Unassociated Document
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K/A
(Amendment No. 2)

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009

OR

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

Lacey Place, Southport, Connecticut
(Address of Principal Executive Offices)
06890
(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
Common Stock, $1 par value
Name of Each Exchange on Which Registered
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 o NO x
                    
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 o NO x           
 
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 x 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 x.

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 x  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 x

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, 2009:
Common Stock, $1 par value - $233,905,000

The number of shares outstanding of the registrant's common stock as of October 26, 2010:
Common Stock, $1 par value -  18,822,284 shares

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the registrant’s Proxy Statement relating to the 2010 Annual Meeting of Stockholders to be held April 28, 2010 are incorporated by reference into Part III (Items 10 through 14) of this Report.
 
1

 
TABLE OF CONTENTS

  PART I
     
Item 1.
 5
     
Item 1A.
11
     
Item 1B.
16
     
Item 2.
17
     
Item 3.
17
     
Item 4.
18
     
  PART II
     
Item 5.
19
     
Item 6.
22
     
Item 7.
23
     
Item 7A.
46
     
Item 8.
47
     
Item 9.
75
     
Item 9A.
75
     
Item 9B.
76
     
  PART III
     
Item 10.
77
     
Item 11.
77
     
Item 12.
77
     
Item 13.
77
     
Item 14.
77
     

 
2

 
 
  PART IV
     
Item 15.
78
     
83
84
89
Exhibits
91
 
 
EXPLANATORY NOTE:

This Amendment No. 2 on Form 10-K/A (“Amendment No. 2”) amends the Annual Report on Form 10-K of Sturm, Ruger & Company, Inc. (the “Company”) for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on February 24, 2010 (the “Original Filing”), and Amendment No. 1 on Form 10-K/A filed with the Securities and Exchange Commission on August 5, 2010 (“Amendment No.1”).  It is being filed to i) amend and restate the signature page of the Original Filing and Amendment No. 1 to include the separate signature of Mr. Thomas A. Dineen in his capacity as Principal Financial Officer and Principal Accounting Officer and ii) amend and restate the officer certifications of Amendment No. 1 to include fully-dated officer certifications.

Other information contained in the Original Filing has not been updated and we have not taken into account any events occurring after the Original Filing that might have affected those disclosures. Therefore, you should read this Amendment No. 2 together with other documents and reports that the Company has filed with the Securities and Exchange Commission subsequent to the filing of the Original Filing.
 
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 including lawsuits filed by mayors, attorneys general and other governmental entities and membership organizations, and the impact of future firearms control and environmental legislation, any one or more of which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.
 
 
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 98% of the Company’s total sales for the year ended December 31, 2009 were from the firearms segment, and approximately 2% were from investment castings.  Export sales represent less than 4% of firearms sales.  The Company’s design and manufacturing operations are located in the United States and most product content is domestic.

The Company has been in the 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 a select number of 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 2% of the Company’s total sales for the year ended December 31, 2009.

For the years ended December 31, 2009, 2008, and 2007, net sales attributable to the Company's firearms operations were approximately, $266.6 million, $174.4 million and $144.2 million or approximately 98%, 96%, and 92%, 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 
Shotguns
 
·
Single-shot
·
    Over and Under
 
·
Autoloading
 
·
Bolt-action
 
·
Modern sporting

Pistols 
Revolvers
 
·
Rimfire autoloading
·
    Single action
 
·
Centerfire autoloading
·
    Double action

Most firearms are available in several models based upon caliber, finish, barrel length, and other features.  Many of the firearms introduced by the Company over the years have become “classics” which have retained their popularity for decades and are sought by collectors.

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 $102.2 million, $69.4 million, and $64.9 million, of revenues for the years 2009, 2008 and 2007, 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 accounted for approximately $1.2 million, $1.5 million, and $3.8 million of revenues for the years 2009, 2008 and 2007, respectively.

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 $87.5 million, $52.5 million, and $33.4 million of revenues for the years 2009, 2008 and 2007, 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 $58.3 million, $41.0 million, and $35.6 million of revenues for the years 2009, 2008, and 2007, respectively.

The Company also manufactures and sells accessories and replacement parts for its firearms.  These sales accounted for approximately $17.4 million, $9.9 million, and $6.5 million of revenues for the years 2009, 2008 and 2007, respectively.

Investment Casting Products
 
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 2% of the Company’s total sales for the year ended December 31, 2009.

Net sales attributable to the Company’s investment casting operations (excluding intercompany transactions) accounted for approximately $4.4 million, $7.1 million, and $12.3 million, or approximately 2%, 4%, and 8% of the Company’s total net sales for 2009, 2008, and 2007, 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 facilities 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 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, 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 19 distributors servicing the domestic law enforcement market and two distributors servicing the Canadian market. Five of the Company’s distributors service both the domestic commercial market and the domestic law enforcement market.

One customer accounted for approximately 15%, 18% and 13% of net firearm sales and 15%, 17% and 12% of consolidated sales in 2009, 2008, and 2007, respectively.  A second customer accounted for approximately 11%, 13%, and 13% of net firearms sales and 11%, 12%, and 12% of consolidated net sales in 2009, 2008, and 2007, respectively.  A third customer accounted for approximately 11%, 12%, and 12% of net firearms sales and 11%, 11%, and 11% of consolidated net sales in 2009, 2008, and 2007, respectively.  A fourth customer accounted for approximately 11% and 10% of the Company's net firearms sales and consolidated net sales in 2009 and 2008, respectively.  A fifth customer accounted for approximately 10% of net firearms sales and consolidated sales in 2009.  A sixth customer accounted for 11% of net firearm sales and 10% of consolidated sales in 2007.

The Company employs eight employees and one independent contractor who service these distributors and call on dealers and law enforcement agencies.  Because the ultimate demand for the Company's firearms comes from end-users, rather than from the Company's 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 impact 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.
 
 
Effective December 1, 2006 the Company began receiving firm, non-cancelable purchase orders on a frequent basis from each of its distributors, with most orders for immediate delivery.  As of February 1, 2010, the order backlog was approximately $70 million.  As of February 1, 2009, order backlog was approximately $87 million.

The Company does not consider its overall firearms business to be predictably seasonal; however, sales of many models of firearms are usually lower in the third quarter of the fiscal year.

Investment Castings
The investment casting segment's principal markets are commercial, sporting goods, and military.  Sales are made directly to customers or through manufacturers’ representatives. The Company produces various products for a number of customers in a variety of industries, including approximately 24 firearms and firearms component manufacturers.  The investment castings segment provides castings for the Company’s firearms segment.

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).  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.  The Company believes that it can compete effectively with its present domestic competitors.  However, it is unknown if the Company can compete with foreign competitors in the long-term.

Employees

As of February 1, 2010, the Company employed approximately 1,150 full-time employees of which approximately 54% had at least ten years of service with the Company.

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

 
Research and Development

In 2009, 2008, and 2007, the Company spent approximately $2.0 million, $1.5 million, and $0.7 million, respectively, on research activities relating to the development of new products and the improvement of existing products.  As of February 15, 2010, the Company had approximately 17 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 basic 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 occasional 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 the outcome of any environmental proceedings and orders will not have a material effect on the financial position of the Company, but could have a material impact 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
52
Chief Executive Officer
     
Thomas A. Dineen
41
Vice President, Treasurer and Chief Financial Officer
     
Christopher J. Killoy
51
Vice President of Sales and Marketing
     
Mark T. Lang
53
Group Vice President
     
Thomas P. Sullivan
49
Vice President of Newport Operations
     
Leslie M. Gasper
56
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.  Prior to joining the Company, Mr. Fifer was President of the Engineered Products Division of Mueller Industries, Inc.  Prior to joining Mueller Industries, Inc., Mr. Fifer was President, North American Operations, Watts Water Technologies.

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. Prior to joining the Company, Mr. Sullivan was Vice President of Lean Enterprises at IMI Norgren Ltd.

Leslie M. Gasper has been Secretary of the Company since 1994.  Prior to this, she was the Administrator of the Company’s pension plans, a position she held for more than five years prior thereto.
 
 
Where You Can Find More Information

The Company is a reporting company and is therefore 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 makes 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 www.ruger.com. A copy of the foregoing corporate governance materials are available upon written request of the Corporate Secretary at Sturm, Ruger & Company, Inc., Lacey Place, Southport, Connecticut 06890.
 
ITEM 1A—RISK FACTORS

In evaluating the Company’s business, the following risk factors, as well as other information in this report, should be carefully considered.
 
Firearms Legislation
 
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 impact on sales in the future.  On September 13, 1994, the “Crime Bill” 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.

Firearms Litigation
 
(The following disclosures within “Firearms Litigation” are identical to the disclosures within Note 17 of the notes to the financial statements-Contingent Liabilities.)

As of December 31, 2009, the Company was a defendant in approximately seven (7) lawsuits and is aware of certain other such claims.

Lawsuits involving the Company’s products generally fall into one of two categories:

 
(i)
Those that claim damages from the Company related to allegedly defective product design and/or manufacture which stem from a specific incident.  Pending lawsuits and claims are based principally on the theory of “strict liability” but also may be based on negligence, breach of warranty, and other legal theories; or

 
(ii)
Those brought by cities or other governmental entities, and individuals against firearms manufacturers, distributors and retailers seeking to recover damages allegedly arising out of the misuse of firearms by third-parties in the commission of homicides, suicides and other shootings involving juveniles and adults.

As to lawsuits of the first type, management believes that, in every case involving firearms, the allegations are unfounded, and that the shootings and any results therefrom were due to negligence or misuse of the firearms by third-parties or the claimant, and that there should be no recovery against the Company.

The only remaining lawsuit of the second type is the lawsuit filed by the City of Gary.  The complaint in that case seeks damages, among other things, for the costs of medical care, police and emergency services, public health services, and other services as well as punitive damages.  In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacture, marketing and distribution practices of the various defendants.  The suit alleges, among other claims, negligence in the design of products, public nuisance, negligent distribution and marketing, negligence per se and deceptive advertising.  The case does not allege a specific injury to a specific individual as a result of the misuse or use of any of the Company’s products. Market share allegations have been held inapplicable by the Indiana Supreme Court.


The Indiana Court of Appeals affirmed the dismissal of the Gary case by the trial court, but the Indiana Supreme Court reversed this dismissal and remanded the case for discovery proceedings on December 23, 2003.  On November 23, 2005, the defendants filed a motion to dismiss pursuant to the Protection of Lawful Commerce in Arms Act (“PLCAA”).  The state court judge held the PLCAA unconstitutional and the defendants filed a motion with the Indiana Court of Appeals asking it to accept interlocutory appeal on the issue, which appeal was accepted on February 5, 2007.  On October 29, 2007, the Indiana Appellate Court affirmed, holding that the PLCAA does not apply to the City’s claims.  A petition for rehearing was filed in the Appellate Court and denied on January 9, 2008.  On February 8, 2008, a Petition to Transfer the appeal to the Supreme Court of Indiana was filed.  The petition was denied on January 13, 2009 and the case was remanded to the trial court.  No trial date has been set.

In addition to the foregoing, on August 18, 2009, the Company was served with a complaint captioned Steamfitters Local 449 Pension Fund, on Behalf of Itself and All Others Similarly Situated v. Sturm, Ruger & Co. Inc., et al. pending in the United States District Court for the District of Connecticut.  The complaint seeks unspecified damages for alleged violations of the Securities Exchange Act of 1934 and is a purported class action on behalf of purchasers of the Company’s common stock between April 23, 2007 and October 29, 2007.  On October 9, 2009, the Company waived service of a complaint captioned Alan R. Herrett, Individually and On Behalf of All Others Similarly Situated v. Sturm, Ruger & Co. Inc., et al. pending in the United States District Court for the District of Connecticut.  This matter is based upon the same facts and basic allegations set forth in the Steamfitters Local 449 Pension Fund litigation.  On October 12, 2009, a motion to consolidate the two actions was filed by counsel for the Steamfitters.  On January 11, 2010, the court entered an order consolidating the two matters.  The January 11, 2010 order also sets a briefing schedule for plaintiffs to file a consolidated amended complaint and for defendants, including the Company, to file a responsive pleading.

On September 11, 2009, the Company was served with a complaint captioned Secretary of Labor v. Sturm, Ruger & Co. Inc. pending before the Occupational Safety and Health Review Commission.  The complaint arises out of a Notice of Contest filed by the Company pursuant to an OSHA inspection conducted at the Company’s manufacturing facility in Newport, New Hampshire. The matter was settled by agreement of the parties in December 2009.

Punitive damages, as well as compensatory damages, are demanded in certain of the lawsuits and claims.  Aggregate claimed amounts presently exceed product liability accruals and applicable insurance coverage.  For 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.

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 our 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 our 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 loss 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 $7.7 million and $12.2 at December 31, 2009 and 2008, respectively, are set forth as an indication of possible maximum liability that 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, 2009 and 2008, the Company was a defendant in 5 and 6 lawsuits, respectively, involving its products and is aware of other such claims.  During the year ended December 31, 2009 and 2008, respectively, 2 and 1 claims were filed against the Company, 2 and 0 claims were dismissed, and 1 and 0 claims were settled.

During the years ended December 31, 2009 and 2008, the Company incurred product liability expense of $1.6 million and $0.9 million, respectively, which includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters.

The Company management monitors the status of known claims and the product liability accrual, which includes amounts for asserted and unasserted claims.  While it is not possible to forecast the outcome of litigation or the timing of costs, in the opinion of management, after consultation with special and corporate counsel, it is not probable and is unlikely that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but may have a material impact on the Company’s financial results for a particular period.


A roll-forward of the product liability reserve and detail of product liability expense for the three years ended December 31, 2009 follows:

Balance Sheet Roll-forward for Product Liability Reserve
(Dollars in thousands)
                                                           
                 Cash Payments                    
   
 
Balance Beginning of Year (a)
   
Accrued Legal Expense (b)
   
 
 
Legal Fees (c)
   
 
 
Settlements (d)
   
 
 
Insurance Premiums
   
 
 
Admin. Expense
   
 
Balance End of Year (a)
 
                                           
2007
  $ 1,741     $ 639     $ (447 )   $ -       N/A       N/A     $ 1,933  
                                                         
2008
    1,933       176       (358 )     (7 )     N/A       N/A       1,744  
                                                         
2009
    1,744       873       (274 )     (261 )     N/A       N/A       2,082  

Income Statement Detail for Product Liability Expense
(Dollars in thousands)

   
Accrued Legal Expense (b)
   
Insurance Premium Expense (e)
   
Admin. Expense (f)
   
Total Product Liability Expense
                         
                                                 
2007
  $ 639     $ 748     $ 299     $ 1,686                          
                                                         
2008
    176       739       -       915                          
                                                         
2009
    873       745       -       1,618                          
 
Notes

(a)
The beginning and ending liability balances represent accrued legal fees only.  Settlements and administrative costs are expensed as incurred.  Only in rare instances is an accrual established for settlements.

(b)
The expense accrued in the liability is for legal fees only.

(c) 
Legal fees represent payments to outside counsel related to product liability matters.

(d)
Settlements represent payments made to plaintiffs or allegedly injured parties in exchange for a full and complete release of liability.

(e) 
Insurance expense represents the cost of insurance premiums.

(f)
Administrative expense represents personnel related and travel expenses of Company employees and firearm experts related to the management and monitoring of product liability matters.
 
 
There were no insurance recoveries during any of the above years.

Environmental
 
The Company is subject to numerous federal, state and local laws and governmental regulations and related state laws. These laws generally relate to potential obligations to remove or mitigate the environmental effects of the disposal or release of certain pollutants at the Company’s manufacturing facilities and at third-party or formerly owned sites at which contaminants generated by the Company may be located. This requires the Company to make capital and other expenses.

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. In an effort to comply with federal and state laws and regulations, the Company has programs in place that monitor compliance with various environmental regulations. However, in the normal course of its operations, the Company is subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment.

The Company believes that it is generally in compliance with applicable environmental regulations. However, the Company cannot assure that the outcome of any environmental proceedings and orders will not have a material adverse effect on the business.

Reliance on Two Facilities
 
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. Any event that causes a disruption of the operation of either of these facilities for even a relatively short period of time might have a material adverse affect on the Company’s ability to produce and ship products and to provide service to its customers.

Availability of Raw Materials
 
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.
 
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 consolidated its casting operations in its Newport, New Hampshire foundry in 2007.

The Company has four other facilities that were not used in its manufacturing operations in 2009:

 
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)(a)
45,000
Owned
Firearms
Enfield, Connecticut
10,000
Leased
Firearms

 
(a)
In 2005, the Company relocated its firearms shipping department into a portion of the Dorr Woolen Building.  In 2006, certain of the Company’s sales department personnel were moved into the same facility.  Approximately 255,000 square feet of the Dorr Woolen Building was demolished in the fall of 2009.

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 17 to this Form 10-K report, which is incorporated herein by reference.

The Company has reported all cases instituted against it through October 3, 2009, 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.
 
 
One case was formally instituted against the Company during the three months ending December 31, 2009:

On October 9, 2009, the Company waived service of a complaint captioned Alan R. Herrett, Individually and On Behalf of All Others Similarly Situated v. Sturm, Ruger & Co., Inc., et al. pending in the United States District Court for the District of Connecticut.  This matter is based upon the same facts and basic allegations set forth in the previously reported Steamfitters 449 Local Pension Fund on Behalf of Itself and All Others Similarly Situated v. Sturm, Ruger & Co., Inc., et al.  On October 12, 2009, a motion to consolidate the two actions was filed by counsel for the Steamfitters.  On January 11, 2010, the court entered an order consolidating the two matters.  The January 11, 2010 order also sets a briefing schedule for plaintiffs to file a consolidated amended complaint and for defendants, including the Company, to file a responsive pleading.

During the three months ending December 31, 2009, no previously reported cases were settled.
 
ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


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, 2010, the Company had 1,834 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
 
2008:
                 
     First Quarter
  $ 9.32     $ 7.32       -  
     Second Quarter
    8.88       6.95       -  
     Third Quarter
    7.84       5.60       -  
     Fourth Quarter
    7.44       4.36       -  
                         
2009:
                       
     First Quarter
  $ 13.06     $ 5.98       -  
     Second Quarter
    13.71       10.08     $ 0.086  
     Third Quarter
    15.20       11.16       0.123  
     Fourth Quarter
    13.70       9.61       0.096  
                         
 
Issuer Repurchase of Equity Securities

None.
 
 
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 12/31/09)
 
 
Assumes $100 invested at the close of trading 12/04 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, Inc.
 
Factual material is obtained from sources believed to be reliable, but the publisher is not responsible for any errors
or omissions contained herein.
 
   
2004
   
2005
   
2006
   
2007
   
2008
   
2009
 
Sturm, Ruger & Co., Inc.
    100.00       80.42       110.13       94.99       68.49       114.33  
Standard & Poor’s 500
    100.00       103.00       117.03       121.16       74.53       92.01  
Recreation
    100.00       93.29       105.16       93.87       59.33       97.11  
Smith & Wesson Holding
    100.00       224.57       590.86       348.57       129.71       233.71  
 
 
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, 2009:
 
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
 
     
1998 Stock Incentive Plan
590,000
$7.78 per share
-
2001 Stock Option Plan for Non-Employee Directors
160,000
$8.60 per share
-
2007 Stock Incentive Plan
808,250
$10.04 per share
1,733,750
 
Equity compensation plans not approved by security holders
 
     
None.
     
Total
1,558,250
$9.00 per share
1,733,750
 
*
Restricted stock units are settled in shares of the Company's 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,  
   
2009
   
2008
   
2007
   
2006
   
2005
 
Net firearms sales
  $ 266,566     $ 174,416     $ 144,222     $ 139,110     $ 132,805  
Net castings sales
    4,419       7,067       12,263       28,510       21,917  
Total net sales
    270,985       181,483       156,485       167,620       154,722  
Cost of products sold
    183,380       138,730       117,186       139,610       124,826  
Gross profit
    87,605       42,753       39,299       28,010       29,896  
Income before income taxes
    44,360       13,978       16,659       1,843       1,442  
Income taxes
    16,857       5,312       6,330       739       578  
Net income
  $ 27,503     $ 8,666     $ 10,329     $ 1,104     $ 864  
Basic and diluted earnings per share
    1.44       0.43       0.46       0.04       0.03  
Cash dividends per share
  $ 0.31     $ 0.00     $ 0.00     $ 0.00     $ 0.30  


      December 31,  
   
2009
   
2008
   
2007
   
2006
   
2005
 
Working capital
  $ 65,377     $ 46,250     $ 53,264     $ 60,522     $ 83,522  
Total assets
    141,679       112,760       101,882       117,066       139,639  
Total stockholders’ equity
    95,516       65,603       76,069       87,326       111,578  
Book value per share
  $ 5.01     $ 3.44     $ 3.57     $ 3.86     $ 4.15  
Return on stockholders’ equity
    34.1 %     12.2 %     12.6 %     1.3 %     0.8 %
Current ratio
 
3.0 to 1
   
2.6 to 1
   
3.6 to 1
   
3.8 to 1
   
5.5 to 1
 
Common shares outstanding
    19,072,800       19,047,300       20,571,800       22,638,700       26,910,700  
Number of stockholders of record
    1,827       1,841       1,769       1,851       1,922  
Number of employees
    1,145       1,145       1,154       1,108       1,250  
 
 
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 98% of the Company’s total sales for 2009 were firearms sales, and 2% were investment castings sales.  Export sales represent less than 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 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.

Because most of the Company’s competitors are not subject to public filing requirements and industry-wide data is generally not available in a timely manner, the Company is unable to compare its performance to other companies or specific current industry trends.  Instead, the Company measures itself against its own historical results.

The Company does not consider its overall firearms business to be predictably seasonal; however, sales of many models of firearms are usually lower in the third quarter of the year.

Results of Operations - 2009

Product Demand

Incoming unit orders in 2009 increased 23% from 2008, and 98% from 2007.  The extraordinary retail demand that began in the latter months of 2008 caused independent distributors to place very large orders for our products in 2009, particularly during the first half of the year when orders from distributors substantially exceeded their sales of our products to retailers.  This resulted in the Company having an abnormally large backlog of unshipped distributor orders throughout 2009.

The Company has temporarily placed less emphasis on incoming orders as a proxy for market demand.  Instead, the Company is using the following estimate of sell-through of our products from distributors to retailers as a proxy for actual market demand and as a metric for planning production.  Note, however, that we believe a portion of the 2009 sell-through from distributors to retailers resulted in an inventory build at retail rather than sales from retailers to consumers.

   
2009
   
2008
   
2007
 
                   
Units Ordered
    958,700       776,400       485,000  
                         
Estimated Units Sold from Distributors to Retailers (1)
    887,400       631,000       476,900  
                         
Units on Backorder
    181,000       175,900       36,500  

 
(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.

Estimated sell-through of our products from distributors to retail in 2009 increased by approximately 40% from 2008, and 86% from 2007.  This annual growth substantially exceeds the 10% and 25% growth in National Instant Criminal Background Check System (NICS*) background checks over the same periods.  This suggests the likelihood of market share gain by the Company during the past two years, and was the result of the introduction of new products and increased production and shipments of legacy products.  The total number of NICS background checks for the past three years follows:

Number of NICS* background checks (in 000’s)
 
   
2009
   
2008
   
2007
 
                   
Total NICS* Background
Checks
    14,000       12,700       11,200  

 
*
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.  

Annual Summary Unit Data

Firearms unit data for orders, production, shipments and backorders follows:
 
   
2009
   
2008
   
2007
 
                   
Units Ordered
    958,700       776,400       485,000  
                         
Units Produced
    934,200       600,600       464,900  
                         
Units Shipped
    925,800       626,500       481,800  
                         
Average Sales Price
  $ 288     $ 278     $ 299  
                         
Units on Backorder
    181,000       175,900       36,500  


The Company’s finished goods unit inventory levels increased slightly in 2009 from the recent historic low levels at the end of 2008.  Strong consumer demand drove down inventories at both the Company and distributors in 2008.  Increased production and shipments to distributors allowed for the replenishment of inventory at distributors, and to a lesser extent at the Company, during the latter months of 2009.  Inventory data follows:

   
December 31,
 
   
2009
   
2008
   
2007
 
                         
Units – Company Inventory
    20,100       12,400       38,300  
                         
Units – Distributor Inventory (2)
    96,200       57,500       62,000  
                         
Total inventory(3)
    116,300       69,900       100,300  

 
(2)
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.

 
(3)
This total does not include inventory at retailers.  The Company does not have access to data on retailer inventories.
 
Orders Received and Ending Backlog

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

   
2009
   
2008
   
2007
 
                   
Orders Received
  $ 299.4     $ 233.8     $ 156.4  
                         
Average Sales Price of Orders Received (4)
  $ 312     $ 301     $ 322  
                         
Ending Backlog
  $ 59.6     $ 47.8     $ 17.9  
                         
Average Sales Price of Ending Backlog (4)
  $ 330     $ 269     $ 444  

 
(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.

The increase in orders received and the ending backlog is due to the strong demand for new products and the increase in overall market demand that started in late 2008.

In 2009, the average sales price of orders received and ending backlog increased from 2008 due to a significant increase in orders for certain higher-priced rifles, including the SR-556, which was introduced in 2009.
 
 
In 2008, the average sales price of orders received and ending backlog decreased from 2007 due to:
 
 
·
the large quantity of new handgun products in the backlog with lower unit sales prices, and
 
·
the cancellation of $3.7 million of orders for Gold Label side-by-side shotguns with higher unit sales prices, that were received prior to 2008.

Production

Production rates, which started to increase late in 2007, continued to improve throughout 2008 and 2009.  In response to the significant increase in demand in 2009, the Company increased production in 2009 by 56% from 2008 and 101% from 2007.

This increased production was facilitated by the Company’s implementation of lean manufacturing, an ongoing process that started in 2006, including:

 
·
transitioning from large-scale batch production to lean manufacturing,
 
·
establishing single-piece flow cells for small parts manufacturing,
 
·
refining existing cells,
 
·
developing pull systems and managing vendors,
 
·
increasing capacity for the products with the greatest unmet demand, and
 
·
re-engineering existing product designs for improved manufacturability.
 
Year ended December 31, 2009, as compared to year ended December 31, 2008:

Sales

Consolidated net sales were $271.0 million in 2009.  This represents an increase of $89.5 million or 49.3% from 2008 consolidated net sales of $181.5 million.

Firearms segment net sales were $266.6 million in 2009.  This represents an increase of $92.2 million or 52.8% from 2008 firearm net sales of $174.4 million.  Firearms unit shipments increased 47.8% in 2009 due to increased shipments of pistols, rifles and revolvers.  This increase is attributable to the introduction of new products in 2009, increased production of mature products, and increased overall industry demand.  A shift in product mix toward firearms with higher unit sales prices, including some new products, resulted in the relatively lower percentage increase in unit shipments compared to the percentage increase in sales.

Casting segment net sales were $4.4 million in 2009.  This represents a decrease of $2.7 million or 37.5% from 2008 casting sales of $7.1 million.

Cost of Products Sold and Gross Margin
Consolidated cost of products sold was $183.4 million in 2009.  This represents an increase of $44.7 million or 32.2% from 2008 consolidated cost of products sold of $138.7 million.
 
 
The gross margin as a percent of sales was 32.3% in 2009.  This represents an increase from the 2008 gross margin of 23.6% as illustrated below:
 
(in thousands)             
Year Ended December 31
 
2009
   
2008
 
                         
Net sales
  $ 270,985       100.0 %   $ 181,483       100.0 %
                                 
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability and product recall
    183,540       67.7 %     136,172       75.0 %
                                 
LIFO expense (income)
    (4,216 )     (1.6 )%     781       0.4 %
                                 
Overhead rate adjustments to inventory
    1,324       0.5 %     (1,389 )     (0.7 )%
                                 
Labor rate adjustments to inventory
    436       0.2 %     (1,251 )     (0.7 )%
                                 
Product liability
    1,618       0.6 %     915       0.5 %
                                 
Product recalls
    678       0.3 %     3,502       1.9 %
                                 
Total cost of products sold
    183,380       67.7 %     138,730       76.4 %
                                 
Gross margin
  $ 87,605       32.3 %   $ 42,753       23.6 %

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall- In 2009, 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 7.3% compared to 2008.  The decrease was primarily related to increased comparable period sales and production while holding fixed-overhead expenses fairly stable.  Labor efficiency also improved in 2009.

LIFO- Gross inventories were reduced by $8.8 million in 2009 and $4.5 million in 2008.  In 2009, the Company recognized a LIFO credit resulting in decreased cost of products sold of $4.2 million.  In 2008, the Company recognized a LIFO charge and increased cost of products sold of $0.8 million.

Overhead Rate Change- The net impact on inventory in 2009 from the change in the overhead rates used to absorb overhead expenses into inventory was a decrease of $1.3 million, reflecting improvement in overhead efficiency.  This decrease in inventory value resulted in a corresponding increase to cost of sales in 2009.  In 2008, the change in inventory value resulting from the change in the overhead rate used to absorb overhead expenses into inventory was an increase of $1.4 million.  This increase in inventory value resulted in a corresponding decrease to cost of products sold.

Labor Rate Adjustments- In 2009, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was a decrease of $0.4 million, reflecting improvement in labor efficiency.  This decrease in inventory value resulted in a corresponding increase to cost of products sold.  The net impact in 2008 from the change in the labor rates used to absorb labor expenses into inventory was an increase to inventory of $1.3 million.  This increase in inventory value resulted in a corresponding decrease to cost of sales.
 
 
Product Liability—In 2009 and 2008, the Company incurred product liability expense of $1.6 million and $0.9 million, respectively, which includes the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters.  See Note 12 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 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 totaled $0.7 million and $3.5 million in 2009 and 2008, respectively. The Company believes that costs incurred for these ongoing retrofit programs in future years will not be significant.

Gross Margin—Gross margin was $87.6 million or 32.3% of sales in 2009.  This is an increase of $44.8 million or 105% from 2008 gross margin of $42.8 million or 23.6% of sales.

Selling, General and Administrative
Selling, general and administrative expenses were $42.5 million in 2009.  This represents an increase of $12.4 million or 41.1% from 2008 selling, general and administrative expenses of $30.1 million.  The increase reflects increased advertising and sales promotion expenses and greater 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):

   
2009
   
2008
 
             
Gain on sale of operating assets (a)
  $ (45 )   $ (95 )
Frozen defined benefit pension plan expense (income)
    1,266       (745 )
                 
Total other operating expenses (income), net
  $ 1,221     $ (840 )
 
 
(a)
The gain on sale of operating assets was generated primarily from the sale of used machinery and equipment.

Operating Income—Operating Income was $43.9 million or 16.2% of sales in 2009.  This is a 224% increase of $30.4 million from 2008 operating income of $13.5 million or 7.5% of sales.

Royalty Income

Royalty income was $0.5 million in 2009.  This represents an increase of $0.4 million from 2008 royalty income of $0.1 million.  The increase is primarily attributable to increased income from licensing agreements.
 
 
Interest income
Interest income was $0.1 million in 2009.  This represents a decrease of $0.3 million from 2008 interest income of $0.4 million.  The decrease is attributable primarily to decreased interest rates in 2009.

Income Taxes and Net Income
The effective income tax rate in 2009 was 38.0%, which is consistent with the 2008 effective income tax rate of 38.0%.

As a result of the foregoing factors, consolidated net income was $27.5 million in 2009.  This represents an increase of $18.8 million from 2008 consolidated net income of $8.7 million.
 
 
Quarterly Data

To supplement the summary annual unit data and discussion above, the same data for the last eight quarters follows:
 
   
2009
 
      Q4       Q3       Q2       Q1  
                                 
Units Ordered (1)
    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  
                                 
Average Sales Price
  $ 276     $ 295     $ 286     $ 283  
                                 
Units on Backorder(1)
    181,000       240,700       412,300       458,900  
                                 
Units – Company Inventory
    20,100       15,100       9,600       8,800  
                                 
Units – Distributor Inventory (2)
    96,200       76,800       53,900       35,200  
 
   
2008
 
      Q4       Q3       Q2       Q1  
                                 
Units Ordered
    270,400       125,700       120,300       260,100  
                                 
Units Produced
    167,100       158,900       150,600       124,000  
                                 
Units Shipped
    208,100       146,000       136,700       135,700  
                                 
Estimated Units Sold from
Distributors to Retailers
    216,400       143,100       135,600       135,900  
                                 
Average Sales Price
  $ 275     $ 276     $ 270     $ 296  
                                 
Units on Backorder
    175,900       115,300       137,700       157,100  
                                 
Units – Company Inventory
    12,400       52,600       40,200       24,900  
                                 
Units – Distributor Inventory (2)
    57,500       65,800       62,900       61,800  

(1)
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.
 
(2)
Distributor ending inventory as provided by the independent distributors of the Company’s products.

 
(in millions except average sales price, including Federal Excise Tax)
 
   
2009
 
      Q4       Q3       Q2       Q1  
                                 
Orders Received(3)
  $ 47.6     $ 15.7     $ 81.8     $ 154.3  
                                 
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  

   
2008
 
      Q4       Q3       Q2       Q1  
                                 
Orders Received
  $ 86.1     $ 33.5     $ 37.0     $ 73.8  
                                 
Average Sales Price of Orders Received(4)
  $ 287     $ 267     $ 275     $ 257  
                                 
Ending Backlog
  $ 47.8     $ 27.9     $ 33.7     $ 40.7  
                                 
Average Sales Price of Ending Backlog(4)
  $ 269     $ 242     $ 245     $ 234  
 
(3)
See description in Note 1 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.
 
 
Fourth Quarter Gross Margin Analysis

The gross margin as a percent of sales for the fourth quarter of 2009 and 2008 was 33.3% and 28.6%, respectively.  Details of the gross margin are illustrated below:
 
(in thousands)             
Three Months Ended December 31
 
2009
   
2008
 
                         
Net sales
  $ 63,879       100.0 %   $ 58,491       100.0 %
                                 
Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability and product recall
    45,678       71.5 %     44,177       75.5 %
                                 
LIFO expense (income)
    (1,536 )     (2.4 )%     (3,026 )     (5.2 )%
                                 
Overhead rate adjustments to inventory
    (1,408 )     (2.2 )%     90       0.2 %
                                 
Labor rate adjustments to inventory
    (323 )     (0.5 )%     60       0.1 %
                                 
Product liability
    171       0.2 %     420       0.7 %
                                 
Product recalls
    32       0.1 %     25       0.1 %
                                 
Total cost of products sold
    42,614       66.7 %     41,746       71.4 %
                                 
Gross margin
  $ 21,265       33.3 %   $ 16,745       28.6 %
 
Note: For a discussion of the above table, please see “Cost of Products Sold and Gross Margin” discussion above.

 
Results of Operations - 2008

Year ended December 31, 2008, as compared to year ended December 31, 2007:
 
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:
 
   
2008
   
2007
   
2006
   
2005
 
                         
Units Ordered
    776,400       485,000       (1)       (1)  
                                 
Units Produced
    600,600       464,900       419,800       414,600  
                                 
Units Shipped
    626,500       481,800       475,900       460,200  
                                 
Average Sales Price
  $ 278     $ 299     $ 292     $ 289  
                                 
Units on Backorder
    175,900       36,500       (1)       (1)  
                                 
Units – Company Inventory
    12,400       38,300       55,200       111,246  
                                 
Units – Distributor Inventory (2)
    57,500       62,000       57,100       70,498  
                                 
Castings Setups
    144,600       156,100       169,100       174,443  
 
Orders Received and Ending Backlog

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

   
2008
   
2007
 
             
Orders Received
  $ 233.8     $ 156.4  
                 
Average Sales Price of Orders Received (3)
  $ 301     $ 322  
                 
Ending Backlog (3)
  $ 47.8     $ 17.9  
                 
Average Sales Price of Ending Backlog (3)
  $ 269     $ 444  
 
(1)
Prior to 2006, the Company received one cancelable annual firearms order in December from each independent distributor.  Effective December 1, 2006, the Company changed the manner in which distributors order firearms, and began receiving firm, non-cancelable purchase orders on a frequent basis, with most orders for immediate delivery.  Because of this change, comparable data for orders received and units on backorder for prior periods is not meaningful.
 
 
(2)
Distributor ending inventory as provided by the independent distributors of the Company’s products.

(3)
Average sales price for orders received and ending backlog is net of Federal Excise Tax of 10% for handguns and 11% for long guns.

The increase in orders received in 2008 is attributable to the following:

 
1.
Increased demand for firearms during the fourth quarter,
 
2.
New products introduced in 2008, and
 
3.
Increased production and order fulfillment in 2008.

The product mix of orders received in 2008 shows an increase in demand for firearms related to self defense, including the LCP pistol, which was introduced in the first quarter of 2008.

The decrease in the average sales price of the units in backlog in 2008 is due to the large quantity of new products in the backlog with lower unit sales prices and a reduction in backlog for certain rifle products where production has increased to meet demand.

Orders for certain discontinued models totaling $3.7 million at the end of 2007 were cancelled and have been eliminated from the 2008 backlog information.  These orders were included in the backlog for 2007, and their elimination had a significant impact on the change in average sales price of the ending backlog from 2007 to 2008.

The increase in the order backlog is due to the strong incoming order rate for new products and the increase in overall demand that occurred in the fourth quarter.

Production

Production rates, which started to increase late in 2007, continued to improve throughout 2008.  This allowed for a 29% increase in unit production from 2007 to 2008.

Inventories

The Company’s finished goods unit inventory levels decreased in 2008, ending at a recent historic low.

 
Quarterly Summary Unit Data

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

   
2008
 
      Q4       Q3       Q2       Q1  
                                 
Units Ordered
    270,400       125,700       120,300       260,100  
                                 
Units Produced
    167,100       158,900       150,600       124,000  
                                 
Units Shipped
    208,100       146,000       136,700       135,700  
                                 
Average Sales Price
  $ 275     $ 276     $ 270     $ 296  
                                 
Units on Backorder
    175,900       115,300       137,700       157,100  
                                 
Units – Company Inventory
    12,400       52,600       40,200       24,900  
                                 
Units – Distributor Inventory (1)
    57,500       65,800       62,900       61,800  
 
   
2007
 
      Q4       Q3       Q2       Q1  
                                 
Units Ordered
    113,100       80,900       115,300       175,700  
                                 
Units Produced
    104,900       100,800       132,000       127,200  
                                 
Units Shipped
    111,900       98,600       129,600       141,700  
                                 
Average Sales Price
  $ 283     $ 297     $ 306     $ 308  
                                 
Units on Backorder
    36,500       35,700       53,400       68,300  
                                 
Units – Company Inventory
    38,300       45,300       43,100       40,700  
                                 
Units – Distributor Inventory (1)
    62,000       70,500       78,800       60,000  

(1)
Distributor ending inventory as provided by the independent distributors of the Company’s products.
 
 
Orders Received and Ending Backlog

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

   
2008
 
      Q4       Q3       Q2       Q1  
                                 
Orders Received
  $ 86.1     $ 33.5     $ 37.0     $ 73.8  
                                 
Average Sales Price of Orders Received
  $ 287     $ 267     $ 275     $ 257  
                                 
Ending Backlog
  $ 47.8     $ 27.9     $ 33.7     $ 40.7