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 three and nine months ended October 3, 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

Product Demand

The incoming order rate in the third quarter of 2009 declined significantly from recent prior quarters, but we estimate that the sell-through of our products from distributors to retailers only declined a modest amount. We believe that the reduction in the incoming order rate was due in part to our distributors reacting to the following factors:

· The large backlog of unshipped distributor orders (orders placed by distributors for the Company's products), which discouraged additional orders,

· Stronger inventories throughout the distribution channel,

· Continued reduction in the industry-wide surge in consumer demand that began in the fourth quarter of 2008, and

· Prolonged ammunition shortages and high ammunition prices at retail, which discouraged retail firearms sales.

The extraordinary retail demand that began in the fourth quarter of 2008 caused the distributors to place very large orders for our products, particularly during the first quarter of 2009 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, and during the third quarter of 2009 the distributors ordered substantially less of our products than they were selling through to retailers. We expect this trend to continue until the backlog of unshipped orders has been reduced to more traditional levels.

Therefore, the Company has temporarily placed less emphasis on incoming orders as a planning metric. 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 third quarter 2009 sell-through from distributors to retailers resulted in an inventory build at retail rather than sales from retailers to consumers (i.e., our sell-through estimate likely overstates the true market demand in the third quarter of 2009).

                            2009                             2008
                     Q3      Q2      Q1           Q4      Q3      Q2      Q1

Units Ordered (1)   80,000 204,700 501,000      270,400 125,700 120,300 260,100

Estimated Units    214,500 227,500 236,000      216,400 143,100 135,600 135.900
Sold from
Distributors to
Retailers (2)

Units on Backorder 240,700 412,300 458,900 175,900 115,300 137,700 157,100

Note 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.

Note 2: 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 from distributors to retail in the third quarter of 2009 decreased by approximately 6% from the second quarter of 2009. However, when compared to the third quarter of 2008, estimated sell-through from distributors to retailers of the Company's products increased approximately 50%. This year-over-year growth substantially exceeded the 11% growth in National Instant Criminal Background Check System (NICS*) background checks over the same period, suggesting the likelihood of some market share gain by the Company and some increase in inventory at the retailers. The total number of NICS background checks for the past seven quarters follows:

(Number of NICS* background checks in 000's)

                             2009                   2008
                        Q3    Q2    Q1      Q4    Q3    Q2    Q1

Total NICS* Background

* 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. NICS background checks are also performed for permit applications, permit renewals, and other administrative reasons.

Sixty percent of the $29.6 million year-over-year sales growth in the third quarter of 2009 was attributable to products introduced since January 2008.

Summary Unit Data

Firearms unit data for the last seven quarters are as follows:

                                2009                          2008
                         Q3      Q2      Q1        Q4      Q3      Q2      Q1

Units Ordered (3)       80,000 204,700 501,000   270,400 125,700 120,300 260,100

Units Produced         242,500 247,300 209,900   167,100 158,900 150,600 124,000

Units Shipped          237,400 246,200 213,700   208,100 146,000 136,700 135,700

Average Sales Price       $295    $286    $283      $275    $276    $270    $296

Units on Backorder (3) 240,700 412,300 458,900 175,900 115,300 137,700 157,100

Note 3: See description in Note 1 above for information relating to Q3 2009 order
cancelations.

While the distributor inventory of some of the Company's products may have reached normal stocking levels, distributor inventory of other products where demand continues to outstrip supply remains lower than normal. Inventory data for the trailing seven quarters follows:

                              2009                                    2008
                       Q3       Q2       Q1            Q4         Q3         Q2         Q1

Units - Company      15,100    9,600    8,800         12,400     52,600     40,200      24,900
Inventory

Units -
Distributor          76,800   53,900   35,200         57,500     65,800     62,900      61,800
Inventory (4)

Total inventory      91,900   63,500   44,000         69,900    118,400    103,100      86,700
(5)

Note 4: Distributor ending inventory as provided by the Company's independent
distributors. These numbers do not include goods-in-transit inventory that has been shipped from the Company but not yet received by the distributors.

Note 5: This total does not include inventory at retailers. The Company does not
have access to data on retailer inventories of the Company's products.

Orders Received and Ending Backlog

The gross value of orders received and ending backlog for the trailing seven
quarters are as follows (in millions except average sales price, including
Federal Excise Tax):

                           2009                           2008
                    Q3      Q2      Q1         Q4     Q3      Q2      Q1

Orders Received     $15.7   $81.8  $154.3     $86.1   $33.5   $37.0   $73.8
(6)

Average Sales
Price of Orders      $196    $400    $308      $287    $267    $275    $257
Received (6) (7)

Ending Backlog      $78.0  $138.0  $136.3     $47.8   $27.9   $33.7   $40.7
(7)

Average Sales
Price of Ending      $324    $335    $297      $269    $242    $245    $234
Backlog (6) (7)

Note 6: 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.

Note 7: 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 decrease in the average sales price of orders received in the third quarter of 2009 compared to the second quarter of 2009 is due to the net cancellation of 34,000 Mini-14 and Mini-Thirty rifles in the third quarter of 2009, as discussed in Note 1 above. In the second quarter of 2009, the average sales price of orders received was higher than usual due to the initial stocking orders received for the SR-556 rifle, which has a higher price relative to the other product lines. The SR-556 rifle was introduced in the second quarter of 2009 and shipments of the SR-556 began late in the second quarter of 2009. Few orders for the SR-556 were received in the third quarter of 2009, as a large backlog for this product remains from the orders received upon its introduction.

Production and Inventories

Total unit production in the third quarter of 2009 decreased slightly from the second quarter of 2009 due to a scheduled annual one-week shutdown of the Company's largest firearms plant and increased overall focus on better matching production rates to estimated retail demand by product. The Company plans to produce at rates moderately in excess of estimated retail demand for certain products to replenish finished goods safety stock at the Company.

The Company's finished goods inventory increased slightly during the third quarter of 2009. The Company anticipates that finished goods inventory could increase by as much as $15 million from the current level upon the attainment of desired levels of finished goods inventory.

Distributor inventory increased in the third quarter of 2009 and is now at a more historical aggregate level.

Sales

Consolidated net sales were $71.2 million for the three months ended October 3, 2009. This represents an increase of $29.4 million or 70.2% from consolidated net sales of $41.8 million in the comparable prior year period.

For the nine months ended October 3, 2009, consolidated net sales were $207.1 million, an increase of $84.1 million or 68.4% from sales of $123.0 million in the comparable 2008 period.

Firearms net sales were $70.0 million for the three months ended October 3, 2009. This represents an increase of $29.7 million or 73.6% from firearms net sales of $40.3 million in the comparable prior year period.

For the nine months ended October 3, 2009, firearms net sales were $203.6 million. This represents an increase of $86.4 million or 73.8% from firearms net sales of $117.2 million in the comparable 2008 period.

Firearms unit shipments increased 62.5% and 65.8% for the three and nine months ended October 3, 2009, respectively, compared to the comparable prior year periods due to increased shipments of pistols, rifles and revolvers. These increases are attributable to continued strong demand for most product lines and increased production of both new and mature products throughout the first nine months of 2009 compared to the prior year periods.

Casting net sales were $1.2 million for the three months ended October 3, 2009. This represents a decrease of $0.3 million or 21.9% from casting sales of $1.5 million in the comparable prior year period.

For the nine months ended October 3, 2009, casting net sales were $3.5 million. This represents a decrease of $2.3 million or 39.8% from casting sales of $5.8 million in the comparable prior year period.

Cost of Products Sold and Gross Margin

Consolidated cost of products sold was $49.4 million for the three months ended October 3, 2009. This represents an increase of $14.4 million or 41.3% from consolidated cost of products sold of $35.0 million in the comparable prior year period.

For the nine months ended October 3, 2009, consolidated cost of products sold was $140.8 million. This represents an increase of $43.8 million or 45.1% from consolidated cost of products sold of $97.0 million in the comparable prior year period.

Gross margin as a percent of sales was 30.6% and 32.0% for the three and nine months ended October 3, 2009. This represents an increase from the gross margin percentages of 16.4% and 21.2% in the comparable prior year periods as illustrated below (in thousands):

                                                      Three Months Ended
                                        October 3, 2009               September 27, 2008
Net sales                          $   71,186          100.0 %    $    41,822          100.0 %

Cost of products sold, before
LIFO, overhead and labor rate
adjustments to inventory,
product liability, and product
recall                                 48,904           68.8 %         30,372           72.6 %
LIFO (income) expense                  (1,502 )         (2.1 )%         1,577            3.8 %
Overhead rate adjustments to
inventory                                 972            1.3 %             48            0.1 %
Labor rate adjustments to
inventory                                 302            0.4 %            569            1.4 %
Product liability                         699            1.0 %            129            0.3 %
Product recall                             29              -            2,269            5.4 %
Total cost of products sold            49,404           69.4 %         34,964           83.6 %

Gross margin                       $   21,782           30.6 %    $     6,858           16.4 %



                                                       Nine Months Ended
                                        October 3, 2009               September 27, 2008

Net sales                          $  207,106          100.0 %    $   122,992          100.0 %

Cost of products sold, before
LIFO, overhead and labor rate
adjustments to inventory,
product liability, and product
recall                                137,831           66.6 %         91,995           74.8 %
LIFO (income) expense                  (2,680 )         (1.3 )%         3,807            3.1 %
Overhead rate adjustments to
inventory                               2,732            1.3 %         (1,479 )         (1.2 )%
Labor rate adjustments to
inventory                                 759            0.4 %         (1,311 )         (1.1 )%
Product liability                       1,447            0.7 %            496            0.4 %
Product recall                            677            0.3 %          3,477            2.8 %
Total cost of products sold           140,766           68.0 %         96,985           78.8 %

Gross margin                       $   66,340           32.0 %    $    26,007           21.2 %

Cost of products sold, before LIFO, overhead and labor rate adjustments to inventory, product liability, and product recall-During the three and nine months ended October 3, 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 3.8% and 8.2%, respectively, compared with the comparable 2008 periods.

This improvement was due to:
· Greater efficiency in direct labor,

· Savings in purchased materials, supplies and services,

· Greater efficiency in non-personnel, variable overhead spending, and

· The leveraging of fixed overhead expenses.

This improvement was partially offset by:
· Cost overruns related to the new SR-556,

· Underabsorption of fixed costs in investment castings,

· Change in firearms sales mix, and

· Increased new product development and process improvement engineering expenses.

LIFO-During the three and nine months ended October 3, 2009, gross inventories decreased by $0.9 million and $8.9 million, respectively, compared to increases in gross inventories of $0.4 million and $3.3 million in the comparable 2008 periods. As a result, in the three and nine months ended October 3, 2009 the Company recognized LIFO income resulting in decreased cost of products sold of $1.5 million and $2.7 million, respectively, compared to LIFO expense and increased cost of products sold of $1.6 million and $3.8 million in the comparable 2008 periods.

Overhead Rate Adjustments- The Company uses actual overhead expenses incurred as a percentage of sales value of production over a trailing six month period to absorb overhead expense into inventory. During the three and nine months ended October 3, 2009, the overhead rates used to absorb overhead expenses into inventory declined, resulting in decreases in inventory value of $1.0 million and $2.7 million, respectively. These decreases in inventory carrying values resulted in increases to cost of products sold. In the third quarter of 2008 the overhead rate used to absorb overhead expenses into inventory decreased slightly, resulting in a decrease in inventory value of $48,000 and a corresponding increase to cost of products sold. In the nine months ended September 27, 2008, the overhead rate used to absorb overhead into inventory increased, resulting in an increase in inventory value of $1.5 million, and a corresponding decrease to cost of products sold.

Labor Rate Adjustments- The Company uses actual direct labor expense incurred as a percentage of sales value of production over a trailing six month period to absorb direct labor expense into inventory. During the three and nine months ended October 3, 2009, the labor rates used to absorb incurred labor expenses into inventory declined, resulting in decreases in inventory value of $0.3 million and $0.8 million, respectively. These decreases in inventory carrying values resulted in increases to cost of products sold. In the third quarter of 2008, the standard labor rates used to absorb incurred labor expenses into inventory decreased, resulting in a decrease in inventory value of $0.6 million, and a corresponding increase to cost of products sold. In the nine months ended September 27, 2008, the standard labor rates used to absorb incurred labor expenses into inventory increased, resulting in an increase in inventory value of $1.3 million, and a corresponding decrease to cost of products sold.

Product Liability-Product liability expenses include the cost of outside legal fees, insurance, and other expenses incurred in the management and defense of product liability matters. During the three and nine months ended October 3, 2009, the Company incurred product liability expense of $0.7 million and $1.4 million, respectively. For the comparable 2008 periods, product liability expenses totaled $0.1 million and $0.5 million, respectively. See Note 9 to the notes to the financial statements "Contingent Liabilities" for further discussion of the Company's product liability.

Product Recalls-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 estimated cost of these safety retrofit programs of approximately $3.5 million was recorded in 2008. During the first quarter of 2009, it became apparent that the recalls were more successful than originally forecast and a greater quantity of affected pistols would be retrofitted than originally estimated. Therefore, an additional expense of $0.6 million was recognized in the first quarter of 2009. The quantity of pistols being returned to the Company for retrofitting has declined significantly since the first quarter of 2009. Therefore only modest retrofit expenses have been recorded in the second and third quarters of 2009.

Gross Margin-For the three and nine months ended October 3, 2009, gross margin was $21.8 million and $66.3 million or 30.6% and 32.0% of sales, respectively. This is an increase of $14.9 million and $40.3 million or 218% and 155% from the comparable prior year periods gross margin of $6.9 million and $26.0 million, or 16.4% and 21.2% of sales.

Selling, General and Administrative

Selling, general and administrative expenses were $9.7 million and $30.8 million, or 13.6% and 14.9% of sales, for the three and nine months ended October 3, 2009, respectively. This represents an increase of $3.2 million and $8.9 million from selling, general and administrative expenses of $6.5 million and $21.9 million, or 15.5% and 17.8% of sales, in the comparable prior year periods. The increase in expense reflects greater personnel-related expenses, increased sales promotion and advertising expenses, and increased shipping expenses.

Other Operating Expenses

In the three months ended October 3, 2009, the Company recognized an expense of $0.8 million related to the demolition of most of its 300,000 square foot Dorr Woolen Building which began in the third quarter of 2009. A portion of the building will remain and will be refurbished, and will continue to serve as the firearms warehouse in New Hampshire. The remaining cost of this demolition and refurbishment is expected to be approximately $1.5 million, and will be incurred over the next three quarters.

Other income

Other income was $0.1 million in both the three and nine months ended October 3, 2009 compared to income of $0.2 million and $0.6 million the three and nine months ended September 27, 2008.

Income Taxes and Net Income

The effective income tax rate in the three and nine months ended October 3, 2009 and September 27, 2008 was 38.0%.

As a result of the foregoing factors, consolidated net income was $7.1 million and $21.6 million for the three and nine months ended October 3, 2009, respectively. This represents an increase of $6.7 million and $18.7 million from consolidated net income of $0.4 million and $2.9 million in the comparable prior year periods.

Financial Condition

Liquidity

At the end of the third quarter of 2009, our cash, cash equivalents and short-term investments totaled $53.1 million. Our pre-LIFO working capital of $102.3 million, less the LIFO reserve of $41.3 million, resulted in working capital of $61.0 million and a current ratio of 2.8 to 1.

As the current surge in demand subsides, the Company expects to replenish its finished goods inventory. This planned replenishment to levels that will better serve our customers could increase the value of finished goods inventory by as much as $15 million from current depressed levels. The cash that will be used by this increase in finished goods inventory would be partially offset by a reduction in accounts receivable which would be expected during a period of reduced sales.

During the first quarter of 2009, the Company paid down the $1 million balance on its $25 million credit facility, in response to the relative improvement in the global financial and credit markets. The credit facility, which expires on December 13, 2009, remains unused and the Company has no debt.

Operations

Cash provided by operating activities was $38.7 million for the nine months ended October 3, 2009 compared to $0.6 million for the comparable prior year period. The increase in cash provided in 2009 compared to 2008 is principally attributable to the increased profitability in 2009, and decreased inventories in 2009 compared to increased inventories in 2008.

Third parties supply the Company with various raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. The Company believes that it has adequate quantities of raw materials in inventory to provide 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 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 for the nine months ended October 3, 2009 totaled $10.3 million. In 2009, the Company expects to spend approximately $13 million on capital expenditures to purchase tooling for new product introductions, to upgrade and modernize manufacturing equipment, and to increase capacity for certain products in strong demand. The Company finances, and intends to continue to finance, all of these activities with cash provided by operations and current cash and short-term investments.

Dividends of $4.0 million were paid during the nine months ended October 3, 2009.

On October 27, 2009, the Company declared a dividend of 9.6¢ per share to shareholders of record on November 13, 2009. The amount of this dividend was based on a percentage of operating profit after adjustment for certain items, . . .