarily of law enforcement agencies and foreign governments. Foreign sales were less than 6% of the Company's consolidated net sales for each of the past three fiscal years.

As of February 1, 2012, the order backlog was approximately $138 million. As of February 1, 2011, order backlog was approximately $59 million.

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

Investment Castings

The investment castings segment provides castings for the Company’s firearms segment. In addition, the investment castings segment produces various products for a number of customers in a variety of industries, including approximately 20 firearms and firearms component manufacturers.

Competition

Firearms

Competition in the firearms industry is intense and comes from both foreign and domestic manufacturers. While some of these competitors concentrate on a single industry product category such as rifles or pistols, several competitors manufacture products in the same four industry categories as the Company (rifles, shotguns, pistols, and revolvers). Some of these competitors are subsidiaries of larger corporations than the Company with substantially greater financial resources than the Company, which could affect the Company’s ability to compete. The principal methods of competition in the industry are product innovation, quality, availability, and price. The Company believes that it can compete effectively with all of its present competitors.

Investment Castings

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

Employees

As of February 1, 2012, the Company employed approximately 1,230 full-time employees of which approximately 49% had at least ten years of service with the Company. The Company uses temporary employees to supplement its workforce. As of February 1, 2012, there were approximately 310 temporary employees.

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

Research and Development

In 2011, 2010, and 2009, the Company spent approximately $4.0 million, $3.2 million, and $2.0 million, respectively, on research activities relating to the development of new products and the improvement of existing products. As of February 1, 2012, the Company had approximately 70 employees whose primary responsibilities were research and development activities.

Patents and Trademarks

The Company owns various United States and foreign patents and trademarks which have been secured over a period of years and which expire at various times. It is the policy of the Company to apply for patents and trademarks whenever new products or processes deemed commercially valuable are developed or marketed by the Company. However, none of these patents and trademarks are considered to be fundamental to any important product or manufacturing process of the Company and, although the Company deems its patents and trademarks to be of value, it does not consider its business materially dependent on patent or trademark protection.

Environmental Matters

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

Executive Officers of the Company

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

Name	Age	Position With Company
Michael O. Fifer	54	President and Chief Executive Officer

Thomas A. Dineen	43	Vice President, Treasurer and Chief Financial Officer

Christopher J. Killoy	53	Vice President of Sales and Marketing

Mark T. Lang	55	Group Vice President

Thomas P. Sullivan	51	Vice President of Newport Operations

Kevin B. Reid, Sr.	51	Vice President and General Counsel

Steven M. Maynard	57	Vice President of Lean Business Development

Leslie M. Gasper	58	Corporate Secretary

Michael O. Fifer joined the Company as Chief Executive Officer on September 25, 2006, and was named to the Board of Directors on October 19, 2006. Mr. Fifer was named President on April 23, 2008.

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

Christopher J. Killoy rejoined the Company as Vice President of Sales and Marketing on November 27, 2006. Mr. Killoy originally joined the Company in 2003 as Executive Director of Sales and Marketing, and subsequently served as Vice President of Sales and Marketing from November 1, 2004 to January 25, 2005.

Mark T. Lang joined the Company as Group Vice President on February 18, 2008. Mr. Lang is responsible for management of the Prescott Firearms Division and the Company’s acquisition efforts. Prior to joining the Company, Mr. Lang was President of the Custom Products Business at Mueller Industries, Inc. Prior to joining Mueller, Mr. Lang was the Vice President of Operations for the Automotive Division of Thomas and Betts, Inc.

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

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

Steven M. Maynard joined the Company as Vice President of Lean Business Development on April 24, 2007. Prior to joining the Company, Mr. Maynard served as Vice President of Engineering and CIO at the Wiremold Company.

Leslie M. Gasper has been Secretary of the Company since 1994. Prior to that, Ms. Gasper was the Administrator of the Company’s pension plans.

Where You Can Find More Information

The Company is subject to the informational requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and accordingly files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements, Current Reports on Form 8-K, and other information with the Securities and Exchange Commission (the "SEC"). The public may read and copy any materials filed with the SEC at the SEC's Public Reference Room at 100 F Street NE, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information on the Public Reference Room. As an electronic filer, the Company's public filings are maintained on the SEC's Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is http://www.sec.gov.

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

Additionally, the Company’s corporate governance materials, including its Corporate Governance Guidelines, the charters of the Audit, Compensation, and Nominating and Corporate Governance

committees, and the Code of Business Conduct and Ethics may also be found under the “Stockholder Relations” section of the Company’s Internet site at http://www.ruger.com. A copy of the foregoing corporate governance materials is available upon written request to the Corporate Secretary at Sturm, Ruger & Company, Inc., Lacey Place, Southport, Connecticut 06890.

ITEM 1A—RISK FACTORS

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

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

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

The sale, purchase, ownership, and use of firearms are subject to thousands of federal, state and local governmental regulations. The basic federal laws are the National Firearms Act, the Federal Firearms Act, and the Gun Control Act of 1968. These laws generally prohibit the private ownership of fully automatic weapons and place certain restrictions on the interstate sale of firearms unless certain licenses are obtained. The Company does not manufacture fully automatic weapons, other than for the law enforcement market, and holds all necessary licenses under these federal laws. From time to time, congressional committees review proposed bills relating to the regulation of firearms. These proposed bills generally seek either to restrict or ban the sale and, in some cases, the ownership of various types of firearms. Several states currently have laws in effect similar to the aforementioned legislation.

Until November 30, 1998, the “Brady Law” mandated a nationwide five-day waiting period and background check prior to the purchase of a handgun. As of November 30, 1998, the National Instant Check System, which applies to both handguns and long guns, replaced the five-day waiting period. The Company believes that the “Brady Law” and the National Instant Check System have not had a significant effect on the Company’s sales of firearms, nor does it anticipate any significant impact on sales in the future. On September 13, 1994, the “Violent Crime Control and Law Enforcement Act” banned so-called “assault weapons.” All the Company’s then-manufactured commercially-sold long guns were exempted by name as “legitimate sporting firearms.” This ban expired by operation of law on September 13, 2004. The Company remains strongly opposed to laws which would restrict the rights of law-abiding citizens to lawfully acquire firearms. The Company believes that the lawful private ownership of firearms is guaranteed by the Second Amendment to the United States Constitution and that the widespread private ownership of firearms in the United States will continue. However, there can be no assurance that the regulation of firearms will not become more restrictive in the future and that any such restriction would not have a material adverse effect on the business of the Company.

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

The Company faces risks arising from various asserted and unasserted litigation matters. These matters include, but are not limited to, assertions of allegedly defective product design or manufacture, purported class actions against firearms manufacturers, generally seeking relief such as medical expense reimbursement, property damages and punitive damages arising from accidents involving firearms or the criminal misuse of firearms, and those lawsuits filed on behalf of municipalities alleging harm to the

general public. Various factors or developments can lead to changes in current estimates of liabilities such as final adverse judgment, significant settlement or changes in applicable law. A future adverse outcome in any one or more of these matters could have a material adverse effect on the Company’s financial results. See Note 16 to the financial statements which are included in this Form 10-K.

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

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

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

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

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

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle and shotgun stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory to provide ample time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials can not be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

The implementation of a new enterprise resource planning (“ERP”) system could cause disruption to the Company’s operations.

The Company is transitioning to a new enterprise resource planning ERP system and has converted one of its manufacturing facilities and a portion of its support functions, including sales and finance during 2011. The Company expects to have the new system fully implemented in the second half of 2012. However, if the implementation of the ERP does not proceed as expected, it could impede the Company’s ability to manufacture products, order materials, generate management reports, invoice customers, and comply with laws and regulations. Any of these types of disruptions could have a material adverse effect on the financial position and the financial results of the Company.

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

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

The healthcare legislation passed in 2010 could have a material adverse impact on the Company.

Certain provisions of the recently passed federal healthcare legislation, in particular the “unlimited lifetime benefit” which eliminated the practice of capping the amount of medical benefits available to an individual, could have a material adverse effect on the Company’s financial position. The Company self insures the cost of the medical benefits for its employees up to an annual and lifetime maximum per individual. It supplements this self-insurance with “stop loss” insurance for costs incurred above these maximum thresholds. In the past, the medical benefit costs for several employees of the Company have exceeded this maximum each year, in some cases significantly. It is the Company’s expectation that if it is forced to provide an “unlimited lifetime benefit” its medical costs would likely increase significantly which would have a material adverse effect on its financial condition.

ITEM 1B—UNRESOLVED STAFF COMMENTS

None

ITEM 2—PROPERTIES

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

	Approximate Aggregate Usable Square Feet	Status	Segment

Newport, New Hampshire	350,000	Owned	Firearms/Castings
Prescott, Arizona	230,000	Leased	Firearms

Each facility contains enclosed ranges for testing firearms and also contains modern tool room facilities. The lease of the Prescott facility provides for rental payments, which are approximately equivalent to estimated rates for real property taxes.

The Company has four other facilities that were not used in its manufacturing operations in 2011:

	Approximate Aggregate Usable Square Feet	Status	Segment

Southport, Connecticut (Station Street property)	5,000	Owned	Not Utilized
Southport, Connecticut (Lacey Place property)	25,000	Owned	Corporate
Newport, New Hampshire(Dorr Woolen Building)	45,000	Owned	Firearms
Enfield, Connecticut	10,000	Leased	Firearms

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

The Company’s principal executive offices are located in Southport, Connecticut. The Company believes that its existing facilities are suitable and adequate for its present purposes.

ITEM 3—LEGAL PROCEEDINGS

The nature of the legal proceedings against the Company is discussed at Note 16 to the financial statements, which are included in this Form 10-K.

The Company has reported all cases instituted against it through October 1, 2011, and the results of those cases, where terminated, to the SEC on its previous Form 10-Q and 10-K reports, to which reference is hereby made.

During the three months ending December 31, 2011, no cases were formally instituted against the Company nor were any previously reported cases settled.

ITEM 4—MINE SAFETY DISCLOSURES—Not applicable

PART II

ITEM 5—

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock is traded on the New York Stock Exchange under the symbol “RGR.” At February 1, 2012, the Company had 1,866 stockholders of record.

The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock as reported on the New York Stock Exchange and dividends paid on Common Stock.

	High		Low		Dividends Per Share
2010:
First Quarter	$	13.02	$	10.01	$	0.060
Second Quarter		17.97		12.06		0.093
Third Quarter		16.69		12.66		0.100
Fourth Quarter		16.38		13.02		0.078

2011:
First Quarter	$	23.23	$	14.65	$	0.050
Second Quarter		24.05		18.65		0.097
Third Quarter		36.85		21.91		0.142
Fourth Quarter		34.95		23.86		0.141

Issuer Repurchase of Equity Securities

In the first quarter of 2011 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
January 4, 2011 to January 28, 2011		133,400	$	14.94		133,400

Total		133,400	$	14.94		133,400	$	8,000,000

In 2010, the Company repurchased 412,000 shares of its common stock, representing 2.1% of the then outstanding shares, in the open market at an average price of $13.83 per share.

In 2009, the Company repurchased 2,400 shares of its common stock, representing 0.1% of the then outstanding shares, in the open market at an average price of $6.03 per share.

In 2008, the Company repurchased 1,535,000 shares of its common stock, representing 7.5% of the then outstanding shares, in the open market at an average price of $6.57 per share.

Comparison of Five-Year Cumulative Total Return*

Sturm, Ruger & Co., Inc., Standard & Poor’s 500, Recreation And Value Line Smith & Wesson Holding Index

(Performance Results Through 12/31/11)

Assumes $100 invested at the close of trading 12/06 in Sturm, Ruger & Co., Inc. common stock, Standard & Poor’s 500, Recreation, and Smith & Wesson Holding.

* Cumulative total return assumes reinvestment of dividends.

Source: Value Line Publishing LLC

	2006		2007		2008		2009		2010		2011
Sturm, Ruger & Co., Inc.		100.00		86.25		62.19		103.81		167.27		372.25
Standard & Poor’s 500		100.00		105.49		66.46		84.04		96.70		98.74
Recreation		100.00		89.26		56.42		92.34		138.55		127.68
Smith & Wesson Holding		100.00		58.99		21.95		39.56		36.17		42.17

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information regarding compensation plans under which equity securities of the Company are authorized for issuance as of December 31, 2011:

Equity Compensation Plan Information
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b) *	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders
2001 Stock Option Plan for Non-Employee Directors	56,100	$6.15 per share	-
2007 Stock Incentive Plan	272,614	$9.09 per share	1,011,000

Equity compensation plans not approved by security holders
None.
Total	328,714	$8.58 per share	1,011,000

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

ITEM 6—SELECTED FINANCIAL DATA

(Dollars in thousands, except per share data)

	December 31,
	2011		2010		2009		2008		2007
Net firearms sales	$	324,200	$	251,680	$	266,566	$	174,416	$	144,222
Net castings sales		4,616		3,526		4,419		7,067		12,263
Total net sales		328,816		255,206		270,985		181,483		156,485
Cost of products sold		217,058		171,224		183,380		138,730		117,186
Gross profit		111,758		83,982		87,605		42,753		39,299
Income before income taxes		63,516		44,149		44,360		13,978		16,659
Income taxes		23,501		15,894		16,857		5,312		6,330
Net income	$	40,015	$	28,255	$	27,503	$	8,666	$	10,329
Basic earnings per share		2.12		1.48		1.44		0.43		0.46
Diluted earnings per share		2.09		1.46		1.42		0.43		0.46
Cash dividends per share	$	0.43	$	0.33	$	0.31	$	0.00	$	0.00

	December 31,
	2011			2010			2009			2008			2007
Working capital	$	96,646		$	71,885		$	65,377		$	46,250		$	53,264
Total assets		206,510			157,761			141,679			112,760			101,882
Total stockholders’ equity		137,391			114,480			95,516			65,603			76,069
Book value per share	$	7.20		$	6.08		$	5.01		$	3.44		$	3.57
Return on stockholders’ equity		32.0	%		26.9	%		34.1	%		12.2	%		12.6	%
Current ratio	3.0 to 1			3.2 to 1			3.0 to 1			2.6 to 1			3.6 to 1
Common shares outstanding		19,083,100			18,837,300			19,072,800			19,047,300			20,571,800
Number of stockholders of record		1,860			1,841			1,827			1,841			1,769
Number of employees		1,224			1,164			1,145			1,145			1,154

ITEM 7—

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company Overview

Sturm, Ruger & Company, Inc. (the “Company”) is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of the Company’s total sales for 2011 were firearms sales, and 1% was investment castings sales. Export sales represent approximately 5% of total sales. The Company’s design and manufacturing operations are located in the United States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale distributors, principally to the commercial sporting market.

The Company also manufactures investment castings made from steel alloys for internal use in its firearms and utilizes excess investment casting capacity to manufacture and sell castings to unaffiliated, third-party customers.

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

Results of Operations - 2011

Product Demand

The estimated sell-through of the Company’s products from distributors to retailers in 2011 increased 20% from 2010. During this period, National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation) increased 14%.

We believe the year-over-year increase in estimated sell-through from distributors to retailers from 2010 is due to the following:

●	The strong demand for the new products launched in 2011, including the new LC9 pistol, the SR1911 pistol, the SR40c pistol, the Gunsite Scout rifle, the Single-Ten revolver, and the SP-101 double-action revolver chambered in 22LR. New product introductions remain a strong driver of demand and represented $98.6 million or 30% of sales in 2011. The Ruger American Rifle and the SR22 pistol were introduced during the latter part of the fourth quarter and did not have a significant impact in 2011 sales,
●	Strong demand for certain mature products, and
●	Increased manufacturing capacity and greater product availability for certain products in strong demand.

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

	2011		2010		2009

Estimated Units Sold from Distributors to Retailers (1)		1,085,200		901,500		887,400

Total Adjusted NICS Background Checks (thousands) (2)		10,800		9,400		9,500

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

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

(2)

While NICS background checks are not a precise measure of retail activity, they are commonly used as a proxy for retail demand. NICS background checks are performed when the ownership of most firearms, either new or used, is transferred by a Federal Firearms Licensee. NICS background checks are also performed for permit applications, permit renewals, and other administrative reasons.

The adjusted NICS data presented above was derived by the National Shooting Sports Foundation (“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. While not a direct correlation to firearms sales, the NSSF-adjusted NICS data provides a more accurate picture of current market conditions than raw NICS data.

Orders Received and Ending Backlog

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

	2011		2010		2009

Orders Received	$	385.9	$	229.4	$	269.5

Average Sales Price of Orders Received	$	278	$	272	$	281

Ending Backlog	$	98.2	$	34.9	$	59.6

Average Sales Price of Ending Backlog	$	291	$	326	$	330

The increase in orders received and the increase in the ending backlog in 2011 are due primarily to strong for demand new products, including the Ruger American Rifle and the SR22 pistol which were introduced in the latter part of the fourth quarter of 2011, and certain mature products.

Production

Total unit production in 2011 increased 23% from 2010. The increased production was due in part to the Company’s previously disclosed strategy of changing production rates less frequently in 2011 in a more deliberate effort to “level load” production throughout the year.

The intention of this planned change in production volumes was to build finished goods inventory during the period when we expect lesser demand (typically the third quarter and the first half of the fourth quarter) so that we have more finished goods inventory available to ship during the period when we expect greater demand (typically the end of the fourth quarter and the first quarter). The annual output of our manufacturing plants in 2011 did increase under this plan which, in turn, allowed us to better capitalize on sales opportunities, particularly during the fourth quarter.

The Company continues to further implement lean manufacturing principles across its facilities. This ongoing process began in 2006, and includes the following current initiatives:

●	transitioning from batch production to single-piece flow manufacturing,

●	refining existing cells and, where practical, consolidating smaller cells into value-stream super cells,

●	developing pull systems and managing vendors,

●	increasing capacity for the products with the greatest unmet demand, and

●	re-engineering mature product designs for improved manufacturability.

The Company is transitioning to a new enterprise resource planning system and converted one of its manufacturing facilities and a portion of its support functions, including sales and finance during 2011. The Company expects to have the new system fully implemented by the end of 2012.

Annual Summary Unit Data

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

	2011		2010		2009

Units Ordered		1,388,100		842,700		958,700

Units Produced		1,114,700		906,200		934,300

Units Shipped		1,123,100		903,200		925,800

Average Sales Price	$	289	$	279	$	288

Units on Backorder		337,400		106,800		181,000

Inventories

The Company’s finished goods inventory decreased 7,400 units during 2011 and remains significantly below what the Company believes to be optimal levels to support rapid fulfillment of distributor demand. The Company expects to replenish its finished goods inventory in future periods to levels that will better serve its customers. This replenishment could increase the FIFO value of finished goods inventory by as much as $15 million from the current level upon the attainment of the desired levels of finished goods inventory.

Distributor inventories of the Company’s products increased 37,900 units during 2011 and are closer to the levels the Company believes are needed to support rapid fulfillment of retailer demand. If the independent distributors attempt to increase their inventory turns, future increases to distributor inventories of the Company’s products may occur at a slower rate than 2011, or distributor inventories of the Company’s products could decrease. Distributor investments in other manufacturers’ products, some of which may not be turning as fast as the Company’s products turn, may further impede this inventory replenishment.

Inventory data follows:

	December 31,
	2011		2010		2009

Units – Company Inventory		16,200		23,600		20,100

Units – Distributor Inventory (3)		135,600		97,700		96,200

Total inventory (4)		151,800		121,300		116,300

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

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

Year ended December 31, 2011, as compared to year ended December 31, 2010:

Net Sales

Consolidated net sales were $328.8 million in 2011. This represents an increase of $73.6 million or 28.8% from 2010 consolidated net sales of $255.2 million.

Firearms segment net sales were $324.2 million in 2011. This represents an increase of $72.5 million or 28.8% from 2010 firearm net sales of $251.7 million. Firearms unit shipments increased 24.4% in 2011.

Casting segment net sales were $4.6 million in 2011. This represents an increase of $1.1 million or 30.9% from 2010 casting sales of $3.5 million.

Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $217.1 million in 2011. This represents an increase of $45.8 million or 26.8% from 2010 consolidated cost of products sold of $171.2 million.

The gross margin was 34.0% in 2011. This represents an increase from the 2010 gross margin of 32.9% as illustrated below:

(in thousands)

Year Ended December 31	2011				2010

Net sales	$	328,816	100.0	%	$	255,206		100.0	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability and product recall		214,506	65.2	%		173,198		67.8	%

LIFO expense (income)		122	0	%		(1,039	)	(0.4	)%

Overhead rate adjustments to inventory		700	0.3	%		(618	)	(0.2	)%

Labor rate adjustments to inventory		95	0	%		(364	)	(0.1	)%

Product liability		1,617	0.5	%		9		0	%

Product recalls		18	0	%		38		0	%

Total cost of products sold		217,058	66.0	%		171,224		67.1	%

Gross profit	$	111,758	34.0	%	$	83,982		32.9	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall- In 2011, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall decreased as a percentage of sales by 2.6% compared to 2010. The main contributors to this decrease include the increased overall volume which favorably leveraged manufacturing overhead and improved productivity from continued emphasis on lean manufacturing techniques, partially offset by a modest increase in input costs.

LIFO- Gross inventories increased by $0.2 million in 2011 and decreased by $2.2 million in 2010. In 2011, the Company recognized LIFO expense of $0.1 million which increased cost of products sold. In 2010, the Company recognized a LIFO credit of $1.0 million which decreased cost of products sold.

Overhead Rate Change- The net impact on inventory in 2011 from the change in the overhead rates used to absorb overhead expenses into inventory was a decrease of $0.7 million, reflecting increased overhead efficiency. This decrease in inventory value resulted in a corresponding increase to cost of products sold in 2011. In 2010, the change in inventory value resulting from the change in the overhead rate used to absorb overhead expenses into inventory was an increase of $1.1 million, reflecting decreased overhead efficiency. This increase in inventory value resulted in a corresponding decrease to cost of products sold.

Labor Rate Adjustments- In 2011, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was a decrease of $0.6 million, reflecting increased

labor efficiency. This decrease in inventory value resulted in a corresponding increase to cost of products sold. The net impact in 2010 from the change in the labor rates used to absorb labor expenses into inventory was an increase to inventory of $0.4 million, reflecting decreased labor efficiency. This increase in inventory value resulted in a corresponding decrease to cost of sales.

Product Liability— This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. These costs totaled $1.6 million in 2011. The negligible expense in 2010 reflects favorable experience in product liability matters that were resolved during 2010. See Note 16 to the notes to the financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

Gross Profit—Gross profit was $111.8 million or 34.0% of sales in 2011. This is an increase of $27.8 million from 2010 gross profit of $84.0 million or 32.9% of sales.

Selling, General and Administrative

Selling, general and administrative expenses were $49.7 million in 2011, an increase of $9.5 million from 2010, and a decrease from 15.7% of sales in 2010 to 15.1% of sales in 2011. The increase in selling, general and administrative expenses is attributable to the following:

●	increased promotional and advertising expenses, including the Million Gun Challenge to benefit the National Rifle Association,

●	increased expenses related to the implementation of a new information technology infrastructure,

●	increased equity-based and incentive compensation, and

●	increased freight expense due to increased sales volume.

Other Operating Expenses (Income), net

Other operating expenses (income), net consist of the following (in thousands):

	2011			2010

Loss (gain) on sale of operating assets (a)	$	(83	)	$	22
Frozen defined-benefit pension plan (income) expense		(236	)		398

Total other operating (income) expenses, net	$	(319	)	$	420

(a)	The loss (gain) on sale of operating assets was generated primarily from the sale of used machinery and equipment.

Operating Income

Operating income was $62.4 million or 19% of sales in 2011. This is an increase of $19.0 million from 2010 operating income of $43.4 million or 17.0% of sales.

Royalty Income

Royalty income was $0.9 million in 2011. This represents an increase of $0.5 million from 2010 royalty income of $0.4 million. The increase is primarily attributable to increased income from licensing agreements.

Interest Income

Interest income was negligible in 2011 and 2010.

Interest Expense

Interest expense was negligible in 2011 and 2010.

Other Income, Net

Other income, net was $0.3 million in 2011, a decrease of $0.1 million from a $0.4 million in 2010. This income is attributable primarily to the sale of by-products of our manufacturing processes.

Income Taxes and Net Income

The effective income tax rate in 2011 was 37.0%, compared to 36.0% in 2010. The increase in the income tax rate reflects an increase in permanent differences.

As a result of the foregoing factors, consolidated net income was $40.0 million in 2011. This represents an increase of $11.7 million from 2010 consolidated net income of $28.3 million.

Quarterly Data

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

	2011
		Q4		Q3		Q2		Q1

Units Ordered		452,300		168,700		263,500		503,500

Units Produced		302,000		289,700		281,200		241,800

Units Shipped		315,100		276,500		279,600		251,800

Estimated Units Sold from Distributors to Retailers		291,800		244,700		264,400		284,300

Total Adjusted NICS Background Checks (thousands)		3,500		2,400		2,200		2,700

Average Sales Price	$	289	$	286	$	281	$	296

Units on Backorder		337,400		204,500		315,500		332,700

Units – Company Inventory		16,200		28,800		15,500		13,700

Units – Distributor Inventory (5)		135,600		112,300		80,500		65,300

	2010
		Q4		Q3		Q2		Q1

Units Ordered		241,900		156,500		138,400		305,900

Units Produced		218,300		207,100		238,900		241,900

Units Shipped		236,200		204,200		225,500		237,300

Estimated Units Sold from Distributors to Retailers		235,200		198,700		213,400		254,200

Total Adjusted NICS Background Checks (thousands)		2,900		2,100		2,000		2,400

Average Sales Price	$	268	$	282	$	282	$	283

Units on Backorder		106,800		99,800		147,900		239,900

Units – Company Inventory		23,600		40,600		37,700		24,400

Units – Distributor Inventory (5)		97,700		96,700		91,200		79,100

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

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

	2011
		Q4		Q3		Q2		Q1

Orders Received	$	120.3	$	49.6	$	81.4	$	134.7

Average Sales Price of Orders Received	$	266	$	294	$	309	$	268

Ending Backlog	$	98.2	$	69.8	$	97.4	$	92.9

Average Sales Price of Ending Backlog	$	291	$	341	$	309	$	279

	2010
		Q4		Q3		Q2		Q1

Orders Received	$	63.3	$	45.6	$	38.7	$	81.8

Average Sales Price of Orders Received	$	262	$	291	$	279	$	270

Ending Backlog	$	34.9	$	34.1	$	44.9	$	71.8

Average Sales Price of Ending Backlog	$	326	$	342	$	304	$	299

Fourth Quarter Gross Profit Analysis

The gross margin for the fourth quarter of 2011 and 2010 was 32.4% and 32.0%, respectively. Details of the gross profit are illustrated below:

(in thousands)

Three Months Ended December 31	2011					2010

Net sales	$	93,241		100.0	%	$	64,138		100.0	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability and product recall		62,528		67.1	%		45,401		70.8	%

LIFO expense (income)		374		0.4	%		(1,264	)	(2.0	)%

Overhead rate adjustments to inventory		(141	)	(0.1	)%		(584	)	(0.9	)%

Labor rate adjustments to inventory		(189	)	(0.2	)%		(98	)	(0.1	)%

Product liability		493		0.4	%		150		0.2	%

Product recalls		4		0	%		6		0.0	%

Total cost of products sold		63,069		67.6	%		43,611		68.0	%

Gross profit	$	30,172		32.4	%	$	20,527		32.0	%

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

Results of Operations - 2010

Year ended December 31, 2010, as compared to year ended December 31, 2009:

Annual Summary Unit Data

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

	2010		2009		2008

Units Ordered		842,700		958,700		776,400

Units Produced		906,200		934,300		600,600

Units Shipped		903,200		925,800		626,500

Average Sales Price	$	279	$	288	$	278

Units on Backorder		106,800		181,000		175,900

Units – Company Inventory		23,600		20,100		12,400

Units – Distributor Inventory (1)		97,700		96,200		57,500

Castings Setups		155,100		202,800		144,600

Orders Received and Ending Backlog

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

	2010		2009

Orders Received	$	229.4	$	269.5

Average Sales Price of Orders Received (2)	$	272	$	281

Ending Backlog (2)	$	34.9	$	59.6

Average Sales Price of Ending Backlog (2)	$	326	$	330

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

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

Product Demand

The estimated sell-through of the Company’s products from distributors to retailers in 2010 increased 2% from 2009. During this period, National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation) decreased 1%.

We believe the year-over-year increase in estimated sell-through from distributors to retailers from 2009 is likely due to the following factors:

●	Increased demand for handguns,

●	The Company’s commitment to new product development which yielded several new product launches in 2010 which generated continued demand, and

●	Increased manufacturing capacity for certain products in strong demand.

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

	2010		2009		2008
Estimated Units Sold from Distributors to Retailers (1)		901,500		887,400		631,000

Total Adjusted NICS Background Checks (thousands) (2)		9,400		9,500		9,000

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

●	Rely on data provided by independent distributors that are not verified by the Company,

●	Do not consider potential timing issues within the distribution channel, including goods-in-transit, and

●	Do not consider fluctuations in inventory at retail.

(2)

The adjusted NICS data presented above was derived by the National Shooting Sports Foundation (“NSSF”) by subtracting out NICS purpose code permit checks used by several states such as Kentucky and Utah for concealed carry (“CCW”) permit application checks as well as checks on active CCW permit databases. While not a direct correlation to firearms sales, the NSSF adjusted NICS data provides a more accurate picture of current market conditions.

The Company launched the SR9c compact pistol, the LCR357 revolver, and the SR40 striker-fired pistol in 2010. New product introductions, including the aforementioned products, remain a strong driver of demand and represented $62.3 million or 24.8% of sales in 2010.

The decrease in orders received and the ending backlog in 2010 is due to the strong retail demand that began in late 2008 and resulted in large orders from distributors in 2009. The backlog was higher than normal for most of 2009.

The average sales price of orders received and ending backlog in 2010 decreased from 2009 due to significant orders in 2009 for certain higher-priced rifles, including the SR-556.

Production

After three years of increased production, the Company intentionally reduced its output in 2010 by 3% compared to 2009 while closely monitoring its finished goods inventory growth and distributor sell-through to retailers. Production of certain products was limited to rates moderately in excess of estimated retail demand for those products, to allow for only modest increased finished goods inventory levels for those products.

The Company continues to further implement lean manufacturing principles across its facilities. This ongoing process began in 2006, and includes initiatives such as the following:

●	transitioning from batch production to single-piece flow manufacturing,

●	refining existing cells and, where practical, consolidating smaller cells into value-stream super cells,

●	developing pull systems and managing vendors,

●	increasing capacity for the products with the greatest unmet demand, and

●	re-engineering mature-product designs for improved manufacturability.

Inventories

Finished goods unit inventory levels for the Company and distributors increased slightly in 2010, and remain below optimal levels to support rapid order fulfillment.

Quarterly Summary Unit Data

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

	2010
		Q4		Q3		Q2		Q1

Units Ordered		241,900		156,500		138,400		305,900

Units Produced		218,300		207,100		238,900		241,900

Units Shipped		236,200		204,200		225,500		237,300

Estimated Units Sold from Distributors to Retailers		235,200		198,700		213,400		254,200

Total Adjusted NICS Background Checks (thousands)		2,900		2,100		2,000		2,400

Average Sales Price	$	268	$	282	$	282	$	283

Units on Backorder		106,800		99,800		147,900		239,900

Units – Company Inventory		23,600		40,600		37,700		24,400

Units – Distributor Inventory (1)		97,700		96,700		91,200		79,100

	2009
		Q4		Q3		Q2		Q1

Units Ordered (2)		173,000		80,000		204,700		501,000

Units Produced		234,600		242,500		247,300		209,900

Units Shipped		228,500		237,400		246,200		213,700

Estimated Units Sold from Distributors to Retailers		209,400		214,500		227,500		236,000

Total Adjusted NICS Background Checks (thousands)		2,700		2,000		2,100		2,700

Average Sales Price	$	276	$	295	$	286	$	283

Units on Backorder (2)		181,000		240,700		412,300		458,900

Units – Company Inventory		20,100		15,100		9,600		8,800

Units – Distributor Inventory (1)		96,200		76,800		53,900		35,200

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

(2)

During the third quarter of 2009, the Company unilaterally cancelled all of the unshipped orders for Mini-14 and Mini Thirty autoloading rifles, and asked the distributors to submit new orders that better represented their forecasted needs. The cancellation of these unshipped orders, partially offset by the submission of new orders for these products, resulted in a net reduction to the backlog of approximately 34,000 units or $20 million. Had these orders not been cancelled, the Units Ordered in the third quarter would have been approximately 114,000 units.

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

	2010
		Q4		Q3		Q2		Q1

Orders Received	$	63.3	$	45.6	$	38.7	$	81.8

Average Sales Price of Orders Received(4)	$	262	$	291	$	279	$	270

Ending Backlog	$	34.9	$	34.1	$	44.9	$	71.8

Average Sales Price of Ending Backlog(4)	$	326	$	342	$	304	$	299

	2009
		Q4		Q3		Q2		Q1

Orders Received(3)	$	42.9	$	14.1	$	73.6	$	138.9

Average Sales Price of Orders Received(3)(4)	$	275	$	196	$	400	$	308

Ending Backlog(3)	$	59.6	$	78.0	$	138.0	$	136.3

Average Sales Price of Ending Backlog(3)(4)	$	330	$	324	$	335	$	297

(3)

See description in Note 2 above for information relating to Q3 2009 order cancellations. The cancellation of these orders reduced Orders Received in the third quarter of 2009 by $20 million and decreased the Average Sales Price of Orders Received by $115 per unit. Had these orders not been cancelled, the Average Sales Price of Orders Received would have been $311 per unit. The Average Sales Price of the Ending Backlog was also impacted for the same reasons.

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

Net Sales

Consolidated net sales were $255.2 million in 2010. This represents a decrease of $15.8 million or 5.8% from 2009 consolidated net sales of $271.0 million.

Firearms segment net sales were $251.7 million in 2010. This represents a decrease of $14.9 million or 5.9% from 2009 firearm net sales of $266.6 million. Firearms unit shipments decreased 2.5% in 2010. A shift in product mix toward firearms with lower unit sales prices resulted in the relatively lower percentage decrease in unit shipments compared to the percentage decrease in sales.

Casting segment net sales were $3.5 million in 2010. This represents a decrease of $0.9 million or 20.1% from 2009 casting sales of $4.4 million.

Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $171.2 million in 2010. This represents a decrease of $12.2 million or 6.6% from 2009 consolidated cost of products sold of $183.4 million.

The gross margin was 32.9% in 2010. This represents a slight increase from the 2009 gross margin of 32.3% as illustrated below:

(in thousands)

Year Ended December 31	2010					2009

Net sales	$	255,206		100.0	%	$	270,985		100.0	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability and product recall		173,198		67.8	%		183,540		67.7	%

LIFO expense (income)		(1,039	)	(0.4	)%		(4,216	)	(1.6	)%

Overhead rate adjustments to inventory		(618	)	(0.2	)%		1,324		0.5	%

Labor rate adjustments to inventory		(364	)	(0.1	)%		436		0.2	%

Product liability		9		0	%		1,618		0.6	%

Product recalls		38		0	%		678		0.3	%

Total cost of products sold		171,224		67.1	%		183,380		67.7	%

Gross profit	$	83,982		32.9	%	$	87,605		32.3	%

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall- In 2010, cost of products sold, before LIFO, overhead and labor rate adjustments to

inventory, product liability, and product recall increased as a percentage of sales by 0.1% compared to 2009.

LIFO- Gross inventories were reduced by $2.2 million in 2010 and $8.8 million in 2009. In 2010, the Company recognized a LIFO credit resulting in decreased cost of products sold of $1.0 million. In 2009, the Company recognized a LIFO credit and decreased cost of products sold of $4.2 million.

Overhead Rate Change- The net impact on inventory in 2010 from the change in the overhead rates used to absorb overhead expenses into inventory was an increase of $0.6 million, reflecting decreased overhead efficiency. This increase in inventory value resulted in a corresponding decrease to cost of products sold in 2010. In 2009, the change in inventory value resulting from the change in the overhead rate used to absorb overhead expenses into inventory was a decrease of $1.3 million, reflecting an improvement in overhead efficiency. This decrease in inventory value resulted in a corresponding increase to cost of products sold.

Labor Rate Adjustments- In 2010, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was an increase of $0.4 million, reflecting decreased labor efficiency. This increase in inventory value resulted in a corresponding decrease to cost of products sold. The net impact in 2009 from the change in the labor rates used to absorb labor expenses into inventory was a decrease to inventory of $0.4 million, reflecting an improvement in labor efficiency. This decrease in inventory value resulted in a corresponding increase to cost of sales.

Product Liability—The Company’s product liability expense was negligible in 2010, and $1.6 million in 2009. This expense includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. The negligible expense in 2010 reflects favorable experience in product liability matters during the year. See Note 16 to the notes to the financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

Product Recalls—There were no product recalls initiated in 2010 or 2009. In 2008, the Company received a small number of reports from the field that its SR9 pistols, and later, its LCP pistols, could discharge if dropped onto a hard surface. The Company began recalling SR9 pistols in April 2008 and LCP pistols in October 2008 to offer free safety retrofits. The cost of these safety retrofit programs was negligible in 2010 and $0.7 million in 2009.

Gross Profit—Gross profit was $84.0 million or 32.9% of sales in 2010. This is a decrease of $3.6 million from 2009 gross profit of $87.6 million or 32.3% of sales.

Selling, General and Administrative

Selling, general and administrative expenses were $40.2 million in 2010. This represents a decrease of $2.0 million or 5% from 2009 selling, general and administrative expenses of $42.2 million. The decrease reflects decreased personnel-related expenses including stock-based compensation and bonuses.

Other Operating Expenses (Income), net

Other operating expenses (income), net consist of the following (in thousands):

	2010		2009

Loss (gain) on sale of operating assets (a)	$	22	$	(45	)
Frozen defined-benefit pension plan expense		398		1,537

Total other operating expenses, net	$	420	$	1,492

(a)	The loss (gain) on sale of operating assets was generated primarily from the sale of used machinery and equipment.

Operating Income

Operating income was $43.4 million or 17.0% of sales in 2010. This is a decrease of $0.5 million from 2009 operating income of $43.9 million or 16.2% of sales.

Royalty Income

Royalty income was $0.4 million in 2010. This represents a decrease of $0.1 million from 2009 royalty income of $0.5 million. The decrease is primarily attributable to decreased income from licensing agreements.

Interest Income

Interest income was negligible in 2010, a slight decrease from 2009 interest income of $0.1 million. The decrease is attributable primarily to decreased interest rates in 2010.

Other Income (Expense), Net

Other income (expense), net was $0.4 million in 2010, an increase from a negligible amount in 2009. This income is attributable primarily to the sale of by-products of our manufacturing processes.

Income Taxes and Net Income

The effective income tax rate in 2010 was 36.0%, a decrease from the 2009 effective income tax rate of 38.0%. The decrease in the income tax rate results primarily from an increased benefit from the American Jobs Creation Act of 2004 that was effective January 1, 2010.

As a result of the foregoing factors, consolidated net income was $28.3 million in 2010. This represents an increase of $0.8 million from 2009 consolidated net income of $27.5 million.

Financial Condition

Liquidity

At December 31, 2011, the Company had cash, cash equivalents and short-term investments of $81.1 million. Our pre-LIFO working capital of $133.0 million, less the LIFO reserve of $37.5 million, resulted in working capital of $96.6 million and a current ratio of 3.0 to 1.

The Company would like to replenish its finished goods inventory to levels that will better serve its customers. This replenishment, which could take more than one year to accomplish, could increase the FIFO value of finished goods inventory by as much as $15 million from the current levels upon the attainment of the desired levels of finished goods inventory.

Operations

Cash provided by operating activities was $57.4 million, $32.5 million, and $46.7 million in 2011, 2010, and 2009, respectively. The increase in cash provided in 2011 compared to 2010 is attributable to increased profitability in 2011 and increased accounts payable and accrued liabilities in 2011, due in part to greater accruals for sales promotions and excise tax payments. The decrease in cash provided in 2010 compared to 2009 was attributable to a greater reduction in inventory in 2009, an increase in employee benefits and compensation in 2009, and an increase in accounts receivable in 2010.

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory to provide sufficient time to locate and obtain additional items at then-current market cost without interruption of its manufacturing operations. However, if market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials can not be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

Investing and Financing

Capital expenditures were $22.1 million, $19.4 million, and $13.8 million in 2011, 2010, and 2009, respectively. In 2012,the Company expects to spend $20 million on capital expenditures to purchase tooling and fixtures for new product introductions, to increase production capacity, and to upgrade and modernize manufacturing equipment. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash and short-term investments.

During the past several years, the Board of Directors authorized the Company to repurchase shares of its common stock. In 2011, the Company repurchased approximately 133,400 shares of its common stock under a 10b5-1 program, representing 0.7% of the then outstanding shares, in the open market at an average price of $14.94 per share. In 2010, the Company repurchased approximately 412,000 shares of its common stock under a 10b5-1 program, representing 2.1% of the then outstanding shares, in the open market at an average price of $13.83 per share. In 2009, the Company repurchased approximately 2,400 shares of its common stock under a 10b5-1 program, representing 0.01% of the then outstanding shares, in the open market at an average price of $6.03 per share. All of these purchases were made with cash held by the Company and no debt was incurred.

At December 31, 2011, $8.0 million remained authorized for share repurchases.

The Company paid dividends totaling $8.2 million, $6.3 million and $5.8 million in 2011, 2010 and 2009, respectively.

On February 14, 2012, the Company’s Board of Directors authorized a dividend of 21.2¢ per share to shareholders of record on March 23, 2012. The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash and short-term investments, and the Company’s need for funds.

During the second quarter of 2011, the Company made a $969,000 minority investment in a pepper spray company for which it received a 12% interest. This investment is included in Other Assets on the balance sheet.

The Company has migrated its retirement benefits from defined-benefit pension plans to defined-contribution retirement plans, utilizing its current 401(k) plan.

In 2007, the Company amended its hourly and salaried defined-benefit pension plans so that employees no longer accrue benefits under them effective December 31, 2007. This action “froze” the benefits for all employees and prevented future hires from joining the plans, effective December 31, 2007. Currently, the Company provides supplemental discretionary contributions to substantially all employees’ individual 401(k) accounts.

Minimum cash contributions of $1.7 million were required for the defined-benefit plans for 2011. The Company contributed $2 million to the defined-benefit plans in both 2011 and 2010.

In future years, the Company may again be required to make cash contributions to the two defined-benefit pension plans. The annual contributions will be based on the amount of the unfunded plan liabilities derived from the frozen benefits and will not include liabilities for any future accrued benefits for any new or existing participants. The total amount of these future cash contributions will depend on the investment returns generated by the plans’ assets and the then-applicable discount rates used to calculate the plans’ liabilities.

The Company plans to contribute approximately $3 million in 2012, but will increase the amount of the contribution if required to do so. The intent of these contributions is to reduce the amount of time that the Company will be required to continue to operate the frozen plans. The ongoing cost of running the plans (even if frozen) is approximately $200,000 per year, which includes PBGC premiums, actuary and audit fees, and other expenses.

Based on its unencumbered assets, the Company believes it has the ability to raise substantial amounts of cash through issuance of short-term or long-term debt. The Company’s unsecured $25 million credit facility, which expires on June 15, 2013, remains unused and the Company has no debt.

Contractual Obligations

The table below summarizes the Company’s significant contractual obligations at December 31, 2011, and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods. This table excludes amounts already recorded on the Company’s balance sheet as current liabilities at December 31, 2011.

“Purchase Obligations” as used in the below table includes all agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions;

and the approximate timing of the transaction. Certain of the Company’s purchase orders or contracts for the purchase of raw materials and other goods and services that may not necessarily be enforceable or legally binding on the Company, are also included in “Purchase Obligations” in the table. Certain of the Company’s purchase orders or contracts therefore included in the table may represent authorizations to purchase rather than legally binding agreements. The Company expects to fund all of these commitments with cash flows from operations and current cash and short-terms investments.

Payment due by period (in thousands)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-Term Debt Obligations		-		-		-		-		-
Capital Lease Obligations		-		-		-		-		-
Operating Lease Obligations		-		-		-		-		-
Purchase Obligations	$	26,600	$	26,600		-		-		-
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP		-		-		-		-		-

Total	$	26,600