STURM RUGER & CO INC (RGR) FY 2021 MD&A

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 sales are from firearms. 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 and metal injection molding (“MIM”) parts for internal use in its firearms and for sale to unaffiliated, third-party customers. Less than 1% of sales are from the castings segment.

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.

Impact of COVID-19

The global outbreak of the Coronavirus disease 2019 was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020. The COVID-19 pandemic has created significant uncertainty and adversely impacted many industries throughout the global economy. In 2021, the Company was able to mitigate the adverse impact on its business resulting from government restrictions on the movement of people, goods, and services. The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, the Company cannot predict the extent to which its business, results of operations, financial condition, or cash flows will ultimately be impacted. Management, with guidance from a dedicated Company COVID-19 Task Force, continues to monitor and assess the situation and prepare for potential implications for the Company’s business, supply chain and customer demand.

From a liquidity perspective, the Company believes it is currently well positioned to continue to manage through this global crisis. At the end of 2021, the Company was debt-free and had cash and short-term investments totaling $221.0 million.

The Company has taken many proactive steps to maintain the health and safety of its employees and to mitigate the impact on its business. These actions include:

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Providing all employees with additional paid time off for COVID-19-related purposes since 2020,

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Offering cash and other incentives for employees who receive COVID-19 vaccinations,

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Holding multiple onsite COVID-19 vaccination clinics at our manufacturing facilities,

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Encouraging employees to continue to work remotely, wherever possible, and maintaining social distancing throughout each manufacturing facility, including in every manufacturing cell,

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Confidentially communicating with and assisting employees with potential health issues and positive case contact tracing through our dedicated facility nurses,

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Restricting visitor access to minimize the introduction of new people to the factory environment,

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Implementing additional cleaning and sanitizing, improved ventilation, and other health and safety processes to maintain a clean and safe workplace,

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Delivering multiple face coverings and other personal protective equipment to employees free of charge and mandating their use in our facilities,

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Giving employees access to free COVID-19 testing through our facility nurses, and

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Issuing periodic guidance, tools, and reminders to all associates to encourage them to engage in safe and responsible behaviors.

The costs of these actions totaled approximately $1.5 million in 2021 and $3.6 million in 2020. The Company has also experienced expense reductions and deferrals in certain areas of our business, including reductions or delays in sponsorships and advertising, reduced conference and trade show participation costs, and reduced travel expenditures. These expense reductions and deferrals approximated $0.4 million in 2021 and $2.9 million in 2020. In 2021 some business activities that had previously been cancelled or deferred as a result of the pandemic began to resume and related expenses increased. As COVID-19 restrictions ease, these expense reductions and deferrals could lessen and may ultimately be eliminated.

The Company has been able to keep all of its facilities safe and open with only limited restrictions on operations. While certain parts of the economy have begun to reopen as restrictions have been lifted, it is possible that additional restrictions will be put in place in the future that could adversely impact the Company’s business for an indeterminate period.

From the latter stages of the first quarter of 2020 to early in 2021, there was a significant increase in consumer demand for firearms, as evidenced by the increase in the National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) . This increased demand may have been related, in part, to COVID-19.

The impact of COVID-19 in 2022 and future years on consumer demand and the Company’s business, operations, financial results financial condition, and cash flows is dependent on future developments, including the duration of the pandemic and the related impact on the global economy, which remains uncertain.

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Results of Operations - 2021

Product Demand

The estimated sell-through of the Company’s products from the independent distributors to retailers in 2021 increased 3.5% from 2020. For the same period, adjusted NICS decreased 12%.

The increase in the sell-through of the Company’s products compared favorably to the decrease in adjusted NICS background checks in 2021 and may be attributable to the following:

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Strong consumer demand for the Company’s products,

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Increased production in 2021, and

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The introduction of popular new products.

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

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Orders Received and Ending Backlog

The Company uses the estimated unit sell-through of our products from the independent distributors to retailers, along with inventory levels at the independent distributors and at the Company, as the key metrics for planning production levels.

Orders Received in 2021 decreased 39.7% from 2020. Our ending order backlog of 1,204,500 units at December 31, 2021 decreased 307,400 units from a backlog of 1,511,900 units at December 31, 2020.

The units ordered, value of orders received and ending backlog, net of Federal Excise Tax, for the trailing three years are as follows (dollars in millions, except average sales price):

Production

The Company reviews the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, to plan production levels and manage inventories. These reviews resulted in an increase in total unit production of 29.9% in 2021 compared to 2020.

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Annual Summary Unit Data

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

Inventories

The Company’s finished goods inventory increased by 11,800 units during 2021, but remain significantly below pre-COVID-19 pandemic levels.

Distributor inventories of the Company’s products increased by 125,000 units during 2021, but remain significantly below the level needed to support rapid fulfillment of retailer demand for most product families.

Inventory data follows:

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Year ended December 31, 2021, as compared to year ended December 31, 2020:

Net Sales, Cost of Products Sold, and Gross Profit

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

Firearms unit shipments increased 24.8% in 2021. New products represented $155.5 million or 22% of firearms sales in 2021, compared to $111.2 million or 22% of firearms sales in 2020. New product sales include only major new products that were introduced in the past two years. In 2021, new products included the Ruger-57 pistol, the PC Charger, the MAX-9 pistol, the LCP II in .22 LR pistol, the LCP MAX pistol, the Wrangler revolver, and the Marlin 1895 lever-action rifle.

The increased gross profit for the year ended December 31, 2021 is attributable to the significant increase in sales and profitability.

The increase in gross margin for the year ended December 31, 2021 is attributable to favorable leveraging of fixed costs, including depreciation, engineering and other indirect labor, resulting from the increased sales and production, labor efficiencies, and reduced sales promotional activities.

Selling, General and Administrative

Selling, general and administrative expenses were $76.5 million in 2021, an increase of $4.2 million from $72.3 million in 2020, and a decrease from 12.7% of sales in 2020 to 10.5% of sales in 2021. The increase in expense was primarily attributable to increased sales and incentive compensation expenses and the decrease in the percentage of sales was attributable to the significant increase in sales.

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Other Operating Income, net

Other operating income, net was $0.1 million in 2021 and was de minimis in 2020.

Operating Income

Operating income was $203.1 million or 27.8% of sales in 2021. This is an increase of $84.0 million from 2020 operating income of $119.1 million or 20.9% of sales.

Royalty Income

Royalty income was $2.0 million in 2021 and $0.8 million in 2020.

Interest Income

Interest income was de minimis in 2021, a decrease from $1.1 million in 2020, due to significantly decreased interest rates earned on short-term investments in 2021.

Interest Expense

Interest expense was $0.2 million in 2021 and 2020.

Other Income, Net

Other income, net was $1.6 million in 2021, an increase of $1.5 million from $0.1 million in 2020.

Income Taxes and Net Income

The effective income tax rate was 24.5% in 2021 and 25.3% in 2020. The Company's 2021 effective tax rate differs from the statutory federal tax rate due principally to state income taxes and the nondeductibility of certain executive compensation. The Company's 2020 effective tax rate differs from the statutory federal tax rate due principally to state income taxes.

As a result of the foregoing factors, consolidated net income was $156.9 million in 2021. This represents an increase of $65.5 million from 2020 consolidated net income of $90.4 million.

Non-GAAP Financial Measure

In an effort to provide investors with additional information regarding its results, the Company refers to various United States generally accepted accounting principles (“GAAP”) financial measures and two non-GAAP financial measures, EBITDA and EBITDA margin, which management believes provides useful information to investors. These non-GAAP measures may not be comparable to similarly titled measures being disclosed by other companies. In addition, the Company believes that the non-GAAP financial measures should be considered in addition to, and not in lieu of, GAAP financial measures. The Company believes that EBITDA and EBITDA margin are useful to understanding its operating results and the ongoing performance of its underlying business, as EBITDA provides information on the Company’s ability to meet its capital expenditure and working capital requirements, and is also an indicator of profitability. The Company believes that this reporting provides better transparency and comparability to its operating results. The Company uses both GAAP and non-GAAP financial measures to evaluate its financial performance.

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Non-GAAP Reconciliation – EBITDA

EBITDA

(Unaudited, dollars in thousands)

EBITDA is defined as earnings before interest, taxes, and depreciation and amortization. The Company calculates this by adding the amount of interest expense, income tax expense and depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest income that was included in net income from net income to arrive at EBITDA. The Company’s EBITDA calculation also excludes any one-time non-cash, non-operating expense.

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Quarterly Data

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

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

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Fourth Quarter Net Sales and Gross Profit Analysis

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

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Results of Operations - 2020

Year ended December 31, 2020, as compared to year ended December 31, 2019:

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:

Orders Received and Ending Backlog

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

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Product Demand

The estimated sell-through of the Company’s products from the independent distributors to retailers in 2020 increased 44% from 2019. For the same period, the National Instant Criminal Background Check System (“NICS”) background checks (as adjusted by the National Shooting Sports Foundation (“NSSF”)) increased 60%.

These substantial increases may be attributable to increased public concern about personal protection and home defense in reaction to:

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Some political and public leaders calling for a reduction in funding and limitations on law enforcement activities,

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Protests, demonstrations, and civil unrest in many cities throughout the United States,

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The continuing COVID-19 pandemic, and

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Concern about possible legislation that could curtail or limit gun ownership rights by both state and Federal governments.

New products represented $111.2 million or 22% of firearms sales in 2020, compared to $102.0 million or 26% of firearms sales in 2019. New product sales include only major new products that were introduced in the past two years. In 2020, new products included the Wrangler revolver, the Ruger-57 pistol, the LCP II in .22 LR pistol, the PC Charger, and the AR-556 pistol.

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

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Production

The Company reviews the estimated sell-through from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, semi-monthly to plan production levels and manage inventories. These reviews resulted in an increase in total unit production of 26% in 2020 compared to 2019. Reduced hiring to help maintain the health and safety of employees and the cleanliness of our facilities during the COVID-19 pandemic negatively impacted production in 2020.

Inventories

The Company’s finished goods inventory decreased by 58,600 units during 2020.

Distributor inventories of the Company’s products decreased by 231,200 units during 2020 and are significantly below the level needed to support rapid fulfillment of retailer demand. In the aggregate, total Company and distributor inventories decreased by 86% in 2020.

Inventory data follows:

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Quarterly Summary Unit Data

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

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

Net Sales

Consolidated net sales were $568.9 million in 2020. This represents an increase of $158.4 million or 38.6% from 2019 consolidated net sales of $410.5 million.

Firearms segment net sales were $565.9 million in 2020. This represents an increase of $159.6 million or 39.3% from 2019 firearms net sales of $406.3 million. Firearms unit shipments increased 29.5% in 2020.

Casting segment net sales were $3.0 million in 2020. This represents a decrease of $1.2 million or 28.1% from 2019 casting sales of $4.2 million

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Cost of Products Sold and Gross Profit

Consolidated cost of products sold was $377.4 million in 2020. This represents an increase of $66.4 million or 21.4% from 2019 consolidated cost of products sold of $311.0 million.

The gross margin was 33.7% in 2020. This represents an increase from 24.3% in 2019 as illustrated below:

(in thousands)

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product safety bulletins and recalls- In 2020, cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability and safety bulletins and recalls decreased 10.5% as a percentage of sales compared to 2019. This decrease was due primarily to the significant increase in sales and production which resulted in favorable leveraging of fixed costs and a reduction in promotional activities.

LIFO- The Company recognized LIFO expense in 2020 and 2019 of $0.9 million and $0.8 million, respectively, which increased cost of products sold in both periods.

Overhead Rate Change- The net impact on inventory in 2020 and 2019 from the change in the overhead rates used to absorb overhead expenses into inventory was a decrease of $0.5 million and an increase of $3.7 million, respectively, reflecting increased overhead efficiency in 2020 and decreased overhead efficiency in 2019. The increase in inventory value in 2020 resulted in a corresponding decrease to cost of products sold and the decrease in inventory value in 2019 resulted in a corresponding increase to cost of products sold.

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Labor Rate Adjustments- In 2020, the change in inventory value resulting from the change in the labor rates used to absorb labor expenses into inventory was a decrease of $0.3 million, reflecting increased labor efficiency. This decrease in inventory value resulted in a corresponding increase to cost of products sold. In 2019, 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.

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 $1.1 million and $0.7 million in 2020 and 2019, respectively. See Note 20 in the notes to the financial statements “Contingent Liabilities” for further discussion of the Company’s product liability.

Product Safety Bulletins and Recalls- In October 2018, the Company issued a safety bulletin announcing that some Ruger American Pistols chambered in 9mm may exhibit premature wear of the locking surfaces between the slide and barrel. The Company offered a free retrofit to customers of affected pistols and recorded a $1.0 million expense in 2018, which was the expected total cost of the safety bulletin. In 2019 and 2020, the estimated costs remaining for the product safety bulletin was reduced, which decreased cost of sales by $0.2 million and $0.9 million in 2019 and 2020, respectively.

Gross Profit- Gross profit was $191.4 million or 33.7% of sales in 2020. This is an increase of $91.9 million from 2019 gross profit of $99.5 million or 24.3% of sales in 2019.

Selling, General and Administrative

Selling, general and administrative expenses were $72.3 million in 2020, an increase of $12.2 million from $60.1 million in 2019, and a decrease from 14.6% of sales in 2019 to 12.7% of sales in 2020. The increase in expense was primarily attributable to increased sales and incentive compensation expenses and the decrease in the percentage of sales was attributable to the significant increase in sales.

Other Operating Income, net

Other operating income, net was de minimis in 2020 and 2019.

Operating Income

Operating income was $119.1 million or 20.9% of sales in 2020. This is an increase of $79.7 million from 2019 operating income of $39.4 million or 9.6% of sales.

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Royalty Income

Royalty income was $0.8 million in 2020 and $0.7 million in 2019.

Interest Income

Interest income was $1.1 million in 2020, a decrease of $1.5 million from $2.6 million in 2019, due to decreased interest rates earned on short-term investments in 2020.

Interest Expense

Interest expense was $0.2 million and $0.2 million in 2020 and 2019, respectively.

Other Income, Net

Other income, net was $0.1 million in 2020, a decrease of $0.5 million from $0.6 million in 2019.

Income Taxes and Net Income

The effective income tax rate was 25.3% in 2020 and 25.0% in 2019.

As a result of the foregoing factors, consolidated net income was $90.4 million in 2020. This represents an increase of $58.1 million from 2019 consolidated net income of $32.3 million.

Non-GAAP Financial Measure

In an effort to provide investors with additional information regarding its results, the Company refers to various United States generally accepted accounting principles (“GAAP”) financial measures and two non-GAAP financial measures, EBITDA and EBITDA margin, which management believes provides useful information to investors. These non-GAAP measures may not be comparable to similarly titled measures being disclosed by other companies. In addition, the Company believes that the non-GAAP financial measures should be considered in addition to, and not in lieu of, GAAP financial measures. The Company believes that EBITDA and EBITDA margin are useful to understanding its operating results and the ongoing performance of its underlying business, as EBITDA provides information on the Company’s ability to meet its capital expenditure and working capital requirements, and is also an indicator of profitability. The Company believes that this reporting provides better transparency and comparability to its operating results. The Company uses both GAAP and non-GAAP financial measures to evaluate its financial performance.

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Non-GAAP Reconciliation – EBITDA

EBITDA

(Unaudited, dollars in thousands)

EBITDA is defined as earnings before interest, taxes, and depreciation and amortization. The Company calculates this by adding the amount of interest expense, income tax expense and depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest income that was included in net income from net income to arrive at EBITDA. The Company’s EBITDA calculation also excludes any one-time non-cash, non-operating expense.

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Financial Condition

Liquidity

At December 31, 2021, the Company had cash and cash equivalents of $21.0 million and $200.0 million in short term investments. Our pre-LIFO working capital of $303.4 million, less the LIFO reserve of $51.8 million, resulted in working capital of $251.6 million and a current ratio of 4.3 to 1.

Operations

Cash provided by operating activities was $172.3 million, $143.8 million, and $49.6 million in 2021, 2020, and 2019, respectively. The increase in cash provided in 2021 compared to 2020 is primarily attributable to significantly increased earnings in 2021.

The increase in cash provided in 2020 compared to 2019 is primarily attributable to significantly increased earnings in 2020, decreased inventories in 2020, and increased employee compensation and benefit accruals in 2020.

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. If market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations could be materially adversely affected.

Investing and Financing

Capital expenditures were $28.8 million, $24.2 million, and $20.3 million in 2021, 2020, and 2019, respectively. In 2022, the Company expects capital expenditures to approximate $20 million, much of which will relate to tooling and fixtures for new product introductions and to upgrade and modernize manufacturing equipment. Due to market conditions and business circumstances, actual capital expenditures could vary significantly from the budgeted amount. The Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash.

On November 23, 2020, the Company acquired substantially all of the Marlin Firearms assets, consisting of inventory, machinery and equipment, and intangible assets. The agreement to purchase these assets emanated from the Remington Outdoor Company, Inc. bankruptcy and was approved by the United States Bankruptcy Court for the Northern District of Alabama on September 30, 2020. The purchase price of approximately $28.3 million was paid with available cash on hand. Shipments of Ruger-made, Marlin lever-action rifles commenced late in the fourth quarter of 2021.

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As of December 31, 2021, the Company had $200.0 million of United States Treasury instruments which mature within one year.

In 2019, the Company repurchased 44,500 shares of its common stock for $2.0 million in the open market. The average price per share purchased was $44.83. These purchases were funded with cash on hand. No shares were repurchased in 2020 or 2021.

At December 31, 2021, approximately $86.7 million remained authorized for future share repurchases.

The Company paid dividends totaling $59.1 million, $113.9 million, and $14.3 million in 2021, 2020, and 2019, respectively. The increased dividends paid in 2020 were attributable to a $5.00 per share special dividend paid in August 2020. The quarterly dividend varies every quarter because the Company pays a percentage of earnings rather than a fixed amount per share. The Company’s practice is to pay a dividend of approximately 40% of net income.

On February 18, 2022, the Company’s Board of Directors authorized a dividend of 86¢ per share to shareholders of record on March 11, 2022. The payment of future dividends depends on many factors, including internal estimates of future performance, then-current cash, and the Company’s need for funds.

The Company provides supplemental discretionary contributions to substantially all employees’ individual 401(k) accounts.

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

Contractual Obligations

At December 31, 2021, the Company had approximately $64.2 million in agreements to purchase goods or services that are enforceable and legally binding on the Company, all of which are expected to be settled in less than one year. Additionally, the Company has approximately $2.3 million in operating lease obligations, which will be payable through 2034. The Company expects to fund all of these commitments with cash flows from operations and current cash.

Firearms Legislation and Litigation

See Item 1A - Risk Factors and Note 20 to the financial statements which are included in the Annual Report on Form 10-K for a discussion of firearms legislation and litigation.

Other Operational Matters

In the normal course of its manufacturing operations, the Company is subject to occasional governmental proceedings and orders pertaining to workplace safety, firearms serial number tracking and control, waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance with applicable Bureau of Alcohol, Tobacco, Firearms & Explosives, environmental, and safety regulations and the outcome of any proceedings or orders will not have a material adverse effect on the financial position or results of operations of the Company. If these regulations become more stringent in the future and we are not able to comply with them, such noncompliance could have a material adverse impact on the Company.

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Three of the Company’s smaller independent domestic wholesale distributors discontinued their firearms distribution operations in 2019. Currently, there are 14 domestic distributors. Additionally, the Company has 44 and 25 distributors servicing the export and law enforcement markets, respectively.

The Company self-insures a significant amount of its product liability, workers’ compensation, medical, and other insurance. It also carries significant deductible amounts on various insurance policies.

The Company expects to realize its deferred tax assets through tax deductions against future taxable income.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities as of the balance sheet date and net sales and expenses recognized and incurred during the reporting period then ended. The Company bases estimates on prior experience, facts and circumstances, and other assumptions, including those reviewed with actuarial consultants and independent counsel, when applicable, that are believed to be reasonable. However, actual results may differ from these estimates.

The Company believes the determination of its product liability accrual is a critical accounting policy. The Company’s management reviews every lawsuit and claim and is in contact with independent and corporate counsel on an ongoing basis. The provision for product liability claims is based upon many factors, which vary for each case. These factors include the type of claim, nature and extent of injuries, historical settlement ranges, jurisdiction where filed, and advice of counsel. An accrual is established for each lawsuit and claim, when appropriate, based on the nature of each such lawsuit or claim.

Amounts are charged to product liability expense in the period in which the Company becomes aware that a claim or, in some instances a threat of a claim, has been made when potential losses or costs of defense are probable and can be reasonably estimated. Such amounts are determined based on the Company’s experience in defending similar claims. Occasionally, charges are made for claims made in prior periods because the cumulative actual costs incurred for that claim, or reasonably expected to be incurred in the future, exceed amounts already provided with respect to such claims. Likewise, credits may be taken if cumulative actual costs incurred for that claim, or reasonably expected to be incurred in the future, are less than amounts previously provided.

While it is not possible to forecast the outcome of litigation or the timing of related costs, in the opinion of management, after consultation with independent and corporate counsel, there is a remote likelihood that litigation, including punitive damage claims, will have a material adverse effect on the financial position of the Company, but such litigation may have a material impact on the Company’s financial results and cash flows for a particular period.

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The Company believes the valuation of its inventory and the related excess and obsolescence reserve is also a critical accounting policy. Inventories are carried at the lower of cost, principally determined by the last-in, first-out (LIFO) method, or market. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and the Company’s estimates of the prevailing costs of the many components of inventory existing at that time.

The Company determines its excess and obsolescence reserve by projecting the year in which inventory will be consumed into a finished product. Given ever-changing market conditions, customer preferences and the anticipated introduction of new products, projecting the future usage of inventory is subjective. As such, it does not seem prudent to carry inventory at full cost beyond what the Company projects to be needed during the next 36 months.

The methodologies applied for determining the estimates related to the product liability accrual, the LIFO reserve, and the excess and obsolescence reserve have not changed from the prior year.

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance for accelerated filing companies will be effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and all other entities should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022. The amendment should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Management does not anticipate that this adoption will have a significant impact on its consolidated financial position, results of operations, or cash flows. The adoption of the new guidance did not have a material impact to the Company.

Forward-Looking Statements and Projections

The Company may, from time to time, make forward-looking statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need for external financing for operations or capital expenditures, the results of pending litigation against the Company, the impact of future firearms control and environmental legislation 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.

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