10-K 1 d76554_10-k.htm ANNUAL REPORT


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 

 

(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, 2008

 

 

 

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: 033-74194-01

(REMINGTON LOGO)

REMINGTON ARMS COMPANY, INC.
(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

51-0350935

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

870 Remington Drive
P.O. Box 700
Madison, North Carolina 27025-0700
(Address of principal executive offices)
(Zip Code)

(336) 548-8700
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

          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 x          No o

          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 o          No x

          Note: Although the registrant is not subject to the filing requirements of Section 13 or 15(d), it has filed all Exchange Act reports that would be required to be so filed during the preceding 12 months.

          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 the 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer o

   Accelerated filer o

 

Non-accelerated filer x (Do not check if a smaller reporting company)

   Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
o No x

There are no shares of the issuer’s common equity held by non-affiliates. At March 27, 2009, the number of shares outstanding of the issuer’s common stock is as follows: 1,000 shares of Class A Common Stock, par value $.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE
None




REMINGTON ARMS COMPANY, INC.

FORM 10-K

December 31, 2008

INDEX

 

 

 

 

 

 

 

 

Page No.

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

 

 

 

 

 

 

 

PART I

 

 

1

 

ITEM 1. BUSINESS

 

 

1

 

ITEM 1A. RISK FACTORS

 

 

14

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

 

22

 

ITEM 2. PROPERTIES

 

 

23

 

ITEM 3. LEGAL PROCEEDINGS

 

 

24

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

27

 

 

 

 

 

PART II

 

 

28

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

 

28

 

ITEM 6. SELECTED FINANCIAL DATA

 

 

29

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

34

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

58

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

59

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

114

 

ITEM 9A(T). CONTROLS AND PROCEDURES

 

 

115

 

ITEM 9B. OTHER INFORMATION

 

 

116

 

 

 

 

 

PART III

 

 

117

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

 

117

 

ITEM 11. EXECUTIVE COMPENSATION

 

 

121

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

 

148

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

 

150

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

 

152

 

 

 

 

 

PART IV

 

 

153

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

 

153

 

 

 

 

 

SIGNATURES

 

 

154

 

 

 

 

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT

 

 

156

 

 

 

 

EXHIBIT INDEX

 

 

157




NOTE REGARDING FORWARD-LOOKING STATEMENTS

          This annual report on Form 10-K, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in the operations and financial results and the business and the products of the Company, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such forward-looking statements are not guarantees of future performance. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Information Concerning Forward-Looking Statements.”



PART I

Item 1. BUSINESS

References in this report to “the Company,” “we,” “us,” “our,” and words of similar import mean the collective reference to Remington Arms Company, Inc. (“Remington”), which includes the financial results of The Marlin Firearms Company (“Marlin”) and its subsidiary, H&R 1871, LLC (“H&R”) (since February 1, 2008), as well as the accounts of Remington’s other subsidiaries, RA Brands, L.L.C. (“RA Brands”) and Remington Steam, LLC (“Remington Steam”), Remington’s consolidated joint venture EOTAC, LLC (“EOTAC”) and Remington’s unconsolidated 27.1% membership interest in INTC USA, LLC (“INTC USA”) (collectively with Remington, the “Company”) unless the context otherwise requires. References in this report to “Holding” are to Remington’s parent, RACI Holding, Inc., and references to “FGI” are to Holding’s 100% stockholder, Freedom Group, Inc. (formerly known as American Heritage Arms, Inc.)

Company Overview

          Founded in 1816 and currently operating as a corporation, we design, manufacture and market a comprehensive line of primarily sporting goods products for the global hunting and shooting sports marketplace under the Remington® brand name. We also design, manufacture and market products with law enforcement, military, and government applications. Our 192-year history gives us a long-established reputation in the marketplace for our products. We believe that both Remington and Marlin are powerful brands in the broader U.S. sporting goods and outdoor recreation markets and that our products are recognized by sportsmen worldwide for their superior value, performance and durability.

          Our product lines consist primarily of firearms (shotguns and rifles) and ammunition, as well as hunting and gun care accessories, licensed products, clay targets, powder metal products and apparel.

          For the year ended December 31, 2008, we had consolidated net sales of $591.1 million and a net loss of $39.4 million.

          The accompanying audited consolidated financial statements of Remington include the accounts of its wholly owned subsidiaries, Marlin, H&R, RA Brands, Remington Steam, as well as its consolidated joint venture, EOTAC, and its unconsolidated membership interest in INTC USA. RA Brands primarily exists to own, protect and comply with the legal requirements applicable to our patents, trademarks, and copyrights (as discussed below), and Remington Steam primarily exists to accommodate changes to the Company’s long-term steam supply at its Ilion, New York facility. The accounts of Holding, the sole stockholder of Remington, and those of FGI, the sole stockholder of Holding, are not presented herein. Significant transactions between the Company, Holding and FGI and the related balances are reflected in the audited consolidated financial statements and related disclosures.

Recent Business Developments

Global Credit Crisis and Market Downturn

          In early 2008, as the United States economy began to soften and fuel and other commodity prices continued to rise, doubts were raised about the ability of borrowers to pay debts. Housing values began to fall and marginal (often sub-prime) loans began to default at historically high rates. Financial institutions responded by tightening their lending policies with respect to counterparties determined to have sub-prime mortgage risk. This tightening of institutional lending policies contributed to the failure of certain major financial institutions late in 2008. Continued failures, losses, and write-downs at other major financial institutions intensified concerns about credit and liquidity risks and have resulted in a sharp reduction in overall market liquidity and broad governmental intervention through early 2009. The global credit and macroeconomic conditions threaten the stability of the global marketplace and have adversely impacted consumer confidence and spending.

Acquisition of The Marlin Firearms Company

          On January 28, 2008, 100% of the shares of Marlin were purchased by Remington (the “Marlin Acquisition”). The Marlin Acquisition includes Marlin’s 100% ownership interest in H&R. We believe the Marlin Acquisition will strengthen our ability to grow our leadership position in shotguns and rifles in the United States,

1



further develop our market presence internationally and benefit from operational improvements and integrating certain manufacturing selling, marketing and administrative functions.

Announcement of Closure of Manufacturing Facility

          On April 7, 2008, Remington announced a strategic manufacturing consolidation decision that resulted in the closure of its manufacturing facility in Gardner, Massachusetts in October 2008. Remington notified affected employees of this decision on April 7, 2008. The consolidation of our manufacturing capabilities is expected to provide improved efficiencies that are anticipated to ultimately provide for better service to customers and quality of products to end users. In connection with the closing, management recorded a $1.2 million liability in the preliminary purchase price allocation. As of December 31, 2008, approximately $0.9 million of the $1.2 million liability has been spent. In addition to the $0.9 million, an additional $1.1 million has been spent on the transfer of equipment, planning and site preparation, as well as $1.7 million spent on purchases of new equipment as of December 31, 2008.

Consolidated Joint Venture

          On July 30, 2008, Remington entered into a joint venture agreement between Remington and certain other members to form the joint venture EOTAC. Remington contributed an initial investment of $0.5 million and subsequently contributed an additional investment of $0.2 million in 2008. In return, the other members contributed existing and future intellectual property, all leased real property, as well as machinery, equipment, tools and tangible personal property. Remington owns 61.8% of EOTAC and other members own 38.2%. EOTAC is a tactical and outdoor apparel business. We believe this joint venture allows us to gain access to both a high quality apparel line and a growing brand. As Remington is the primary beneficiary, EOTAC meets the consolidation criteria and is being accounted for under the rules of Accounting Research Bulletin No. 51, Consolidated Financial Statements (“ARB 51”).

Membership Interest Purchase and Investment Agreement

          On October 31, 2008, Remington entered into a membership interest purchase and investment agreement between Remington, International Non-Toxic Composites Corp., and INTC USA. Remington contributed an initial investment of approximately $0.8 million. Remington owns 27.1% of the issued and outstanding membership interests in INTC USA. INTC USA owns a majority interest in Springfield Munitions Company, LLC, which with Delta Frangible Ammunition, LLC owns intellectual property rights related to manufacturing rights for various shot, ammunition and other products. We believe this membership interest will allow INTC USA to acquire, construct and/or lease and thereafter equip and operate a manufacturing facility for the production of products for sale to Remington and others. Management has assessed the accounting treatment of INTC USA and accounts for its investment under the equity method of accounting as outlined in the provisions of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (“APB18”).

Increase of Management Depth

          Since the acquisition of RACI Holding, Inc., the sole stockholder of Remington, by Freedom Group, Inc. (the “FGI Acquisition”) in May 2007, Remington has employed a number of additional executives in an effort to increase our leadership position in the industry and add depth to the existing management team. Such positions include a Chief Operating Officer, a Chief Sales Officer, a Chief Information Officer, a Chief Supply Chain Officer, a Chief Marketing Officer, a Chief Technology officer and a General Counsel.

Financial Information about Segments and Geographic Areas

          In accordance with the provision of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), after consideration of both quantitative and qualitative factors, our operating segments form two reportable segments – Firearms and Ammunition operating segments — while the remaining operating segments are combined into our All Other reporting segment:

 

 

 

(1) Firearms, which designs, manufactures, imports and markets primarily sporting shotguns and rifles;

2



 

 

 

(2) Ammunition, which designs, manufactures and markets primarily sporting ammunition and ammunition reloading components; and

 

 

 

(3) All Other, which includes accessories, other gun-related products, licensed products, clay targets, powder metal products and apparel.

          The following table sets forth our net sales for each of our aggregated reporting segments for the periods shown:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

Predecessor

 

 

 

     

 

 

 

 

  June 1-
Dec. 31

 

Jan. 1-
May 31

     

 

 

 

2008

 

2007

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Firearms

 

$

295.2

 

$

138.7

 

$

80.5

 

$

223.4

 

Ammunition

 

 

275.9

 

 

169.3

 

 

78.9

 

 

204.9

 

All Other

 

 

20.0

 

 

14.0

 

 

7.6

 

 

17.7

 

 

 

   

 

   

 

   

 

   

 

Total

 

$

591.1

 

$

322.0

 

$

167.0

 

$

446.0

 

 

 

   

 

   

 

   

 

   

 

          See Note 21 to our audited consolidated financial statements for the year ended December 31, 2008 appearing in “Item 8 – Financial Statements and Supplementary Data” in this annual report on Form 10-K. There are no significant assets owned by the Company outside of the United States.

NARRATIVE DESCRIPTION OF BUSINESS BY SEGMENT

     Firearms

          Products

          Our firearms product offerings include a comprehensive line of sporting shotguns and rifles, as well as firearms for the government, military, and law enforcement markets, marketed predominantly under the Remington, Marlin, H&R, New England Firearms, L.C. Smith and Parker brand names. Our goal has been to market a broad assortment of general-purpose firearms together with more specialized products that embody emphasis on value, performance and design.

          Our most popular Remington shotguns are the Model 870 pump-action shotgun, and the Model 1100 and Model 11-87 auto-loading shotguns. Remington shotguns are offered in versions that are marketed to both novices and experienced gun owners. Specialty shotguns focus on the deer, turkey and other specialized hunting markets, recreational and competitive clay target shooting, and various law enforcement and military applications. We also offer over/under, side-by-side, and single shot shotguns. Retail list prices for our most popular shotguns range up to $1,200.

          Our most popular Remington rifles are the Model 700, Model Seven, and Model 770 centerfire rifles and the Model 597 rimfire rifles. To appeal to a broad range of gun owners, we manufacture these rifles in a wide variety of chamberings, configurations and finishes. Retail list prices for our most popular rifles range up to $1,000. In addition, Remington offers a series of products based upon the popular AR styled rifle configured primarily for hunting use. Known as the R-15™ and R-25™, these rifles offer today’s sportsman the most modern choice in centerfire rifle technology.

          The Marlin Firearms Company is perhaps best known for legendary lever-action rifles. The most popular lever action offerings are the Model 336, Model 1895, Model 1894 and the newer XLR configurations designed for high performance and durability. Retail list prices for most Marlin lever-action rifles range up to $1,000. In addition to lever-action rifles, Marlin is also known for its rimfire rifle offerings. The Marlin rimfire line is best known for the legendary Model 60, as well as the Model 795, Model 925 and Model 917. Retail prices for Marlin rimfire rifles range up to $400. Marlin entered into the bolt-action centerfire rifle business in 2007 with the competitively priced X7 series rifle. Retail list prices for X7 series rifles range up to $500.

          Harrington & Richardson (H&R) is best known for competitively priced break-action single shot shotguns and rifles. Popular models include the Pardner® line of single shot shotguns as well as the Handi-Rifle® single shot rifle and Ultra Slug Hunter rifled slug shotguns. New England Firearms (NEF) offers opening price point products,

3



primarily imported in nature in the form of the Pardner Pump® pump-action shotgun and the Excel Auto line of autoloading shotguns.

          Product Introductions

          We focus our product development efforts on introducing new products that satisfy the need for specialized, high-performance firearms. In 2008, Remington announced the R-15 Modular Repeating Rifle, a version of the popular AR-15 style rifle geared primarily toward the hunting market. In addition, a uniquely featured new product was presented in the Model 700 VTR (Varmint Target Rifle) with a new triangular barrel contour and integral muzzle brake as well as a stainless steel version of the Model 770. Product introductions from Remington in 2009 include the new Model 887™ Nitromag™, an innovative new pump-action shotgun fully encased in an over-molded shell of rugged polymer, the Model 700™ XHR™ with its hunting weight, triangular profiled barrel and the Model R-15™ rifle chambered for the new 30 Remington AR hunting cartridge. Additionally, Remington upgraded the X-Mark Pro™ trigger for the Model 700 series with external trigger pull weight adjustment capability. New 2009 introductions from Marlin include the 338 MXLR and 338 MX rifles chambered for the new 338 Marlin Express cartridge, short-action chamberings in the X7 series rifles as well as a big loop lever version of the 1895 series rifle.

          Seasonality

          We sell a broad range of firearms products. The majority of our firearms products are manufactured for hunting, target, and plinking use, while other models are intended for government, military, and law enforcement applications. As a result of the core use of our products occurring during the fall hunting season (September-December), the majority of our sales are seasonal and concentrated toward the fall hunting season. While the Company has historically followed the industry practice of selling products pursuant to a “dating” plan, allowing the customer to buy the products commencing at the beginning of our dating plan periods and pay for them on extended terms, the Company has now commenced to shorten the duration of these terms in order to increase cash flow and working capital.

          As a result of the seasonal nature of our sales, our historical working capital financing needs generally have exceeded cash provided by operations during certain parts of the year. Our recent efforts to shorten terms and reduce dating plan billing practices have moderated this seasonal aspect of working capital financing needs as compared to prior years. However, our working capital financing needs still tend to be higher during the spring and summer months, decreasing during the fall and reaching their lowest points during the winter.

          Competition

          Product image, performance, quality and innovation are the primary competitive factors in the firearms industry, with price and customer service also being important. Our shotgun products compete with products offered by O. F. Mossberg & Sons, Inc., Winchester firearms, Browning, and Beretta. Our rifles compete with products offered by Sturm, Ruger & Co., Inc., Savage Arms, Inc. and Browning. We believe that we compete effectively with all of our present competitors. However, there can be no assurance that we will continue to do so, and our ability to compete could be adversely affected by our leveraged condition. In 2007, Smith & Wesson, through its acquisition of Thompson/Center Arms, Inc. became a competitor with their entry into the long gun market.

          Manufacturing

          Our facility in Ilion, New York manufactures shotguns, rifles, powder metal parts, extra barrels, and gun parts, and also houses our factory repair services and custom gun shop. Our facility in Mayfield, Kentucky manufactures rimfire and centerfire rifles. Our facility in North Haven, Connecticut primarily manufactures rifles. To manufacture our various firearm models, we utilize a combination of parts manufactured from raw materials at the Ilion, Mayfield, and North Haven facilities and components purchased from independent manufacturers. Quality control processes are employed throughout the production process, utilizing specifically tailored testing procedures and analyses.

          Supply of Raw Materials

          To manufacture our various products, we utilize numerous raw materials, including steel, wood and plastics, as well as parts purchased from independent manufacturers. For a number of our raw materials, we rely on

4



a limited number of suppliers. For example, a major portion of our requirements for shotgun barrel blanks and wood stocks are each currently being met by a limited number of vendors. In 2006, we began importing sourced products from a few foreign vendors, which continued in 2007 and 2008. See “Risk Factors” for additional information on our sole source supplier agreement and risks associated with this product line.

          The Company has written purchase agreements with the majority of our suppliers, some of which contain minimum purchase requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Commercial Commitments.” Any disruption in our relationships with any of these vendors or reductions in the production of material supplied could, in each case, adversely affect our ability to obtain an adequate supply of material and could impose additional operational costs associated with sourcing raw materials from new suppliers. The Company has had long-term relationships with each of these vendors and believes that such relationships are good, and does not currently anticipate any material shortages or disruptions in supply from these vendors. Although alternative sources exist from which we could obtain such raw materials, we do not currently have significant supply relationships with any of these alternative sources and cannot estimate with any certainty the length of time that would be required to establish such a supply relationship, or the sufficiency of the quantity or quality of materials that could be so obtained.

          The price and availability of production materials are affected by a wide variety of interrelated economic and other factors, including alternative uses of materials and their components, changes in production capacity, energy prices, commodity prices, and governmental regulations. Specifically, our manufacturing sites have experienced cost increases related to metals and other raw material purchases and energy prices. We believe some of these increases were directly related to supply shortages due to foreign market demand for domestic scrap and increases in energy costs. Industry competition and the timing of price increases by suppliers limits, to some extent, our ability and the ability of other industry participants to pass raw material cost increases on to customers in a timely manner. The Company has experienced favorable variances in utility costs and expects to continue to see the leveling continue in the foreseeable future for energy costs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Instruments” and “Quantitative and Qualitative Disclosures about Market Risk”.

Ammunition

          Products

          Our ammunition product offerings consist of a comprehensive line of sporting ammunition and ammunition reloading components, along with ammunition for the government, military, and law enforcement markets, marketed predominantly under the Remington brand name, as well as the UMC® brand name.

          We market an extensive line of products that range from high volume, promotionally priced, ammunition products to premium, high performance products that meet the needs of the most discriminating hunters and shooters. Those products include, among other things, shotgun shells, centerfire ammunition for use in rifles and handguns, and .22 caliber rimfire ammunition. We also market duty and frangible training ammunition specifically tailored to meet the requirements of law enforcement and military customers. We produce and market sporting ammunition components used by smaller ammunition manufacturers, as well as by individual consumers engaged in the practice of reloading centerfire cases or shotgun shells.

          Our most popular ammunition products include Core-Lokt® centerfire rifle ammunition, the brand share leader in the category, Premier STS and Nitro 27 target loads, which management believes are widely viewed as the performance leader in trap, skeet and sporting clays shooting by virtue of their combination of superior first firing performance and reloadability. Recent ammunition product introductions have focused on developing exclusive or proprietary technology with application to performance oriented hunting segments and special application law enforcement needs.

     Product Introductions

          We focus our product development efforts on introducing new products that satisfy the need for specialized, high-performance ammunition.

          In 2008, Remington introduced the AccuTip™ high performance deer slug, expanded our Power Level ammunition concept to include the 7mm Remington Ultra Mag™ cartridge and grew the Managed Recoil™ line of

5



rifle ammunition to include new offerings in the 300 Remington Ultra Mag, 7mm-08 Remington and 260 Remington. Remington also responded to the needs of law enforcement with the introduction of the Disintegrator® CTF frangible training line of ammunition in key pistol cartridges. Finally, Remington expanded it’s boxed Component Bullet offering to include both Core-Lokt® and AccuTip™ bullets in popular rifle calibers.

          For 2009, we are expanding our successful AccuTip slug offering to include two 20 gauge loads in 2-3/4” and 3”. To strengthen our product position in lead-free hunting areas, Remington is introducing a variety of new products including Steel Game and Target shotshell loads in 12 and 20 gauge, Disintegrator® Varmint Ammunition featuring Jacketed Iron Core HP bullets in 2 key centerfire calibers and a new line of big game centerfire hunting ammunition, Premier® Copper Solid®, in six key calibers. The 2009 introduction of a brand new cartridge, the 30 Remington AR, a co-development project with the Remington and DPMS firearms businesses, is designed to cement Remington’s leadership in the modular repeating firearm hunting segment. The 30 Remington AR is the first 30 caliber cartridge providing deer-sized big game hunting performance in a lightweight R-15 firearms platform.

          Competition

          Price, service, quality and product innovation are the primary competitive factors in the ammunition industry. In the ammunition market, we compete with the Winchester division of Olin Corporation, and the Federal Cartridge Co. and CCI units of Alliant Techsystems, Inc. Additionally, some imported ammunition brands compete in the domestic market, focusing primarily on price to gain and maintain access and drive sales. We believe that we compete effectively with all of our present competitors. However, there can be no assurance that we will continue to do so, and our ability to compete could be adversely affected by our leveraged condition.

          Seasonality

          We produce and market a broad range of ammunition products. The majority of our ammunition products are manufactured for hunting use. Sales of some of our products occur outside the core fall hunting season (September through December) and consist of several types of ammunition that are intended for target shooting. In addition, these non-seasonal products include certain types of ammunition, primarily for pistol and revolver use, as well as ammunition with government, military, and law enforcement applications. The majority of our ammunition products, however, are manufactured for hunting use. As a result, with the majority of the sales of our products being seasonal and concentrated toward the fall hunting season, we have historically followed the industry practice of selling products pursuant to a “dating” plan, allowing the customer to buy the products commencing at the beginning of our dating plan periods and pay for them on extended terms. We have shortened the duration of these terms in order to increase cash flow and working capital.

          As a result of the seasonal nature of our sales, our historical working capital financing needs generally have exceeded cash provided by operations during certain parts of the year. Our recent efforts to shorten terms and reduce dating plan billing practices have moderated this seasonal aspect of working capital financing needs as compared to prior years. However, our working capital financing needs still tend to be higher during the spring and summer months, decreasing during the fall and reaching their lowest points during the winter.

          Manufacturing

          Our facility in Lonoke, Arkansas manufactures ammunition and ammunition components. Primer mixture manufactured on site is combined with parts and raw materials to produce ammunition. Some parts are manufactured on site, while other components are purchased from independent manufacturers. Throughout the various processes, our technicians continuously monitor and test the velocity, pressure and accuracy levels of the ammunition.

          Supply of Raw Materials

          To manufacture our various products, we utilize numerous raw materials, including steel, lead, brass, powder, and plastics. For a number of our raw materials, we rely on a limited number of suppliers. For example, our brass strip and lead requirements are being serviced primarily by a few vendors and our requirements for smokeless powder are primarily met by three suppliers, which are the only sources of smokeless powder in the United States and Canada.

          We have written purchase agreements with the majority of our suppliers. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual

6



Obligations and Commercial Commitments”. Any disruption in our relationships with any of these vendors or reductions in the production of the material supplied could, in each case, adversely affect our ability to obtain an adequate supply of the material and could impose additional operational costs associated with sourcing raw materials from new suppliers. We have had long-term relationships with each of these vendors and believe such relationships are good, and do not currently anticipate any material shortages or disruptions in supply from these vendors. Although alternative sources exist from which we could obtain such raw materials, we do not currently have significant supply relationships with any of these alternative sources and cannot estimate with any certainty the length of time that would be required to establish such a supply relationship, or the sufficiency of the quantity or quality of materials that could be so obtained.

          The price and availability of production materials are affected by a wide variety of interrelated economic and other factors, including alternative uses of materials and their components, changes in production capacity, energy prices, commodity prices, and governmental regulations. Specifically, in 2006 and 2007 our manufacturing site experienced cost increases related to purchases of base metals related to our business, increased processing charges and increased energy costs. These increases were directly related to supply shortages caused by an increase in foreign market demand for base metals and energy. Industry competition and the timing of price increases by suppliers’ limits to some extent our ability and the ability of other industry participants to pass these types of cost increases on to customers. We generally use commodity options contracts to hedge against the risk of increased prices for certain raw materials. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financial Instruments”.

All Other Product Lines

          Accessories. We market hunting and shooting accessories (primarily gun parts, gun care and cleaning products and folding and collectible knives). These items are primarily purchased from third parties.

          Licensing Income. We have licensed the Remington mark to certain third parties that manufacture and market sporting and outdoor products that complement our product line. Currently, the Remington mark is licensed for use on, among other things, automobiles, sporting and outdoor apparel, caps, gun cases and slings, tree stands, wildlife feeders, sporting dog equipment, air guns, game decoys & calls, hunting and shooting safety and security products, gun safes, and various other nostalgia/novelty goods. We strive to ensure that the quality, image and appeal of these licensed products are consistent with the high-quality image of our core products. These licenses generally grant an exclusive right to sell a specific product category, with initial terms of various years and various renewals based on performance. We believe that these licenses increase the market recognition of the Remington trademark and enhance our ability to market core products, and that licensing facilitates new cross-marketing promotional opportunities and generates income. Some of our licensing efforts are carried out under terms established in the Trademark Settlement Agreement, dated December 5, 1986, between us and Remington Products Company, L.L.C. (“Remington Products”) (the “Trademark Settlement Agreement”), described below in “Other Corporate Information—Patents, Trademarks, and Copyrights”.

          Powder Metal Products. We market commercial powder metal parts primarily for the automotive, sporting goods, office equipment, and hardware industries. These items are manufactured at our Ilion, New York facility.

          Clay Targets. We produce a complete line of clay targets for use in trap, skeet and sporting clays shooting activities, marketed under the STS brand name. Targets are manufactured from a mixture of limestone and petroleum pitch. Our clay targets are manufactured at one facility located in Findlay, Ohio.

          Outdoor Tactical Clothing. We market tactical and outdoor apparel through our joint venture, EOTAC, which we entered into on July 24, 2008.

7



OTHER CORPORATE INFORMATION

          Backlog Information

          As of February 28, 2009, the backlog of unfilled orders total was approximately $296.2 million, as compared to $115.5 million (which excluded unfilled orders resulting from the Marlin Acquisition) as of February 29, 2008. We are setting factory capacities at levels to target fulfillment of these orders during 2009.. The increase in the backlog at February 28, 2009 compared to the prior year is primarily due to the inclusion of the Marlin backlog as a result of the Marlin Acquisition, increased demand as a result of the uncertainty related to firearms and ammunition political legislation, and to a lesser degree development of the tactical business.

          Service and Warranty

          We support service and repair facilities for all of our firearms products in order to meet the service needs of our distributors, customers and consumers nationwide. New Remington and H&R brand firearms products manufactured by the Company in North America are warranted to the original purchaser to be free from defects in material and workmanship for a period of two years commencing with the registered date of purchase by the end customer. New Marlin brand firearms products manufactured by the Company in North America are warranted to the original purchaser to be free from defects in material and workmanship for a period of five years commencing with the registered date of purchase by the end customer. Import products are warranted by our vendors for a period of one year commencing with the registered date of purchase by the end customer. We also provide limited warranties for our ammunition products. Warranty expense was $3.3 million, $2.4 million, and $2.7 million in 2008, 2007, and 2006, respectively.

          Customer Concentration

          Approximately 18.1% of our total 2008 sales consisted of sales made to one customer; Wal-Mart. National accounts generally provide convenient access for hunting and shooting consumers to our products but carry a more limited array of products and are more seasonal in sales. Our sales to Wal-Mart are generally not governed by written contracts. Although we believe our relationship with Wal-Mart is good, the loss of this customer or a substantial reduction in sales to this customer could adversely affect our financial condition, results of operations or cash flows. No other single customer comprises more than 10% of total sales.

          No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of a governmental purchaser.

          Foreign sales accounted for approximately 13% in 2008, 12% in 2007, and 6% in 2006 of our total net sales. Our sales personnel and manufacturer’s sales representatives market to foreign distributors generally on a nonexclusive basis and for a one-year term.

          Marketing and Distribution

          Our products are distributed throughout the United States and in approximately 64 other countries (including Canada and various countries throughout Europe and Asia). In the United States, our products are distributed primarily through a network of wholesalers and retailers who purchase the product directly from us for resale to gun dealers and end users, respectively. The end users include sportsmen, hunters, target shooters, gun collectors, and members of law enforcement and other government organizations.

          Our products are marketed and sold via both direct sales representatives and manufacturer’s sales representatives. Both groups market and sell principally to wholesalers, dealers and regional chains. Our direct sales representatives market and sell only Remington, Marlin & H&R firearms, as well as Remington ammunition and accessory products while our manufacturer’s sales representatives market and sell other product lines as well. Our manufacturer’s sales representatives are prohibited from selling competing goods from other manufacturers and are paid variable commissions based on the type of products that are sold. The customers to which our sales representatives market and sell our products are authorized to carry specified types of Remington, Marlin, H&R and L.C. Smith products for a non-exclusive one-year term, though not all carry the full range of products. These customers generally carry broader lines of merchandise than do the mass merchants and are less seasonal in sales.

8



          Our direct sales force services four distribution channels: distributors, chains (regional and national), direct dealers and indirect dealers.

          Patents, Trademarks and Copyrights

          Our operations are not dependent upon any single trademark other than the Remington word mark and the Remington logo mark. In addition, as a result of the Marlin Acquisition on January 28, 2008, we now own the Marlin, H&R, L.C. Smith, and New England Firearms trade names and trademarks. Some of the other trademarks that we use, however, are nonetheless identified with and important to the sale of our products. Generally, registered trademarks have perpetual life, provided that they are renewed on a timely basis and continue to be properly used as trademarks. Our business is not dependent to a material degree on patents, copyrights, or trade secrets. We do not believe that the expiration of any of our patents will have a material adverse effect on our financial condition or our results of operations. We likewise do not believe that any of our licenses of intellectual property to third parties are material to our business, taken as a whole.

          In June 2000, we formed RA Brands, a Delaware limited liability company and wholly-owned subsidiary of Remington to which Remington transferred ownership of all of its patents, trademarks and copyrights. RA Brands owns all of the above-referenced trademarks and licenses them to Remington at an arm’s length royalty rate. We believe that we have adequate policies and procedures in place to protect our intellectual property.

          While we own the Remington marks (and registrations thereof) for use in our firearms and ammunition product lines and certain related products associated with hunting, wildlife and the outdoors, Spectrum Brands, Inc. (formerly Rayovac Corporation), with its September 2003 purchase of Remington Products Co. LLC, and DESA, LLC, all unrelated companies, claims rights to the Remington mark with respect to certain other product areas, particularly personal care products (including electric razors) and lawn and garden products. Spectrum Brands, Inc. filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code on February 3, 2009. DHP Holding II, the parent company of DESA, LLC filed for Chapter 11 bankruptcy on December 29, 2008.

          Pursuant to a Trademark Settlement Agreement reached with Remington Products Co. LLC in 1986, we agreed as follows:

 

 

 

 

Remington Licensing Corporation, a Delaware corporation owned equally by us and Remington Products, owns the Remington marks in the United States with respect to products of mutual interest to us and to Remington Products.

 

 

 

 

Remington Licensing Corporation licenses the Remington marks on a royalty-free basis to us and Remington Products for products in our and their respective non-core markets.

 

 

 

 

We are restricted in our ability to expand our use of the Remington mark beyond what has been detailed in the Trademark Settlement Agreement, as is Remington Products.

 

 

 

 

If certain bankruptcy or insolvency-related events occur with respect to either us or Remington Products, the bankrupt or insolvent party may be contractually required to sell its interest in Remington Licensing Corporation to the other party at book value or fair market value, depending on the circumstances.

          Research and Development

          We maintain an ongoing research and development program, and employ approximately 30 individuals to work in such capacity at our Elizabethtown, Kentucky facility as of February 28, 2009. New products and improvements to existing products are developed based upon the perceived needs and demands of consumers, as well as in response to the market by our competitors. Our research and development program involves an in-house team of engineers and technicians working with operations personnel using tools such as computer-assisted design. Research and plant technical staff then collaborate to produce an experimental prototype, ensuring that products and manufacturing processes are concurrently designed. Following a successful prototype, a pilot run is commenced to ensure that plant personnel and equipment can manufacture the product efficiently. We continue to introduce new products employing innovations in design, manufacturing and safety in both firearms and ammunition, as outlined in the “Product Introductions” sections above.

          Research and development expenditures for our continuing operations for the year ended December 31, 2008 amounted to approximately $7.1 million, approximately $6.3 million in 2007 and approximately $6.4 million in 2006.

9



          Product Liability

          For information concerning product liability cases and claims involving us, see Item 3, “Legal Proceedings”. We entered into an Asset Purchase Agreement (the “Purchase Agreement”) with E.I. DuPont Nemours & Company (“DuPont”) and its affiliates (collectively, the “1993 Sellers”) in 1993 (the “Asset Purchase”). Because our assumption of financial responsibility for certain product liability cases and claims involving pre-Asset Purchase occurrences was limited to an amount that has now been fully paid, with the 1993 Sellers retaining liability in excess of that amount and indemnifying us in respect thereof, and because of the passage of time, we believe that product liability cases and claims involving occurrences arising prior to the Asset Purchase are not likely to have a material adverse effect upon our financial condition, results of operations, or cash flows. See “Business—Certain Indemnities”.

          While it is difficult to forecast the outcome of litigation, we do not believe, in light of relevant circumstances (including the current availability of insurance for personal injury and property damage with respect to cases and claims involving occurrences arising after the Asset Purchase, our accruals for the uninsured costs of such cases and claims and the 1993 Sellers’ agreement to bear partial responsibility for certain post-Asset Purchase shotgun-related product liability costs, as well as the type of firearms products we make), that the outcome of all pending product liability cases and claims will be likely to have a material adverse effect upon our financial condition, results of operations, or cash flows. However, in part because of the uncertainty as to the nature and extent of manufacturer responsibility for product liability allegations, especially as to firearms, as well as the potential nature of firearms-related injuries, there can be no assurance that our resources will be adequate to cover both pending and future product liability occurrences, cases or claims, in the aggregate, or that such a material adverse effect will not result therefrom. Because of the nature of our products, we anticipate that we will continue to be involved in product liability cases and claims in the future.

          Since December 1, 1993, we have maintained insurance coverage for product liability claims for personal injury or property damage relating to occurrences after the 1993 asset purchase, subject to certain self-insured retentions on a per-occurrence basis. The current insurance policy extends through November 30, 2009. Certain of our current excess insurance coverage expressly excludes actions brought by municipalities as described in “Legal Proceedings”. We paid $2.5 million, $1.4 million, and $3.2 million in legal fees and settlements in connection with product liability cases and claims in the years ended December 31, 2008, 2007 and 2006, respectively, excluding insurance costs. At December 31, 2008, our accrual for product liability cases and claims was $13.4 million. The amount of our accrual for product liability cases and claims is based upon estimates developed as follows. We establish reserves for anticipated defense and disposition costs to us of those pending cases and claims for which we are financially responsible. Based on those estimates and an actuarial analysis of actual defense and disposition costs incurred by us with respect to product liability cases and claims in recent years, we determine the estimated defense and disposition costs for unasserted product liability cases and claims. We combine the estimated defense and disposition costs for both pending and unasserted cases and claims to determine the amount of our accrual for product liability cases and claims. It is reasonably possible that future claims experience could result in further increases or decreases in the reporting period in which such information becomes available. We believe that our accruals for losses relating to such cases and claims are adequate. Our accruals for losses relating to product liability cases and claims include accruals for all probable losses the amount of which can be reasonably estimated. Based on the relevant circumstances (including the current availability of insurance for personal injury and property damage with respect to cases and claims involving occurrences arising after the Asset Purchase, our accruals for the uninsured costs of such cases and claims and the 1993 Sellers’ agreement to be responsible for a portion of certain post-Asset Purchase shotgun-related product liability costs, as well as the type of firearms products that we make), we do not believe with respect to product liability cases and claims that any probable loss exceeding amounts already recognized through our accruals has been incurred.

          Because our assumption of financial responsibility for certain product liability cases and claims involving pre-Asset Purchase occurrences was limited to an amount that has now been fully paid, with the 1993 Sellers retaining liability in excess of that amount and indemnifying us in respect of such liabilities, and because of our accruals with respect to such cases and claims, we believe that product liability cases and claims involving occurrences arising prior to the Asset Purchase are not likely to have a material adverse effect upon our financial condition, results of operations, or cash flows. Moreover, although it is difficult to forecast the outcome of litigation, we do not believe, in light of relevant circumstances (including the current availability of insurance for personal injury and property damage with respect to cases and claims involving occurrences arising after the Asset Purchase, our accruals for the uninsured costs of such cases and claims and the 1993 Sellers’ agreement to be responsible for a portion of certain post-Asset Purchase shotgun-related product liability costs, as well as the type of firearms products that we make),

10



that the outcome of all pending post-Asset Purchase product liability cases and claims will be likely to have a material adverse effect upon our financial condition, results of operations, or cash flows. Nonetheless, in part because the nature and extent of liability based on the manufacture and/or sale of allegedly defective products (particularly as to firearms and ammunition) is uncertain, there can be no assurance that our resources will be adequate to cover pending and future product liability occurrences, cases or claims, in the aggregate, or that a material adverse effect upon our financial condition, results of operations, or cash flows will not result therefrom. Because of the nature of our products, we anticipate that we will continue to be involved in product liability litigation in the future. Because of the potential nature of injuries relating to firearms and ammunition, certain public perceptions of our products, and recent efforts to expand liability of manufacturers of firearms and ammunition, product liability cases and claims, and insurance costs associated with such cases and claims, may cause us to incur significant costs.

     Regulation

          The manufacture, sale and purchase of firearms are subject to extensive federal, state and local governmental regulation. The primary federal laws are the National Firearms Act of 1934 (“NFA”), the Gun Control Act of 1968 (“GCA”) and the Arms Export Control Act of 1976 (“AECA”), which have been amended from time to time. The NFA severely restricts the private ownership of those firearms defined in that regulation, including fully automatic weapons. We do manufacture limited NFA products, none of which are fully automatic weapons, primarily for official end users. The GCA places certain restrictions on the interstate sale of firearms, among other things. The AECA requires approved licenses to be in place prior to importing or exporting certain firearms, ammunition and explosives. We cannot guarantee that the administrative branches responsible for approving those licenses will do so in all cases. We possess valid federal licenses and registrations for all of our owned and leased sites to manufacture and/or sell firearms and ammunition.

          In September 2004, the United States Congress declined to renew the Federal Assault Weapons Ban of 1994 which generally prohibited the manufacture of certain firearms defined under that statute as “assault weapons” as well as the sale or possession of “assault weapons” except for those that, prior to the law’s enactment, were legally in the owner’s possession. Various states and local jurisdictions have adopted their own version of that former federal law and some laws and regulations at the state and local levels do apply to certain Remington sporting firearms products. We cannot guarantee that an “assault weapons” ban similar to the Federal Assault Weapons Ban of 1994, or version thereof, will not be re-enacted.

          Bills have been introduced in Congress to establish, and to consider the feasibility of establishing, a nationwide database recording so-called “ballistic images” of ammunition fired from new guns. Should such a mandatory database be established, the cost to Remington and its customers could be significant, depending on the type of firearms and ballistic information included in the database. To date, only two states have established such registries, and neither state includes such “imaging” data from long guns, although there can be no assurance that these (or other states) will not require the inclusion of such imaging in the future. Proposed legislation in at least one other state would be applicable to Remington rifles, and would call for “imaging” of both cartridges and projectiles. In addition, bills have been introduced in Congress in the past several years that would affect the manufacture and sale of handgun ammunition, including bills to regulate the manufacture, importation and sale of any projectile that is capable of penetrating body armor, to impose a tax and import controls on bullets designed to penetrate bullet-proof vests, to prohibit the manufacture, transfer or importation of .25 caliber, .32 caliber and 9mm handgun ammunition, to increase the tax on handgun ammunition, to impose a special occupational tax and registration requirements on manufacturers of handgun ammunition, and to dramatically increase the tax on certain handgun ammunition, such as 9mm, .25 caliber, and .32 caliber bullets. Some of these bills would apply to ammunition of the kind we produce, and accordingly, if enacted, could have a material adverse effect on our business.

          In addition to federal requirements, state and local laws and regulations may place additional restrictions or prohibitions on gun ownership and transfer. These vary significantly from jurisdiction to jurisdiction. At least one jurisdiction bans the possession of a firearm altogether. Some states or other governmental entities have recently enacted, and others are considering, legislation restricting or prohibiting the ownership, use or sale of certain categories of firearms and/or ammunition. Although numerous jurisdictions presently have mandatory waiting periods for the sale of handguns (and some for the sale of long guns as well), there are currently few restrictive state or municipal regulations applicable to handgun ammunition. Remington firearms are covered under several recently enacted state regulations requiring guns to be sold with internal or external locking mechanisms. Some states are considering mandating certain design features on safety grounds, most of which would be applicable only to handguns. We believe that hunter safety issues may affect sales of firearms, ammunition and other shooting-related products.

11



          Remington is no longer a defendant in any lawsuits brought by municipalities against participants in the firearms industry. In addition, legislation has been enacted in approximately 34 states precluding such actions. Similar federal legislation, entitled “The Protection of Lawful Commerce in Arms Act” was signed into law by President Bush on October 26, 2005, after being passed by the U.S. Senate in August 2005 and by the House of Representatives in October 2005, both by two-to-one margins. However, the applicability of the law to various types of governmental and private lawsuits has been challenged.

          We believe that existing federal and state regulation regarding firearms and ammunition has not had a material adverse effect on our sales of these products to date. However, there can be no assurance that federal, state, local or foreign regulation of firearms and/or ammunition will not become more restrictive in the future and that any such development would not have a material adverse effect on our business either directly or by placing additional burdens on those who distribute and sell our products or those consumers who purchase our products.

          Environmental Matters

          Our operations are subject to a variety of federal, state and local environmental laws and regulations which govern, among other things, the discharge of hazardous materials into the air and water, handling, treatment, storage and disposal of such materials, as well as remediation of contaminated soil and groundwater. We have in place programs that monitor compliance with these requirements and believe our operations are in material compliance with them. In the normal course of our manufacturing operations, we are subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions and water discharges into the environment. We believe that we are in compliance with applicable environmental regulations in all material respects, and that the outcome of any such proceedings and orders will not have a material adverse effect on our business. Under the terms of the Purchase Agreement, DuPont agreed to retain responsibility for certain pre-closing environmental liabilities. In connection with the Asset Purchase, Remington also entered into an agreement with Dupont with respect to cooperation and responsibility for specified environmental matters. See “—Certain Indemnities”.

          There are various pending proceedings associated with environmental liability naming us for which the 1993 Sellers have accepted liability. Our obligation on these cases is not expected to be material.

          Based on information known to us, we do not expect current environmental regulations or environmental proceedings and claims to have a material adverse effect on our results of operations, financial condition or cash flows. However, it is not possible to predict with certainty the impact of future environmental compliance requirements or of the cost of resolution of any future environmental proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under some federal environmental laws is under certain circumstances joint and several in nature, and environmental laws and regulations are subject to modification and changes in interpretation. There can be no assurance that environmental regulation will not become more burdensome in the future or that unknown conditions will not be discovered and that any such development would not have a material adverse effect on our business. We do not anticipate incurring any material capital expenditures for environmental control facilities for 2009 or 2010.

          The Marlin Acquisition triggered the Connecticut Transfer Act (the “Act”) with respect to the facility located in North Haven, Connecticut. The Act is designed to identify properties contaminated with hazardous wastes and to ensure that such properties are cleaned up to the satisfaction of the Connecticut Department of Environmental Protection (“DEP”). Under the Act, Marlin is required to investigate areas of environmental concern at the North Haven facility and to clean up contamination exceeding state standards to the satisfaction of the DEP. The investigation of the North Haven facility is ongoing. Remediation costs may be incurred, but such costs at this time are not expected to be material to operations or cash flows.

          Marlin is also conducting other remediation activities at its Gardner, Massachusetts facility and a former facility in New Haven, Connecticut. Costs for remediation at both of these locations are not expected to be material.

          Employees

          As of February 28, 2009, we employed approximately 2,275 full-time employees of whom approximately 1,925 were engaged in manufacturing and approximately 350 of whom were engaged in sales, general

12



administration and research and development. An additional work force of temporary employees is engaged during peak production schedules at certain of our manufacturing facilities.

          The United Mine Workers of America (“UMWA”) represents approximately 650 individuals at February 28, 2009 employed by the Company at the Company’s Ilion, New York manufacturing facility. The collective bargaining agreement with the UMWA was renegotiated effective October 2007 and expires on October 28, 2012. We also have a labor agreement with Local 2021 of the United Automobile, Aircraft and Agricultural Implement Workers of America, which represents less than 10 hourly employees at our plant in Findlay, Ohio. This labor agreement is terminable by either party upon notice to the other party. Employees at our other manufacturing facilities are not represented by unions. There have been no significant interruptions or curtailments of operations due to labor disputes since prior to 1968 and we believe that our relations with our employees are satisfactory.

Available Information

          Our internet address is www.remington.com. The information contained on, or that can be accessed through, our internet website is not incorporated by reference into this annual report on Form 10-K. We have included our website address as a factual reference and do not intend it as an active link to our internet website. We make available, free of charge, on our internet website our latest annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after filing or furnishing such reports with the Securities and Exchange Commission (“SEC”) via a link on our website to our page in the SEC electronic filing database.

13



 

 

Item 1A.

RISK FACTORS

          Our business and operations are subject to a number of risks and uncertainties as described below. However, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we may currently deem immaterial, may become important factors that harm our business, financial condition, results of operations or cash flows. If any of the following risks actually occur, our business, financial condition, results of operations or liquidity could suffer. You should read and carefully consider each of the following risks, as well as the other information provided elsewhere in this report.

          Our substantial indebtedness could have a material adverse effect on our financial health and our ability to obtain financing in the future and to react to changes in our business.

          On December 31, 2008, we had approximately $279.0 million of debt outstanding and our interest expense for the year ended December 31, 2008 was approximately $24.6 million. Our significant amount of debt could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive position. For example, it could:

 

 

make it more difficult for us to satisfy our obligations under the $200.0 million 10.5% Senior Notes due 2011 (the “Notes”) and to the lenders under our Amended and Restated Credit Agreement;

 

 

increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings are and will continue to be at variable rates of interest;

 

 

require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce the availability of our cash flow from operations to fund working capital, capital expenditures or other general corporate purposes;

 

 

limit our flexibility in planning for, or reacting to, changes in our business and industry;

 

 

place us at a disadvantage compared to competitors that have proportionately less debt; and

 

 

limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements.

          The agreements and instruments governing our debt place specified limitations on incurrence of additional debt. Despite current indebtedness levels, we and our subsidiaries may be able to incur substantial additional indebtedness in the future. However, if new debt is added to our and our subsidiaries’ current debt levels, the related risks would intensify.

          If we default under our Amended and Restated Credit Agreement, we may not have the ability to make payments on our indebtedness.

          In the event of a default under our Amended and Restated Credit Agreement, the lenders could elect to declare all amounts borrowed, together with accrued and unpaid interest and other fees, to be due and payable. If such acceleration occurs, thereby causing an acceleration of amounts outstanding under our Notes, we may not be able to repay the amounts due under our Amended and Restated Credit Agreement or our Notes. This could have serious consequences to the holders of the Notes and to our financial condition and results of operations, and could cause us to become bankrupt or insolvent.

          Our ability to generate the significant amount of cash needed to make payments on and repay our outstanding Notes and our other debt and to operate our business depends on many factors beyond our control.

          Payments on our debt and the funding of working capital needs and planned capital expenditures will depend on our ability to generate cash and secure financing in the future, either or both of which may be limited by the adverse effects of the ongoing global financial crisis. This ability, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. If our business does not generate sufficient cash flow from operations, and sufficient future borrowings are not available to us under our Amended and Restated Credit Agreement or from other sources of financing, we may not be able to repay our outstanding Notes or our other debt, operate our business or fund our other liquidity needs. We may not be able to obtain additional financing, particularly due to current macroeconomic and credit conditions and because of our anticipated high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt. If we cannot

14



meet or refinance our obligations when they are due, this may lead us to sell assets, reduce capital expenditures or take other actions which could have a material adverse effect on us.

          The agreements and instruments governing our debt contain restrictions and limitations which could significantly impact the holders of our outstanding Notes and our ability to operate our business.

          The Amended and Restated Credit Agreement and the indenture governing our outstanding Notes contain a number of significant covenants that could adversely impact the holders of our Notes and our business by limiting our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. These covenants, among other things, restrict our ability and the ability of our subsidiaries to:

 

 

pay dividends or make other distributions;

 

 

make certain investments or acquisitions;

 

 

enter into transactions with affiliates;

 

 

dispose of assets or enter into business combinations;

 

 

incur or guarantee additional debt;

 

 

issue equity;

 

 

repurchase or redeem equity interests and debt;

 

 

create or permit to exist certain liens; and

 

 

pledge assets.

          Furthermore, the Amended and Restated Credit Agreement requires us to meet specified financial covenants. Our ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants will result in a default under the Amended and Restated Credit Agreement, which could place us in default under the indenture governing our Notes.

          Unfavorable market trends and social concerns could adversely affect demand for our products and our business.

          We believe that a number of trends currently exist that are potentially significant to the hunting and shooting sports market:

 

 

The development of rural property in many locations has curtailed or eliminated access to private and public lands previously available for hunting and shooting sports.

 

 

Environmental issues, such as concern about lead in the environment, may also adversely affect the industry.

 

 

Decreases in consumer confidence and levels of consumer discretionary spending as a result of the ongoing global financial crisis.

          These trends may have a material adverse effect on our business by impairing industry sales of firearms, ammunition and other shooting-related products.

          Our business could be materially adversely affected as a result of general economic and market conditions, including the current economic crisis. Continued volatility and disruption of the credit and capital markets may negatively impact our revenues and our, or our suppliers’ or customers’, ability to access financing on favorable terms or at all.

          We are subject to the effects of general global economic and market conditions. Increases in commodity prices, higher levels of unemployment, higher consumer debt levels, declines in consumer confidence, uncertainty about economic stability and other economic factors that may affect consumer spending or buying habits could adversely affect the demand for products we sell. If the current economic conditions and the related factors remain

15



uncertain or persist, spread or deteriorate further, our business, results of operations or financial condition could be materially adversely affected.

          While we intend to finance expansion, renovation and other projects with existing cash, cash flow from operations and borrowings under our existing credit facility, we may require additional financing to support our continued growth. However, as widely reported in recent months, the financial crisis in the banking sector and financial markets has resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit and equity markets. Possible consequences from the financial crisis on our business include decreased revenues from our operations attributable to decreases in consumer spending, limitations on our, or our suppliers’ or customers’, access to capital on terms acceptable to each party or at all, potential failure to satisfy the financial and other restrictive covenants to which we are subject under our existing indebtedness, insolvency of key suppliers resulting in product delays, inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies, increased risk that customers may delay payments, fail to pay or default on credit extended to them, and counterparty failures negatively impacting our treasury operations, could have a material adverse effect on our results of operations or financial condition.

          Our business is subject to economic, market and other factors beyond our control or ability to predict.

          The sale of hunting and shooting sports products depends upon a number of factors related to the level of consumer spending, including the general state of the economy and the willingness of consumers to spend on discretionary items. Historically, the general level of economic activity has significantly affected the demand for sporting goods products in the hunting and shooting sports and related markets. As economic activity slows, consumer confidence and discretionary spending by consumers declines. Competitive pressures arising from any significant or prolonged economic downturn could have a material adverse impact on our financial condition and results of operations, and such impact could be intensified by our leveraged condition.

          Moreover, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business and operations. These risks and uncertainties include, but are not limited to, weather and other Acts of God that could result in the loss or destruction of warehoused inventory and stoppages in our ability to manufacture our key products for a sustained period of time.

          Our business is affected by seasonal fluctuations in business, and our inventory management practices have had an effect on our business.

          Many of our firearms products are purchased in anticipation of use during the fall hunting season. As a result of the seasonal nature of our sales, our historical working capital financing needs generally have exceeded cash provided by operations during certain parts of the year. Our recent efforts to shorten terms and reduce dating plan billing practices, under which a distributor may purchase these products beginning in December (the start of our firearms dating plan year) and pay for them on extended terms, have moderated this seasonal aspect of working capital financing needs as compared to prior years. However, our working capital financing needs still tend to be higher during the spring and summer months, decreasing during the fall and reaching their lowest points during the winter.

          In addition, we believe that worsening economic conditions have caused other customers (dealers and chains) to defer purchases of our products until later in the core fall hunting seasons (September through December) and to utilize lower inventory levels than during prior periods. This overall trend in demand continues to date, and there can be no assurance that such trends will not continue.

          As a result of the seasonal nature of our sales and our customers’ inventory management practices, our working capital financing needs may significantly exceed cash provided by operations during certain periods in a year.

          A substantial amount of our business comes from one “national account” customer. A substantial portion of our accounts receivable is concentrated with two customers. Loss of business from either of these customers could adversely affect our revenues, operating results and statements of cash flows.

          Our in-house sales force markets our products directly to national accounts (consisting primarily of mass merchandisers) and to federal, state and local government agencies. Approximately 18% of our total 2008 sales and 15% of our December 31, 2008 accounts receivable balance consisted of sales made to one national account, Wal-Mart. Our sales to Wal-Mart are generally not governed by a written agreement. In the event that Wal-Mart

16



significantly reduces or terminates its purchases of firearms and/or ammunition from us, our revenue could be adversely affected.

          Wal-Mart, together with another customer, accounts for approximately 24% of our accounts receivable. This other customer, due to the timing of its purchasing, usually maintains significant amounts of accounts receivable at the end of our fiscal year. In the event that this customer incurs financial difficulty and is unable to pay its account in full, our cash flows and operating results could be adversely affected.

          We are dependent on a number of key suppliers. Loss or damage to our relationships with these suppliers could have a material adverse effect on our business, financial condition, results of operations and cash flows.

          To manufacture our various products, we use many raw materials, including steel, zinc, lead, brass, plastics and wood, as well as manufactured parts purchased from independent manufacturers. An extended interruption in the supply of these or other raw materials or in the supply of suitable substitute materials would disrupt our operations, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, we may incur additional costs in sourcing raw materials from alternative producers.

          For a number of our raw materials, we rely on one or a few suppliers. Alternative sources, many of which are foreign, exist for each of these materials. We do not, however, currently have significant supply relationships with any of these alternative sources. We cannot estimate with any certainty the length of time that would be required to establish alternative supply relationships, or whether the quantity or quality of materials that could be so obtained would be sufficient.

          Management has been increasing the prices on certain of our products and has been shortening sales terms. These higher product selling prices coupled with reduced sales terms could limit sales, which could negatively impact our business, operating results or financial condition.

          Management has imposed price increases on our customers in an attempt to offset cost increases relating to materials and energy (including lead, copper, zinc, steel and fuel) that we have experienced since 2003. Management has also worked to reduce sales terms over the past year related to certain working capital initiatives. These higher product prices and shorter sales terms could limit our sales in the future and could negatively impact our business, operating results or financial condition.

          We purchase a limited number of foreign manufactured firearms products through third party suppliers as part of our strategy to grow revenues and improve profitability, which exposes us to additional uncertainties.

          We introduced an opening price point line in 2004 and subsequently expanded the line with additional product offerings. Our dependence on foreign suppliers means, in part, that we may be affected by declines in the relative value of the U.S. dollar to foreign currencies. Although all of our purchases of foreign products are negotiated and paid for in U.S. dollars, declines in the applicable foreign currency and currency exchange rates might negatively affect the profitability and business prospects of our foreign manufacturer. This, in turn, might cause such supplier to demand higher prices for merchandise, hold up merchandise shipments to us, or discontinue selling to us, any of which could ultimately reduce our sales or increase our costs.

          We are also subject to other risks and uncertainties associated with changing economic and political conditions in foreign countries. These risks and uncertainties include import duties and quotas, disruptions or delays in product deliveries, our suppliers’ on-going quality controls, work stoppages, economic uncertainties (including inflation), foreign government regulations, political unrest and trade restrictions. Any event causing a disruption or delay of imports from our foreign manufacturers, including the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition, results of operations, or cash flows.

          We may not be able to compete successfully within our highly competitive markets, which could adversely affect our business, financial condition or cash flows.

          The markets in which we operate are highly competitive. Product image, quality and innovation are the primary competitive factors in the firearms industry. Product differentiation exists to a much lesser extent in the

17



ammunition industry, where price is the primary competitive factor. Reductions in price by our competitors in the ammunition industry could force us to reduce prices or otherwise alter terms of sale as a competitive measure, which could adversely affect our business, financial condition, results of operations or cash flows.

          Our competitors vary by product line. Some of our competitors are subsidiaries of large corporations with substantially greater financial resources than us. Although we believe that we compete effectively with all of our present competitors, we may not continue to do so, and our ability to compete could be adversely affected by our leveraged condition. See “Business—Firearms—Competition” and “Business—Ammunition—Competition”.

          An increase in revenues to the government, law enforcement, and military sales channels could result in increased uncertainty to the timing of our sales revenues.

          Government, law enforcement, and military sales channels are typically in the form of contract sales arrangements. We are exposed to these channels through our sale of certain firearms and ammunition products. An increasing percentage of our sales revenues could therefore be subject to contract negotiations. This trend could cause sales revenue amounts to be increasingly volatile and uncertain with respect to the timing of orders.

          The acquisition of RACI Holding by Freedom Group, as well as our acquisition of The Marlin Firearms Company and our investments in EOTAC and INTC may not meet our expectations.

          We believe the FGI Acquisition, the Marlin Acquisition and our investments in EOTAC and INTC will strengthen our ability to grow our leadership position in the United States and provide additional capital to further develop our market presence internationally and accelerate operational improvements within the Company. However, we may not experience the anticipated benefits of the acquisitions.

          The execution of post-acquisition events will involve considerable risks and may not be successful. These risks include the following:

 

 

The potential strain on our financial and managerial controls and reporting systems and procedures;

 

 

Unanticipated expenses and potential delays related to integration of the operations, technology, and other resources of the companies;

 

 

The impairment of relationships with employees, suppliers, strategic partners and customers as a result of any integration of new management personnel;

 

 

Greater than anticipated costs and expenses related to the integration of our businesses;

 

 

The potential combination of weaker credit metrics and near-term lower cash flow pressuring credit quality and the ratings of companies that actively pursue consolidation strategies; and

 

 

Potential unknown liabilities associated with the combined operations.

          We may not succeed in addressing these risks or any other problems encountered in connection with the Marlin Acquisition or with respect to other potential acquisitions. The inability to integrate successfully the operations, technology, and personnel of our business, or any significant delay in achieving integration, could have a material adverse effect on the Company.

          If we are unable to retain key management personnel, our business could be adversely affected.

          Our success is dependent to a large degree upon the continued service of our executive management team. We have entered into employment agreements with certain of our executives. See “Executive Compensation—Employment Agreements.” The loss of any member of our executive management team could have a material adverse effect on our business, financial condition and results of operations.

18



          The substantial diversion of management’s attention from Remington’s day-to-day business when evaluating and considering the impact of the acquisitions could negatively impact our business, operating results or financial condition.

          Our management has spent a significant amount of time addressing various matters related to our recent acquisitions and has not been able to focus all of its time on our ongoing business matters. The diversion of our management’s attention and any delay or difficulties encountered in connection with such acquisitions could result in the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could negatively affect our ability to maintain relationships with customers, suppliers, employees and others with whom we have business dealings.

          Any acquisitions that we undertake in the future could be difficult to integrate, disrupt our business and harm our operating results.

          We expect to review opportunities to acquire other businesses that would complement or expand our current products, expand the breadth of our markets, or otherwise offer growth opportunities. If we make any future acquisitions, we could incur additional debt or assume contingent liabilities. Our experience in acquiring other businesses is limited.

          Because of the nature of potential injuries relating to firearms and ammunition, certain public perceptions of our products, and recent efforts to expand liability of manufacturers of firearms and ammunition, product liability cases and claims, and insurance costs associated with such cases and claims, may cause us to incur significant costs.

          We are currently defending product liability litigation involving Remington brand firearms (including firearms manufactured under the Marlin, H&R, L.C. Smith, and New England Firearms names) and our ammunition products (including ammunition manufactured under the UMC and Peters names). As of December 31, 2008, approximately 19 individual bodily injury cases or claims were pending, primarily alleging defective product design, defective manufacture and/or failure to provide adequate warnings. Some of these cases seek punitive as well as compensatory damages.

          Because the nature and extent of liability based on the manufacture and/or sale of allegedly defective products is uncertain, particularly as to firearms and ammunition, our resources may not be adequate to cover pending and/or future product liability occurrences, cases or claims, in the aggregate, and such cases and claims may have a material adverse effect upon our business, financial condition or results of operations. In addition, insurance coverage for these risks may not continue to be available or, if available, we may not be able to obtain it at a reasonable cost. See Item 3, “Legal Proceedings”.

          Our business is subject to extensive governmental legislation and regulation that may restrict our operations, increase our costs of operations, or adversely affect the demand for our products by limiting the availability and/or increasing the cost of our products.

          The manufacture, sale and purchase of firearms and ammunition are subject to extensive federal, state and local governmental regulation. Although we do not believe that current regulations have had such an impact to date, future regulations may adversely affect our operations by limiting the types of products that we can manufacture and/or sell, or imposing additional costs on us or on our customers in connection with the manufacture and/or sale of our products. Such regulations may also adversely affect demand for our products by imposing limitations that increase the costs of our products, making it more difficult or cumbersome for our distributors or end users to transfer and own our products, or creating negative consumer perceptions with respect to our products.

          Current federal regulations include:

 

 

 

 

Licensing requirements for the manufacture and/or sale of firearms and ammunition.

 

 

 

 

A national system of instant background checks for all purchases of firearms from federal license holders, including purchases of our firearms products and purchases from license holders at gun shows.

19



          In addition, bills have been introduced in Congress to establish, and to consider the feasibility of establishing, a nationwide database recording so-called “ballistic images” of ammunition fired from new guns. Should such a mandatory database be established, the cost to Remington, its distributors and its customers could be significant, depending on the type of firearms and ballistic information included in the database. Bills have also been introduced in Congress in the past several years that would affect the manufacture and sale of ammunition, including bills to regulate the manufacture, importation and sale of armor-piercing bullets, to prohibit the manufacture, transfer or importation of .25 caliber, .32 caliber and 9mm handgun ammunition, and to increase or impose new taxes on the sales of certain types of ammunition, as well as bills addressing the use of lead in ammunition. Certain of these bills would apply to ammunition of the kind we produce, and accordingly, if enacted, could have a material adverse effect on our business.

          State and local laws and regulations may place additional restrictions on gun ownership and transfer:

 

 

Some states have recently enacted, and others are considering, legislation restricting or prohibiting the ownership, use or sale of specified categories of firearms and ammunition. Many states currently have mandatory waiting period laws in effect for the purchase of firearms, including rifles and shotguns. Although there are few restrictive state or local regulations applicable to ammunition, several jurisdictions are considering such restrictions on a variety of bases.

 

 

Some states have enacted regulations prohibiting the sale of firearms unless accompanied by an internal and/or external locking device. In several states, this requirement is imposed on both handguns and long guns. Some states are also considering mandating the inclusion of various design features on safety grounds. Most of these regulations as currently contemplated would be applicable only to handguns.

 

 

To date, two states have established registries of so-called “ballistic images” of ammunition fired from new guns. Although neither law mandates the inclusion of such “imaging” data from long guns in their registries, these or other states may do so in the future. Proposed legislation in at least one other state would be applicable to Remington rifles and would call for “imaging” of both cartridges and projectiles.

          We believe that existing federal and state legislation relating to the regulation of firearms and ammunition has not had a material adverse effect on our sales of these products. However, the regulation of firearms and ammunition may become more restrictive in the future and any such development might have a material adverse effect on our business, financial condition, results of operations, or cash flows. In addition, regulatory proposals, even if never enacted, may affect firearms or ammunition sales as a result of consumer perceptions. See “Business—Regulation”.

          Although we are a manufacturer of long guns, the trends regarding firearms regulation, as well as pending industry litigation, and the consumer perception of such developments, may adversely affect sales of firearms, ammunition and other shooting-related products by such means as increasing costs of production and/or reducing the number of distribution outlets for our products.

          Environmental litigation and regulations may restrict or increase the cost of our operations and/or impair our financial condition.

          We are subject to a variety of federal, state and local environmental laws and regulations which govern, among other things, the discharge of hazardous materials into the air and water, the handling, treatment, storage and disposal of such materials, as well as remediation of contaminated soil and groundwater. We have programs in place that monitor compliance with those requirements and believe that our operations are in material compliance with them. In the normal course of our manufacturing operations, we are subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions and water discharges into the environment.

          Based on information known to us, we do not expect current environmental regulations or environmental proceedings and claims to have a material adverse effect on our results of operations, financial condition, or cash flows. However, it is not possible to predict with certainty the impact on us of future environmental compliance requirements or of the cost of resolution of future environmental proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under federal environmental laws is, under certain circumstances, joint and several in nature, and environmental laws and regulations are subject to modifications and changes in interpretation. Environmental regulations may become more burdensome in the future and any such development, or discovery of unknown conditions, may require us to make material expenditures or otherwise materially adversely affect the way we operate our business, as well as have a material adverse effect on our results of operations, financial condition, or cash flows. See “Business—Environmental Matters”.

20



          Worse-than-assumed economic and demographic experience for our postretirement benefit plans (e.g., discount rates, investment returns, and health care cost trends) could negatively impact our operating results, financial condition, and cash flows.

          We sponsor plans to provide postretirement pension and health care for certain of our retired employees. The measurement of our obligations, costs and liabilities associated with these benefits, requires that we estimate the present values of projected future payments to all participants. We use many assumptions in calculating these estimates, including discount rates, investment returns on designated plan assets, health care cost trends, and demographic experience (e.g., mortality and retirement rates). To the extent that actual results are less favorable than our assumptions there could be a substantial adverse impact on our results of operations, financial condition, and cash flows.

          Our future pension costs and required level of contributions could be unfavorably impacted by changes in actuarial assumptions and future market performance of plan assets, which could adversely affect our financial position, results of operations, and cash flows.

          We have significant defined benefit pension obligations. The funding position of our pension plans is impacted by the performance of the financial markets, particularly the equity markets, and the discount rates used to calculate our pension obligations for funding and expense purposes. Recent significant declines in the financial markets have negatively impacted the value of the assets in the Company’s pension plans. In addition, lower bond yields may reduce our discount rates resulting in increased pension contributions and expense.

          Funding obligations are determined under government regulations and are measured each year based on the value of assets and liabilities on a specific date. If the financial markets do not provide the long-term returns that are expected under the governmental funding calculations, we could be required to make larger contributions. The equity markets can be, and recently have been, very volatile, and therefore our estimate of future contribution requirements can change dramatically in relatively short periods of time. Similarly, changes in interest rates can impact our contribution requirements. In a low interest rate environment, the likelihood of higher contributions in the future increases.

          If our business does not perform well, we may be required to recognize further impairments of our intangible or other long-lived assets, which could adversely affect our results of operations or financial condition.

          Goodwill is initially recorded at fair value and is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators are present. In assessing the recoverability of goodwill, we make estimates and assumptions about sales, operating margin growth rates and discount rates based on our budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors.

          As part of the Company’s annual impairment testing conducted with outside valuation experts under SFAS 144 and SFAS 142, the Company recorded non-cash impairment charges related to goodwill of $44.3 million and certain trademarks of $3.1 million for the year ended December 31, 2008. The charge eliminated the goodwill amounts from both our Firearms and All Other reporting segments.

          Our future results of operations may be impacted by the prolonged weakness in the current economic environment which may result in an impairment of any goodwill recorded in the future and/or other long-lived assets, which could adversely affect our results of operations or financial condition.

21



 

 

Item 1B.

UNRESOLVED STAFF COMMENTS

          None.

22



 

 

Item 2.

PROPERTIES

          We currently own seven facilities for our manufacturing operations. The following table sets forth selected information regarding each of these facilities:

 

 

 

 

 

 

 

 

Plant

 

Product

 

Segment

 

Square Feet
(in thousands)

 

 

 

 

 

 

 

Ilion, New York

 

Shotguns; centerfire and rimfire rifles

 

Firearms

 

1,000

 

Lonoke, Arkansas

 

Shotshell; rimfire and centerfire ammunition

 

Ammunition

 

750

 

Mayfield, Kentucky

 

Rimfire and centerfire rifles

 

Firearms

 

44

 

Findlay, Ohio

 

Clay targets

 

All Other

 

40

 

Ada, Oklahoma

 

Clay targets

 

All Other

 

21

 

North Haven, Connecticut

 

Rifles

 

Firearms

 

227

 

Gardner, Massachusetts

 

Rifles and shotguns

 

Firearms

 

124

 

          We believe that the above facilities that we are currently utilizing are suitable for the manufacturing conducted therein and have capacities appropriate to meet existing production requirements. The Ilion, Lonoke, Mayfield and North Haven facilities each contain enclosed ranges for testing firearms and ammunition. The Ada, Oklahoma facility is currently idle due to supply limitations discussed in Note 4 to our audited consolidated financial statements for the year ended December 31, 2008, contained in “Item 8 – Financial Statements and Supplementary Data” in this annual report on Form 10-K.

          We acquired the Connecticut and Massachusetts facilities in connection with our acquisition of The Marlin Firearms Company on January 28, 2008. On April 7, 2008, we announced a strategic manufacturing consolidation decision that resulted in the closure of our manufacturing facility in Gardner, Massachusetts. The Gardner facility was closed in early October 2008 and is currently for sale.

          Our headquarters and related operations are conducted in an office building that we own in Madison, North Carolina. We believe that this facility is suitable for the activities conducted therein and is appropriately utilized.

          Research and development is conducted at a facility that we own in Elizabethtown, Kentucky. We believe that this facility is suitable for the activities conducted therein and is appropriately utilized.

          All of the real property owned by us has been mortgaged as collateral for our obligations under the Amended and Restated Credit Agreement pursuant to the Second Amendment thereto.

          We lease a facility in Memphis, Tennessee and contract for distribution services with major third party contractors, which impacts distribution for all of our reporting segments. We believe that this facility is suitable for the activities conducted therein and is appropriately utilized.

23



 

 

Item 3.

LEGAL PROCEEDINGS

          Under the terms of the Purchase Agreement, the 1993 Sellers retained liability for, and are required to indemnify us against:

 

 

liability in excess of our limited financial responsibility for environmental claims and disclosed product liability claims relating to pre-closing occurrences;

 

 

liability for product liability litigation related to discontinued products; and

 

 

certain tax liabilities, and employee and retiree compensation and benefit liabilities and intercompany accounts payable which do not represent trade accounts payable.

          These indemnification obligations of the 1993 Sellers are not subject to any survival period limitation. We have no current information on the extent, if any, to which the 1993 Sellers have insured these indemnification obligations. Except for certain cases and claims relating to shotguns as described below, and except for all cases and claims relating to products discontinued prior to the Asset Purchase, we generally bear financial responsibility for the costs of product liability cases and claims relating to occurrences after the Asset Purchase and are required to indemnify the 1993 Sellers against such cases and claims. See “—Certain Indemnities.”

          The main types of legal proceedings include:

 

 

 

 

Product liability litigation filed by individuals.

 

 

 

 

Product liability litigation filed by municipalities.

 

 

 

 

Environmental litigation.

Product Liability Litigation 

          Since December 1, 1993, we have maintained insurance coverage for product liability claims subject to certain self-insured retentions on a per-occurrence basis for personal injury or property damage relating to occurrences arising after the Asset Purchase. We believe that our current product liability insurance coverage for personal injury and property damage is adequate for our needs. Our current product liability insurance policy runs from December 1, 2008 through November 30, 2009 and provides for certain self-insured retention amounts per occurrence. It also includes a limited batch clause provision, which allows that a single retention be assessed when the same defects manufactured in a common lot or batch results in multiple injuries or damages to third parties. The policy excludes from coverage any pollution-related liability. Based in part on the nature of our products, there can be no assurance that we will be able to obtain adequate product liability insurance coverage upon the expiration of the current policy. Certain of our current excess insurance coverage expressly excludes actions brought by municipalities as described below.

          As a result of contractual arrangements, we manage the joint defense of product liability litigation involving Remington brand firearms and our ammunition products for both Remington and the 1993 Sellers. As of December 31, 2008, approximately 19 individual bodily injury cases and claims were pending, primarily alleging defective product design, defective manufacture and/or failure to provide adequate warnings; some of these cases seek punitive as well as compensatory damages. We have previously disposed of a number of other cases involving post-Asset Purchase occurrences by settlement. The 22 pending cases involve post-Asset Purchase occurrences for which we bear responsibility under the Purchase Agreement.

          The relief sought in individual cases includes compensatory and, sometimes, punitive damages. Certain of the claims and cases seek unspecified compensatory and/or punitive damages. In others, compensatory damages sought may range from less than $50,000 to in excess of $1 million and punitive damages sought may exceed $1 million. Of the individual post-Asset Purchase bodily injury cases and claims pending as of December 31, 2008, the plaintiffs and claimants seek either compensatory and/or punitive damages in unspecified amounts or in amounts within these general ranges. In the Company’s experience, initial demands do not generally bear a reasonable relationship to the facts and circumstances of a particular matter, and in any event, are typically reduced significantly as a case proceeds. The Company believes that its accruals for product liability cases and claims, as described below, are a superior quantitative measure of the cost to it of product liability cases and claims.

          At December 31, 2008, our accrual for product liability cases and claims was $13.4 million. The amount of our accrual for product liability cases and claims is based upon estimates developed as follows. We establish reserves for anticipated defense and disposition costs to us of those pending cases and claims for which we are

24



financially responsible. Based on those estimates and an actuarial analysis of actual defense and disposition costs incurred by us with respect to product liability cases and claims in recent years, we determine the estimated defense and disposition costs for unasserted product liability cases and claims. We combine the estimated defense and disposition costs for both pending and unasserted cases and claims to determine the amount of our accrual for product liability cases and claims. It is reasonably possible additional experience could result in further increases or decreases in the period in which such information is made available. We believe that our accruals for losses relating to such cases and claims are adequate. Our accruals for losses relating to product liability cases and claims include accruals for all probable losses the amount of which can be reasonably estimated. Based on the relevant circumstances (including the current availability of insurance for personal injury and property damage with respect to cases and claims involving occurrences arising after the Asset Purchase, our accruals for the uninsured costs of such cases and claims and the 1993 Sellers’ agreement to be responsible for a portion of certain post-Asset Purchase shotgun-related product liability costs, as well as the type of firearms products that we make), we do not believe with respect to product liability cases and claims that any probable loss exceeding amounts already recognized through our accruals has been incurred.

          Because our assumption of financial responsibility for certain product liability cases and claims involving pre-Asset Purchase occurrences was limited to an amount that has now been fully paid, with the 1993 Sellers retaining liability in excess of that amount and indemnifying us in respect of such liabilities, and because of our accruals with respect to such cases and claims, we believe that product liability cases and claims involving occurrences arising prior to the Asset Purchase are not likely to have a material adverse effect upon our financial condition, results of operations or cash flows. Moreover, although it is difficult to forecast the outcome of litigation, we do not believe, in light of relevant circumstances (including the current availability of insurance for personal injury and property damage with respect to cases and claims involving occurrences arising after the Asset Purchase, our accruals for the uninsured costs of such cases and claims and the 1993 Sellers’ agreement to be responsible for a portion of certain post-Asset Purchase shotgun-related product liability costs, as well as the type of firearms products that we make), that the outcome of all pending post-Asset Purchase product liability cases and claims will be likely to have a material adverse effect upon our financial condition, results of operations or cash flows. Nonetheless, in part because the nature and extent of liability based on the manufacture and/or sale of allegedly defective products (particularly as to firearms and ammunition) is uncertain, there can be no assurance that our resources will be adequate to cover pending and future product liability occurrences, cases or claims, in the aggregate, or that a material adverse effect upon our financial condition, results of operations or cash flows will not result therefrom. Because of the nature of our products, we anticipate that we will continue to be involved in product liability litigation in the future. Because of the potential nature of injuries relating to firearms and ammunition, certain public perceptions of our products, and recent efforts to expand liability of manufacturers of firearms and ammunition, product liability cases and claims, and insurance costs associated with such cases and claims, may cause us to incur material costs.

Municipal Litigation

          In addition to these individual cases, as a manufacturer of shotguns and rifles, the Company has been named previously in several actions brought by various municipalities, primarily against manufacturers, distributors and sellers of handguns. However, the Company is not a defendant in any pending municipal litigation.

          A majority of states have enacted some limitation on the ability of local governments to file such lawsuits against firearms manufacturers. In addition, similar legislation limiting such lawsuits on a federal level has been proposed in both houses of Congress, most recently by the House of Representatives on October 20, 2005, and the Protection of Lawful Commerce in Arms Act was adopted in October 2005. However, the applicability of the law to various types of governmental and private lawsuits has been challenged in both state and federal courts.

Litigation Outlook

          We are involved in lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. We do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial position, results of operations or cash flows.

Certain Indemnities

          As of the closing of the Asset Purchase in December 1993 under the Purchase Agreement, we assumed:

25



 

 

 

 

a number of specified liabilities, including certain trade payables and contractual obligations of the 1993 Sellers;

 

 

 

 

limited financial responsibility for specified product liability claims relating to disclosed occurrences arising prior to the Asset Purchase;

 

 

 

 

limited financial responsibility for environmental claims relating to the operation of the business prior to the Asset Purchase; and

 

 

 

 

liabilities for product liability claims relating to occurrences after the Asset Purchase, except for claims involving products discontinued at the time of closing.

          All other liabilities relating to or arising out of the operation of the business prior to the Asset Purchase are excluded liabilities (the “Excluded Liabilities”), which the 1993 Sellers retained. The 1993 Sellers are required to indemnify Remington and its affiliates in respect of the Excluded Liabilities, which include, among other liabilities:

 

 

 

 

liability in excess of our limited financial responsibility for environmental claims and disclosed product liability claims relating to pre-closing occurrences;

 

 

 

 

liability for product liability litigation related to discontinued products; and

 

 

 

 

certain tax liabilities, and employee and retiree compensation and benefit liabilities and intercompany accounts payable which do not represent trade accounts payable.

          The 1993 Sellers’ overall liability in respect of their representations, covenants and the Excluded Liabilities under the Purchase Agreement, excluding environmental liabilities and product liability matters relating to events occurring prior to the purchase but not disclosed, or relating to discontinued products, is limited to $324.8 million. With a few exceptions, the 1993 Sellers’ representations under the Purchase Agreement have expired. We made claims for indemnification involving product liability issues prior to such expiration. See “—Product Liability Litigation”.

          In addition, the 1993 Sellers agreed in 1996 to indemnify us against a portion of certain product liability costs involving various shotguns manufactured prior to 1995 and arising from occurrences on or prior to November 30, 1999. These indemnification obligations of the 1993 Sellers relating to product liability and environmental matters (subject to a limited exception) are not subject to any survival period limitation, deductible or other dollar threshold or cap. We and the 1993 Sellers are also party to separate agreements setting forth agreed procedures for the management and disposition of environmental and product liability claims and proceedings relating to the operation or ownership of the business prior to the Asset Purchase, and are currently engaged in the joint defense of certain product liability claims and proceedings. See “—Product Liability Litigation”.

26



 

 

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          There were no matters submitted to a vote of the Company’s sole stockholder during the fourth quarter of 2008.

27



PART II

 

 

Item 5.

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

          Market Information. There is no established public trading market for the securities issued by FGI, Holding or Remington.

          Holders. As of February 28, 2009, the only holder of Remington’s common stock was Holding.

          Dividends. Remington did not pay any dividends during 2008 or 2007.

          The declaration and payment of future dividends by Remington, if any, will be at the sole discretion of the Board of Directors subject to the restrictions set forth in the Amended and Restated Credit Agreement, and the indenture for the Notes, which currently limit the payment of cash dividends by Remington to its sole stockholder, as well as restrictions, if any, imposed by other indebtedness outstanding from time to time.

          See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 15 to our audited consolidated financial statements for the year ended December 31, 2008, appearing in “Item 8 – Financial Statements and Supplementary Data” in this annual report on Form 10-K for a more detailed discussion of the material limitations on our ability to pay dividends.

28



 

 

Item 6.

SELECTED FINANCIAL DATA

          As a result of the FGI Acquisition, the financial results for the twelve months ended December 31, 2007 have been separately presented, split between the “Predecessor” entity, covering the period from January 1, 2007 through May 31, 2007, and the “Successor” entity, covering the period from June 1, 2007 through December 31, 2007. For comparative purposes, we combined the two periods through December 31, 2007 in the table and related footnotes below. We believe this presentation provides the reader with a more accurate comparison and the combined results of operations are what management relies on internally when making business decisions.

          The following table sets forth certain selected financial information derived from our audited consolidated financial statements as audited by our independent registered public accounting firms, Grant Thornton LLP for data for the annual periods ended December 31, 2008, December 31, 2007 and December 31, 2006, and PricewaterhouseCoopers LLP for the annual periods ended December 31, 2005, and December 31, 2004. The table should be read in conjunction with “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes and other financial information included elsewhere in this annual report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Predecessor

 

 

Successor

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

Year Ended
December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2004

 

2005

 

2006

 

Jan. 1–
May 31
2007

 

 

June 1 –
Dec. 31
2007

 

Combined
2007

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in millions)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales (1)

 

$

393.0

 

$

410.4

 

$

446.0

 

$

167.0

 

 

$

322.0

 

$

489.0

 

$

591.1

 

Sales Growth Percentage

 

 

9.0

%

 

4.4

%

 

8.7

%

 

N/A

 

 

 

N/A

 

 

9.6

%

 

20.9

%

Gross Profit

 

 

90.5

 

 

85.5

 

 

107.6

 

 

49.7

 

 

 

52.7

 

 

102.4

 

 

144.2

 

Gross Profit Percentage

 

 

23.0

%

 

20.8

%

 

24.1

%

 

29.8

%

 

 

16.4

%

 

21.0

%

 

24.4

%

Operating Expenses

 

 

69.6

 

 

69.8

 

 

77.8

 

 

28.5

 

 

 

54.0

 

 

82.5

 

 

109.4

 

Impairment Charges (2)

 

 

 

 

4.7

 

 

0.2

 

 

 

 

 

 

 

 

 

47.4

 

Operating Profit (Loss)

 

 

20.9

 

 

11.0

 

 

29.6

 

 

21.2

 

 

 

(1.3

)

 

19.9

 

 

(12.6

)

Interest Expense (3)

 

 

24.6

 

 

26.4

 

 

28.0

 

 

10.9

 

 

 

14.6

 

 

25.5

 

 

24.6

 

Income (Loss) from Continuing Operations before Taxes and Equity in Losses from Unconsolidated Joint Venture

 

 

(3.7

)

 

(15.4

)

 

1.6

 

 

10.3

 

 

 

(15.9

)

 

(5.6

)

 

(37.2

)

Income Tax Expense (Benefit) from Continuing Operations (4)

 

 

14.0

 

 

0.4

 

 

0.9

 

 

1.3

 

 

 

(5.9

)

 

(4.6

)

 

2.3

 

Income (Loss) from Discontinued Operations, net of tax (5)

 

 

 

 

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

Gain on Disposal of Discontinued Operations, net of tax (6)

 

 

13.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority Interest in Income of Consolidated Subsidiary (7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.1

)

Net Income (Loss)

 

 

(4.1

)

 

(16.9

)

 

0.3

 

 

9.0

 

 

 

(10.5

)

 

(1.5

)

 

(39.4

)

Operating and Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization (8)

 

$

9.2

 

$

9.6

 

$

10.0

 

$

4.2

 

 

$

8.3

 

$

12.5

 

 

15.6

 

Other Non-Cash Charges (Gains) (9)

 

 

7.4

 

 

6.0

 

 

(0.3

)

 

1.7

 

 

 

(6.2

)

 

(4.5

)

 

2.1

 

Nonrecurring and Restructuring Items (10)

 

 

(12.7

)

 

0.2

 

 

0.3

 

 

(3.9

)

 

 

35.8

 

 

31.9

 

 

15.6

 

Equity in Loss for Unconsolidated Joint Venture

 

 

 

 

1.0

 

 

0.4

 

 

 

 

 

0.5

 

 

0.5

 

 

 

Gross Capital Expenditures

 

 

9.5

 

 

10.1

 

 

6.5

 

 

1.5

 

 

 

6.7

 

 

8.2

 

 

17.3

 

Adjusted EBITDA related to Discontinued Operations (11)

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by
(used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(11.8

)

$

(6.0

)

$

13.2

 

$

(36.3

)

 

$

65.4

 

$

29.1

 

$

39.7

 

Investing activities

 

 

35.1

 

 

(11.1

)

 

(7.9

)

 

(12.1

)

 

 

(1.4

)

 

(13.5

)

 

(56.0

)

Financing activities

 

 

(23.3

)

 

17.2

 

 

(5.3

)

 

56.9

 

 

 

(49.6

)

 

7.3

 

 

63.0

 

29



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Predecessor

 

 

Successor

 

 

 

2004

 

2005

 

2006

 

 

2007

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (end of period):

 

 

 

 

 

 

 

 

 

 

 

 

Working Capital (12)

 

$

120.2

 

$

136.4

 

$

130.2

 

 

$

166.6

 

$

203.3

 

Total Assets

 

 

354.4

 

 

363.3

 

 

371.3

 

 

 

502.1

 

 

534.1

 

Total Debt (13)

 

 

203.5

 

 

221.7

 

 

221.4

 

 

 

233.3

 

 

279.0

 

Credit Facility

 

 

1.8

 

 

19.4

 

 

19.4

 

 

 

 

 

58.1

 

Stockholder’s Equity (Deficit)

 

 

9.9

 

 

(11.1

)

 

(10.2

)

 

 

108.0

 

 

52.1

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Predecessor

 

 

Successor

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

Year Ended
December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2004

 

2005

 

2006

 

Jan. 1–
May 31
2007

 

 

June 1 –
Dec. 31
2007

 

Combined
2007

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA and Credit Statistics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (11) (14)

 

$

38.6

 

$

31.4

 

$

42.5

 

$

23.2

 

 

$

38.1

 

$

61.3

 

$

70.8

 

Consolidated Interest Expense (15)

 

$

22.8

 

$

24.7

 

$

26.4

 

$

10.3

 

 

$

14.2

 

$

24.5

 

$

24.0

 

Consolidated Coverage Ratio (16)

 

 

1.7

x

 

1.3

x

 

1.6

x

 

2.3

x

 

 

2.7

x

 

2.5

x

 

3.0

x

Ratio of Earnings to Fixed Charges (17)

 

 

(17

)

 

(17

)

 

1.0

x

 

1.9

x

 

 

(17

)

 

0.8

x

 

(17

)

 

 

(1)

Presented net of federal excise taxes. Federal excise taxes were $33.5 million, $34.0 million, and $37.4 million for the years ended December 31, 2004, 2005, and 2006, respectively. Federal excise taxes were $12.1 million for the five months ended May 31, 2007 and $27.2 million for the seven months ended December 31, 2007. Federal excise taxes were $45.4 million for the year ended December 31, 2008.

 

 

(2)

Impairment charges in 2008 were associated with a write-down of goodwill and certain trademarks in the Firearms and All Other reporting segments. Impairment charges in 2006 were associated with an incremental write-down in certain embellishing fixed assets in the Firearms reporting segment and in 2005 are associated with the write-down in goodwill, trademarks, and fixed assets in the All Other reporting segment and with the write-down in certain embellishing fixed assets in the Firearms reporting unit. See Note 4 to our audited consolidated financial statements for the year ended December 31, 2008 appearing in “Item 8 – Financial Statements and Supplementary Data” in this annual report on Form 10-K.

 

 

(3)

Interest expense included in discontinued operations is $0.1 million for the year ended December 31, 2004.

 

 

(4)

The years ended December 31, 2004 and 2005 include $15.5 million and $8.7 million, respectively, in tax expense associated with recording a valuation allowance against certain deferred tax assets. See Note 18 to the audited consolidated financial statements for the year ended December 31, 2008 appearing in “Item 8 – Financial Statements and Supplementary Data” in this annual report on Form 10-K.

 

 

(5)

On February 9, 2004, we completed the sale of our fishing line business, and the results are reflected as discontinued operations for all periods presented.

 

 

(6)

Reflects the Gain on Disposal of assets sold associated with the sale of specified assets of our fishing line business on February 9, 2004.

 

 

(7)

On July 30, 2008, Remington entered into a joint venture agreement between Remington and certain other members to form the joint venture EOTAC. EOTAC is a tactical and outdoor apparel business. Remington owns 61.8% of EOTAC and other members own 38.2%. $0.1 million reflects the other members’ minority contribution.

30



 

 

(8)

Excludes amortization of deferred financing costs of $1.9 million, $1.8 million, and $1.6 million for the years ended 2004, 2005, and 2006, respectively, which is included in interest expense. Excludes amortization expense of deferred financing costs of $0.6 million for the five month period ended May 31, 2007. Excludes amortization expense of deferred financing costs of $1.0 million, offset by $0.6 and $1.6 million, offset by $1.0 million of amortization associated with the premium recorded on the indenture for the $200.0 million 10.5% Senior Notes due 2011 (the “Notes”) for the seven and twelve month periods ended December 31, 2007 and 2008, respectively.

 

 

(9)

Non-cash charges consist of the following: (a) for the year ended December 31, 2004, a $7.1 million accrual for retiree benefits and a $0.3 million loss on disposal of assets; (b) for the year ended December 31, 2005, a $5.6 million accrual for retiree benefits and a $0.4 million loss on disposal of assets; (c) for the year ended December 31, 2006, a $6.0 million accrual for retiree benefits, a $0.8 million loss on disposal of assets, a $7.4 million curtailment gain for pension expense, and $0.3 million of other compensation expense associated with stock option expense recognition under SFAS 123(R); (d) for the five month period ended May 31, 2007, $1.5 million of other compensation expense associated with stock option expense and the deferred shares recognized under SFAS 123(R), and $0.2 million of mark-to-market expense associated with redeemable shares of common stock and for the seven month period ended December 31, 2007, $0.3 million accrual for retiree benefits, offset by a gain of $6.4 million for curtailment of pension plan expense; and (e) for the year ended December 31, 2008, $1.4 million for retirement benefit accruals and $0.7 million loss on disposal of assets.

 

 

(10)

Nonrecurring and restructuring expenses consist of the following: (a) for the year ended December 31, 2004, $13.6 million gain on sale of the fishing line business, offset by $0.2 million of severance costs, and $0.7 million in consulting fees associated with the nonrecurring exclusive distribution and joint venture agreements for certain technology products; (b) for the year ended December 31, 2005, $0.6 million of severance charges, $0.3 million associated with the exclusive distribution agreement, a write-off of debt issuance costs of $0.5 million associated with the permanent reduction in borrowing capacity, offset by $1.2 million gain associated with the settlement of a contract in the Firearms reporting unit; (c) for the year ended December 31, 2006, $2.8 million of nonrecurring professional fees, and $0.2 million associated with the exclusive distribution agreements for certain technology products; (d) for the five month period ended May 31, 2007, $4.9 million of non-cash gain associated with the unsettled metals hedging contracts from the predecessor company. (The Company recognized approximately $2.0 million of this amount as an addition to Adjusted EBITDA in the fourth quarter as certain of the unexpired contracts as of May 31, 2007 ultimately settled in a gain position and the Company received cash for them. Consistent with the treatment of similar gains not effected by purchase accounting, management would have experienced those gains as a reduction in cost of goods sold based on inventory turnover), $0.1 million of professional fees related to the FGI Acquisition, $0.1 million of professional fees associated with the Haskin settlement agreement, $0.1 million of expense associated with certain employee benefits, and $0.7 million expense related to certain predecessor company insurance policies, and for the seven month period ended December 31, 2007, $3.0 million of professional fees and expenses incurred in connection with factory improvement initiatives, $28.7 million related to the inventory write-up from the application of purchase accounting to inventory as of May 31, 2007 being recognized in cost of sales as the acquired inventory is sold at a higher basis, $0.8 million of transaction fees related to the FGI Acquisition, $0.4 million of restructuring related fees, $0.2 million of other employee expenses, $3.1 million of realized gains associated with metals hedging contracts that settled prior to May 31, 2007 that would have been reclassified from other comprehensive income (“OCI”) into cost of goods sold based on inventory turnover that were actually accounted for and removed from OCI as a result of applying purchase accounting, and $0.5 million of gain for our investment in a previous joint venture; and (e) for the year ended December 31, 2008, $2.2 million of fees and expenses incurred in connection with factory improvement initiatives, $3.0 million related to the inventory write-up from the application of purchase accounting to inventory as a result of the FGI Acquisition and Marlin Acquisition being recognized in cost of sales as the acquired inventory is sold at a higher basis, $2.9 million of adjustments for metals hedging contracts, $2.1 million of cost associated with the Marlin and H&R integration, $1.2 million of stock option expense, $3.1 million for the write-off of the remaining value of the technology products inventory, $0.8 million related to severance for the closing of the H&R facility, $0.7 million related to Ilion & Lonoke restructuring expenses, $0.8 million related to other employee costs, $0.3 million of project expense, offset by $1.5 million gain on the sale of an investment.

 

 

(11)

“Adjusted EBITDA” as presented herein has the same meaning as defined in Note 21 to the audited

31



 

 

 

 

consolidated financial statements presented in “Item 8 – Financial Statements and Supplementary Data” in this annual report on Form 10-K. Discontinued Operations relates solely to the sale of our fishing line business on February 9, 2004. Adjusted EBITDA related to Discontinued Operations is appropriately included in “Consolidated EBITDA” as defined in the Notes.

 

 

(12)

Working capital as presented herein consists of total current assets less total current liabilities.

 

 

(13)

Consists of short-term and long-term debt, current portion of long-term debt, note payable to Holding and capital lease obligations.

 

 

(14)

Adjusted EBITDA differs from the term “EBITDA” as it is commonly used, and is substantially similar to the measure “Consolidated EBITDA” that is used in the Indenture. In addition to adjusting net income (loss) to exclude income taxes, interest expense, and depreciation and amortization, Adjusted EBITDA also adjusts net income (loss) by excluding items or expenses not typically excluded in the calculation of “EBITDA”, such as noncash items, gain or loss on asset sales or write-offs, extraordinary, unusual or nonrecurring items, including transaction expenses associated with the FGI Acquisition and certain “special payments” to Remington employees who held options and deferred shares in respect of Holding common stock, consisting of amounts that are treated as compensation expense by Remington and are paid in connection with payments of dividends to holders of Holding common stock. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. GAAP. However, management believes that Adjusted EBITDA is useful to investors in evaluating the Company’s performance because it is a commonly used financial analysis tool for measuring and comparing companies in the Company’s industry in areas of operating performance. Management believes that the disclosure of Adjusted EBITDA offers an additional view of the Company’s operations that, when coupled with the U.S. GAAP results and the reconciliation to U.S. GAAP results, provides a more complete understanding of the Company’s results of operations and the factors and trends affecting the Company’s business.

 

 

 

Adjusted EBITDA should not be considered as an alternative to net income (loss) as an indicator of the Company’s performance or as an alternative to net cash provided by operating activities as a measure of liquidity. The primary material limitations associated with the use of Adjusted EBITDA as compared to U.S. GAAP results is (i) it may not be comparable to similarly titled measures used by other companies in the Company’s industry, and (ii) it excludes financial information that some may consider important in evaluating the Company’s performance. The Company compensates for these limitations by providing disclosure of the differences between Adjusted EBITDA and U.S. GAAP results, including providing a reconciliation of Adjusted EBITDA to U.S. GAAP results, to enable investors to perform their own analysis of the Company’s operating results.

 

 

 

The indenture for the Notes provides that, in order to enter into the following types of transactions, in addition to other applicable requirements, the ratio of Consolidated EBITDA (where we use the substantially similar Adjusted EBITDA as noted above) to Remington’s consolidated interest expense (subject to certain adjustments as provided in the indenture for the Notes) must be greater than 2.25 to 1.00 for the four most recent quarters for which financial statements are available:

 

 

 

The incurrence of indebtedness in addition to limited specified categories of permitted indebtedness that is enumerated in the indenture for the Notes.

 

 

 

 

Mergers and consolidations involving Remington.

 

 

 

 

Dividends, investments and other restricted payments in addition to limited specified categories of permitted restricted payments and investments that are enumerated in the indenture for the Notes.

 

 

 

 

The re-designation of an unrestricted subsidiary as a restricted subsidiary for the purposes of the indenture for the Notes.

 

 

 

(15)

“Consolidated Interest Expense” as defined in the indenture for the Notes, consists of the total interest expense of Remington and its subsidiaries, net of any interest income of Remington and its subsidiaries, and includes interest expense consisting of (a) interest expense attributable to capital leases, (b) amortization of debt discount, (c) interest on debt of other persons guaranteed by Remington or any of its subsidiaries, (d) non-cash interest expense, (e) the interest portion of any deferred payment obligation and (f) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing. The definition of “Consolidated Interest Expense” also provides that gross interest is to be determined after giving effect to any net payment made or received by Remington or its subsidiaries with respect to interest rate hedging agreements.

32



 

 

 

Note that Consolidated Interest Expense excludes amortization expense associated with the Company’s debt acquisition costs of $1.9 million, $1.8 million, and $1.6 million for the years ended 2004, 2005, and 2006, respectively, and includes amounts reclassified to discontinued operations of $0.1 million for the year ended December 31, 2004. Excludes amortization expense of deferred financing costs of $0.5 million for the five month period ended May 31, 2007 and excludes amortization expense of deferred financing costs of $1.0 million and $1.6 million, offset by $0.6 million and $1.0 million of amortization associated with the premium recorded on the notes for the seven and twelve month periods ended December 31, 2007 and 2008, respectively. There were no discontinued operations amounts included in 2007 or 2008.

 

 

(16)

“Consolidated Coverage Ratio” as defined in the indenture for the Notes is the ratio of Consolidated EBITDA (where we use the substantially similar Adjusted EBITDA as noted above) for the four most recently ended quarters for which financial statements are available to Consolidated Interest Expense (as defined in the indenture for the Notes) for the same period. The Consolidated Coverage Ratio is presented for illustrative purposes.

 

 

(17)

For purposes of computing this ratio, earnings consists of earnings before income taxes and fixed charges, excluding capitalized interest. Fixed charges consist of interest expense, capitalized interest, amortization of discount on indebtedness and one-third of rental expense (the portion deemed representative of the interest factor). Due to our net losses in 2004, and 2005, this ratio was less than 1:1. Additional earnings of $3.7 million and $16.4 million in 2004 and 2005, respectively, would have been required to achieve a ratio of 1:1. Due to our net loss in the seven month period ended December 31, 2007, this ratio was less than 1:1. Additional earnings of $16.3 million would have been required to achieve a ratio of 1:1. Due to our net loss in 2008, this ratio was less than 1:1. Additional earnings of $37.1 million would have been required to achieve a ratio of 1:1.

33



Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion and analysis should be read in conjunction with the “Selected Financial Data”, our audited consolidated financial statements, related notes and other financial information appearing elsewhere in this annual report of Remington Arms Company, Inc. (“Remington”), which includes the financial results of The Marlin Firearms Company (“Marlin”) and its subsidiary, H&R 1871, LLC (“H&R”) (since February 1, 2008), as well as the accounts of Remington’s subsidiaries, RA Brands, L.L.C. (“RA Brands”) and Remington Steam, LLC (“Remington Steam”), Remington’s consolidated joint venture EOTAC, LLC (“EOTAC”) and Remington’s unconsolidated 27.1% membership interest in INTC USA, LLC (“INTC USA”) (collectively with Remington, the “Company”) unless the content otherwise requires.

          “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is separated into the following sections:

 

 

 

 

Recent Developments

 

 

 

 

Executive Overview

 

 

 

 

Business Outlook

 

 

 

 

Liquidity and Capital Resources

 

 

 

 

Results of Operations

 

 

 

 

Recent Accounting Pronouncements

 

 

 

 

Critical Accounting Policies and Estimates

 

 

 

 

Information Concerning Forward-Looking Statements

Recent Developments

Global Credit Crisis and Market Downturn

          In early 2008, as the United States economy began to soften and fuel and other commodity prices began to rise, doubts were raised about the ability of borrowers to pay debts. Housing values began to fall and marginal (often sub-prime) loans began to default at historically high rates. Financial institutions responded by tightening their lending policies with respect to counterparties determined to have sub-prime mortgage risk. This tightening of institutional lending policies contributed to the failure of certain major financial institutions in late 2008. Continued failures, losses, and write-downs at other major financial institutions through 2008 intensified concerns about credit and liquidity risks and have resulted in a sharp reduction in overall market liquidity and broad governmental intervention. The global credit and macroeconomic conditions threaten the stability of the global marketplace and have adversely impacted consumer confidence and spending.

Acquisition of The Marlin Firearms Company

          On January 28, 2008, 100% of the shares of Marlin were purchased by Remington (the “Marlin Acquisition”). The Marlin Acquisition includes Marlin’s 100% ownership interest in H&R. We believe the Marlin Acquisition will strengthen our ability to grow our leadership position in shotguns and rifles in the United States, further develop our market presence internationally and benefit from operational improvements and integrating certain selling, marketing and administrative functions.

Announcement of Closure of Manufacturing Facility

          On April 7, 2008, Remington announced a strategic manufacturing consolidation decision that resulted in the closure of its manufacturing facility in Gardner, Massachusetts in October 2008. Remington notified affected employees of this decision on April 7, 2008. The consolidation of our manufacturing capabilities is expected to provide improved efficiencies that are anticipated to ultimately provide for better service to customers and quality of products to end users. In connection with the closing, management recorded a $1.2 million liability in the preliminary purchase price allocation. As of December 31, 2008, approximately $0.9 million of the $1.2 million liability has been spent. In addition to the $0.9 million, an additional $1.1 million has been spent on the transfer of equipment, planning and site preparation, as well as $1.7 million spent on purchases of new equipment as of December 31, 2008.

34



Consolidated Joint Venture

          On July 30, 2008, Remington entered into a joint venture agreement between Remington and certain other members to form the joint venture EOTAC. Remington contributed an initial investment of $0.5 million and subsequently contributed an additional $0.2 million in 2008. In return, the other members contributed existing and future intellectual property, all leased real property, as well as machinery, equipment, tools and tangible personal property. Remington owns 61.8% of EOTAC and other members own 38.2%. EOTAC is a tactical and outdoor apparel business. We believe this joint venture allows us to gain access to both a high quality apparel line and a growing brand.

Membership Interest Purchase and Investment Agreement

          On October 31, 2008, Remington entered into a membership interest purchase and investment agreement between Remington, International Non-Toxic Composites Corp., and INTC USA, LLC (“INTC USA”). Remington contributed an initial investment of approximately $0.8 million. Remington owns 27.1% of the issued and outstanding membership interests in INTC USA. INTC USA owns a majority interest in Springfield Munitions Company, LLC, which with Delta Frangible Ammunition, LLC owns intellectual property rights related to manufacturing rights for various shot, ammunition and other products. We believe this membership interest will allow INTC USA to acquire, construct and/or lease and thereafter equip and operate a manufacturing facility for the production of products for sale to Remington and others. Management has assessed the accounting treatment of INTC USA and accounts for its investment under the equity method of accounting as outlined in the provisions of APB Opinion 18.

Goodwill and Intangible Asset Impairment

          As part of the Company’s annual impairment testing conducted with outside valuation experts under SFAS 144 and SFAS 142, the Company recorded non-cash impairment charges related to goodwill of $44.3 million and certain trademarks of $3.1 million for the year ended December 31, 2008. The charge eliminated the goodwill amounts from both our Firearms and All Other reporting segments.

Increase of Management Depth

          Since the acquisition of RACI Holding, Inc., the sole stockholder of Remington, by Freedom Group, Inc. (the “FGI Acquisition”) in May 2007, Remington has employed a number of additional executives in an effort to increase our leadership position in the industry and add depth to the existing management team. Such positions include a Chief Operating Officer, a Chief Sales Officer, a Chief Information Officer, a Chief Supply Chain Officer, a Chief Marketing Officer, a Chief Technology Officer and a General Counsel. Management believes we have sufficient talent to manage even greater revenue streams if new acquisition opportunities arise.

Executive Overview

Company Overview

          We evaluate our business primarily on Adjusted EBITDA (as described in Note 21 to our consolidated financial statements appearing elsewhere in this annual report) from two core segments, Firearms and Ammunition, and to a lesser degree on other operating segments organized within the All Other reporting segment, consisting of Accessories, Licensed Products, Clay Targets, and Powder Metal Products. Following the Marlin Acquisition, the Marlin and H&R products are included in our Firearms reporting segment. As part of this evaluation, we focus on managing inventory (including quantity), length and volume of extended dating sales terms and trade payables through, among other things, production management, expense control and improving operating efficiencies at our factories.

          We continue to look for opportunities to improve our quality and efficiencies in our manufacturing facilities as we strive to be a market-driven company in an increasingly demanding global marketplace. Accordingly, we have undertaken an effort to accelerate existing initiatives in the area of Lean manufacturing. In addition, we are committed to refining our core businesses and positioning ourselves to take advantage of opportunities to strategically grow and improve our business. As we regularly evaluate our overall business, we look for new products in the hunting, shooting, accessories, law enforcement, government, and military areas that

35



complement our core strategies, which may include direct product sourcing, licensing, acquisitions or other business ventures.

          Finally, in order to be well positioned for growth, we recognize the need to protect our competitive position with the introduction of new, innovative, high quality, higher performance and cost effective products to support our customers and consumers. As a result of the market polarization trends we have identified in “Business Outlook – Industry” below, we are augmenting our already existing product lines with import product lines, and we expect to continue to enhance our existing product lines both through the internal development of new products and the further sourcing of product.

          The sale of firearms and ammunition depends upon a number of factors related to the level of consumer spending, including the general state of the economy and the willingness of consumers to spend on discretionary items. The industry can be affected by macroeconomic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. Disruptions in the overall economy and financial markets have historically reduced consumer confidence in the economy and negatively affected consumer spending. Historically, the general level of economic activity has significantly affected the demand for sporting goods products in the firearms, ammunition, and related markets. As economic activity loses momentum, confidence and discretionary spending by consumers has historically decreased. See further discussion in “Business Outlook” below.

          Management continues to believe that we have successfully maintained the strength of our brands and our market-leading positions in our primary product categories, and that we remain poised to take advantage of any significant improvement in the demand environment. We have engaged in selective efforts to stimulate demand for our products through targeted new product introductions and promotions in selected product categories.

          We continue to experience volatile costs related to materials and energy (including lead, copper, zinc, steel, and fuel) which are above any historical comparison. Specifically, management currently estimates that its 2008 annual costs for certain core materials and energy alone have increased in the range of $50-70 million over 2003 annual levels. Management has initiated price increases to our customers in an attempt to partially offset these estimated costs and will continue to evaluate the need for future price increases in light of these trends, our competitive landscape, and financial results. Management estimates that its cumulative price increases initiated since 2003 have offset greater than 50% of the estimated cumulative costs incurred. These estimates assume no significant loss in overall sales or production volume.

          Although we believe that regulation of firearms and ammunition, and consumer concerns about such regulation, have not had a significant adverse influence on the market for our firearms and ammunition products for the periods presented herein, there can be no assurance that the regulation of firearms and ammunition will not become more restrictive in the future or that any such development will not adversely affect these markets.

          On March 13, 2009, effective immediately, our Chief Executive Officer, Thomas L. Millner, announced that he was (i) terminating his employment with Remington, and (ii) resigning as a member of the Board of Directors of Remington (the “Board”). On March 14, 2009, effective immediately, the Board appointed Theodore H. Torbeck to serve as Chief Executive Officer of Remington.

Business Outlook

General Economy

          We believe the general economic environment continues to be increasingly volatile and uncertain as a result of credit concerns due to the challenges in the banking industry, the crisis in the housing market, the decline in the stock market, tightening in the credit markets, disappointing labor market conditions, job losses, an uncertainty about the geopolitical environment and the recent stimulus bill. Consumer confidence is at an all time low. In addition, the commodity prices for raw materials such as lead, copper, zinc and steel, as well as energy costs, continue to be very unstable. See Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”. We can provide no assurance that these trends will not continue. Changes in consumer confidence and spending and/or significant changes in commodity and energy prices could have a material impact on our consolidated financial position, results of operations or cash flows.

36



Industry

          In the first three quarters of 2008, the domestic firearms and ammunition markets continued to experience a decline in volumes that began in late 2007 due to the weak economic conditions discussed above. The industry experienced a marked decline in mid-September 2008 amidst the challenges in the banking industry, the resulting market shock and the government bailout. Commencing in the fourth quarter of 2008, domestic firearms and ammunition sales increased, particularly in the high end product areas with concerns that the new administration would ban and regulate guns and ammunition more severely than previous administrations.

          Also in 2008, the international sporting and hunting market remained steady largely due to the weakness of the U.S. dollar. In addition, the government, military, and law enforcement market has remained strong due to the availability of homeland security funding and political uncertainty.

          General worldwide economic conditions in 2008 have experienced a downturn due to the sequential effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, volatile energy costs, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. These conditions make it difficult for our customers and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow spending on our products, which would delay and lengthen sales cycles. We cannot predict the timing or duration of any economic slowdown or the timing or strength of a subsequent economic recovery, worldwide or in the industry.

The Company

          Management believes that despite the challenges in the banking industry, the resulting stock market drop, unstable fuel prices and the ensuing government bailout, we have experienced no significant adverse impact in our overall sales. We believe the overall market for our products picked up subsequent to the U.S. Presidential election and we believe this is attributable to consumer concerns that the new administration could ban and regulate certain guns and ammunition in a more restrictive manner. Management’s strategy in light of the economic environment noted above has been to improve efficiencies and quality, improve profitability, increase average working capital and preserve liquidity, remain firm with price increases, and implement a strong promotion strategy.

          In an effort to improve efficiencies and quality, we accelerated our implementation of Lean manufacturing and Six Sigma initiatives as part of the culture in our factories. The Lean manufacturing and Six Sigma initiatives implemented have had a positive impact in improving our productivity and quality.

          In order to improve profitability, we successfully completed the integration of Marlin, including back office consolidation, and a manufacturing consolidation that resulted in the closure of our Gardner, Massachusetts firearms facility in October 2008. The Gardner facility is currently for sale. Management believes that this consolidation will enhance our ability to more efficiently provide quality products at competitive prices in an increasingly demanding global marketplace.

          In our efforts to increase working capital and preserve liquidity, we have remained disciplined in our approach to limit the use of extended dating terms and evaluating customer credit worthiness. In order to maintain our inventories at target levels, we are closely monitoring and evaluating our production levels in order to balance production with our sales demand. We have successfully decreased our inventory levels and increased our inventory turns.

          Due to continuing volatility of metal, energy and transportation costs, management remained firm with price increases throughout 2008. As a result of management’s approach, firearms price increases generally held steady during 2008, while overall demand remained stable. In our ammunition segment, price increases have held although volume softened. Our strategies have enabled us to improve our sales performance as compared to 2007.

          In anticipation of a challenging year in our domestic hunting market in 2008, we developed a national promotion strategy offering consumer rebates on a number of Remington Core Product Categories in both firearms and ammunition. These categories included select Model 700™ Centerfire rifles, all Model 798™ and Model 799™ Mauser action Centerfire rifles, all Model 770™ Centerfire rifles, all Model 11-87™ Auto-Loading shotguns, all

37



Model 870™ Express Pump shotguns and all Model 597™ Rimfire rifles. In ammunition, these categories included Core-Lokt rifle ammunition, Express Long Range Shotshells, as well as Wingmaster HD waterfowl ammunition. We also engaged in selective efforts to diversify and stimulate demand for our products through targeted product introductions and promotions in selected product categories such as the R-25™ Modular Repeating Rifle, and consumer rebates on specific products in both Firearms and Ammunition including Model SPR310™ Shotguns, and Genesis Muzzleloaders, as well as select Premier Shotshells and Premier Centerfire Rifle ammunition.

          Management believes our international hunting market remains strong due to the weakness of the U.S. dollar and strong brand recognition. In addition, we have successfully continued our initiatives to pursue growth initiatives in our government, military, and law enforcement divisions, along with broadening our brand awareness with selective licensing arrangements.

          Subsequent to the U.S. Presidential election, the majority of sales have been in the military rifles and ammunition markets. Management is unable to predict whether current consumer spending trends and uncertain general economic conditions will impact the demand for our products. However, management continues to evaluate these trends as well as uncertainties associated with costs related to producing and procuring materials, energy, processing and transportation costs.

          Management’s strategy in light of the environment noted above has been to raise prices, contain costs, improve average working capital and preserve liquidity, while improving profitability. We have also engaged in selective efforts to stimulate demand for our products through targeted product introductions and promotions in selected product categories. We continue to pursue growth initiatives in our government, military, and law enforcement divisions along with broadening our brand awareness with selective licensing arrangements.

Liquidity and Capital Resources

Sources and Uses of Liquidity

          Historically, our principal debt financing has consisted of borrowings under our Amended and Restated Credit Agreement (as amended by the First and Second Amendments and the Letter Amendment) and the indenture for our 10 ½% Senior Notes due 2011 (the “Notes”) (as supplemented, the “Indenture”).

          We generally fund expenditures for operations, administrative expenses, capital expenditures, debt service obligations, potential repurchases of our Notes (which we intend to make from time to time depending on market conditions) and dividend payments with internally generated funds from operations, and satisfy working capital needs from time to time with borrowings under our Amended and Restated Credit Agreement. We believe that we will be able to meet our debt service obligations, fund our short-term and long-term operating requirements, and make permissible dividend payments (subject to restrictions in the Amended and Restated Credit Agreement as amended, and the Indenture) in the future with cash flow from operations and borrowings under our Amended and Restated Credit Agreement prior to its maturity in 2010, although no assurance can be given in this regard. We continue to focus on managing inventory levels to keep them in line with sales projections and management of accounts payable.

          As of December 31, 2008, we had outstanding approximately $275.8 million of indebtedness, consisting of approximately $202.1 million aggregate carrying amount ($200.0 million principal) of the Notes, a $20.3 million balance on our Term Loan, $51.8 million in borrowings under the Amended and Restated Credit Agreement, $0.9 million in capital lease obligations and a $0.7 million note payable to Holding. As of December 31, 2008, we also had aggregate letters of credit outstanding of $7.1 million. In addition, we have $3.2 million in short-term borrowings.

          The outstanding amount due under the Amended and Restated Credit Agreement was $51.8 million at December 31, 2008 compared to zero at December 31, 2007. The increase in the outstanding amount is due to the Company borrowing incremental funds as a cautionary measure in response to uncertainty in the financial markets in 2008. The Company has not repaid the borrowed amounts as of the date of this filing. Cash on hand at December 31, 2008 was $66.7 million, compared to $23.4 million at December 31, 2007, and is invested in a treasury reserve fund.

          The declaration and payment of dividends, if any, will be at the sole discretion of the Board of Directors of the Company, subject to the restrictions set forth in the Amended and Restated Credit Agreement and the indenture for the Notes, which currently restrict the payment of dividends by the Company to Holding. We expect to make

38



future dividend payments to Holding, if any, based on available cash flows as and to the extent permitted by the Amended and Restated Credit Agreement and the indenture for the Notes. There were no dividends paid in 2008 or 2007. At present, we do not have the ability to make any dividend payments due to restrictions placed upon us by the Amended and Restated Credit Agreement and the indenture for the Notes.

Current Market Conditions

          Recently, certain banks in our syndicate have merged with other financial institutions. Wachovia Corporation, the lead agent for our credit facility under our Amended and Restated Credit Agreement with a commitment of $60.3 million, completed a merger with Wells Fargo & Company; Bank of America, N.A., our syndication agent with a commitment of $60.3 million, acquired Merrill Lynch; and National City, our documentation agent with a $34.4 million commitment, was acquired by PNC Corporation. These mergers and acquisitions have not had an impact on our ability to access funds available under our Amended and Restated Credit Agreement.

          Financing for our efforts to strategically grow from direct product sourcing, licensing, acquisitions or business ventures may be available under our Amended and Restated Credit Agreement, to the extent permitted under the Indenture.

Operating Activities

          With respect to other significant cash outlays, we contributed $15.6 million during the year ended December 31, 2008 to plan assets under our funded defined-benefit pension plan. Due to the adverse changes in the financial markets, our pension assets have been negatively impacted. We are assessing our asset allocation and investment strategy to determine if any adjustments may be appropriate. We anticipate an increase in the minimum funding requirements and possibly the pension expense in 2009 due to the decrease in asset value during 2008.

Investing Activities

          Gross capital expenditures for the year ended December 31, 2008 were $17.3 million, consisting primarily of capital expenditures both for new equipment related to the manufacture of firearms and ammunition, as well as maintenance of existing facilities. We expect capital expenditures for 2009 to be in a range of $16.0 million to $20.0 million. Our Amended and Restated Credit Agreement allows for capital expenditures of up to $29.0 million in 2009, including unused capacity carried over from previous years.

Financing Activities

          10½% Senior Notes due 2011. The FGI Acquisition resulted in a new basis of the value of the Notes. Accordingly, the Notes were adjusted to their estimated fair value as of May 31, 2007 of $203.8 million. The increase of $3.8 million is being amortized into interest expense over the remaining term of the Notes. In addition, debt acquisition costs associated with obtaining waivers, consents and amendments in the amount of $4.2 million related to the Notes and $1.0 million related to the Amended and Restated Credit Agreement have been capitalized as of May 31, 2007 and are being amortized.

          The Notes were initially issued on January 24, 2003 in an aggregate principal amount of $200.0 million. The Notes are senior unsecured obligations of Remington. The Indenture contains restrictive covenants that, among other things, limit the incurrence of debt by Remington and its subsidiaries, the payment of dividends to Holding, the use of proceeds of specified asset sales and transactions with affiliates. In addition, the Indenture permits repurchases of the Notes on the open market, subject to limitations that may be contained in the Amended and Restated Credit Agreement and the Indenture.

          On May 12, 2008, Remington entered into a Second Supplemental Indenture, by and among Remington, U.S. Bank National Association as Trustee, and each of RA Brands, Marlin and H&R (the “New Guarantors”), to the Indenture. Pursuant to the Second Supplemental Indenture, each of the New Guarantors has agreed to unconditionally guarantee all of Remington’s obligations under the Notes on the terms and subject to the conditions of the Indenture.

          We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such

39



repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and the amounts involved may be material.

          The Amended and Restated Credit Agreement. Our Amended and Restated Credit Agreement provides up to $155.0 million of borrowing capacity under an asset-based senior secured revolving credit facility through June 30, 2010. Amounts available under the Amended and Restated Credit Agreement are subject to a borrowing base limitation based on certain percentages of eligible accounts receivable and eligible inventory in addition to the minimum availability requirement of $27.5 million. The Amended and Restated Credit Agreement also includes a letter of credit sub-facility of up to $15.0 million. The maximum amount outstanding for the period from January 1, 2008 through December 31, 2008 was $116.8 million. As of December 31, 2008, approximately $49.8 million in additional borrowings including the minimum availability requirement of $27.5 million were available as determined pursuant to the Amended and Restated Credit Agreement compared to $59.9 million at December 31, 2007.

          On November 13, 2007, we added a $25.0 million Term Loan Commitment at an interest rate of LIBOR plus 200 basis points (which was 6.84% at December 31, 2007) with monthly principal payments of $0.5 million, plus interest, which began May 1, 2008 and continues on the first day of each month thereafter, the final installment of which shall be in an amount equal to such Lender’s Pro Rata share of the remaining principal balance of the Term Loan and shall be payable on the Commitment Termination Date. As a part of the Second Amendment, we can elect the interest rate of LIBOR plus 200 basis points or prime plus 50 basis points. The Term Loan was in LIBOR plus 200 basis points, or 3.88%, at December 31, 2008. The weighted average interest rate of our Term Loan at December 31, 2008 was 5.02%.

          We executed the Second Amendment to provide additional capacity and flexibility to support strategic initiatives including, but not limited to, factory improvements, penetration of certain sales channels, new product development, potential acquisitions and other corporate purposes. In connection with the closing of the Marlin Acquisition, and pursuant to the Second Amendment, each of Marlin and H&R became a “Borrower” under the Amended and Restated Credit Agreement.

          The interest rate margin for the Alternate Base Rate and the Euro-Dollar loans at December 31, 2008 was (0.50%) and 1.00%, respectively. The weighted average interest rate under our outstanding credit facility balance was approximately 3.89% and 7.09% for the years ended December 31, 2008 and 2007, respectively.

Cash Flows

          Net cash provided by operating activities was $39.7 million for the fiscal year ended December 31, 2008 and was primarily due to:

 

 

 

 

Inventories decreasing by $36.8 million, primarily due to higher sales orders than expected around year end as well as management initiatives to reduce inventory levels.

          Net cash provided by operating activities was $65.4 million for the seven month period ended December 31, 2007 and was primarily due to:

 

 

 

 

Accounts receivable decreasing by $21.2 million, which was primarily attributable to shorter terms in 2007 compared to 2006;

 

 

 

 

Inventories decreasing by $64.0 million primarily due to higher sales, as well as the rollout of $28.7 million due to purchase price accounting; offset by

 

 

 

 

A net loss for the period of $10.5 million; and

 

 

 

 

Pension plan contributions of $11.0 million.

          Net cash used in operating activities was $36.3 million for the five month period ended May 31, 2007 and was primarily due to:

 

 

 

 

Inventories increasing $39.5 million principally due to higher material costs; and

 

 

 

 

The Other category within changes in operating assets and liabilities showed a use of cash of $8.1 million due to $6.2 million of realized gains associated with hedging activity, as well as the recording

40



 

 

 

 

 

of a $4.9 million gain related to unsettled contracts at May 31, 2007, all of which were offset by net income for the period of $9.0 million.

          Net cash used in investing activities for the fiscal year ended December 31, 2008 was $56.0 million and was primarily related to the $46.3 million payment for the purchase of Marlin, net of cash acquired, as well as the purchase of property, plant and equipment of $16.3 million, offset by cash of $5.6 million received on the termination of Company owned life insurance policies.

          Net cash used in investing activities for the seven month period ended December 31, 2007 was $1.4 million and was due to the purchase of property, plant and equipment of $6.7 million, option cancellation payments of $1.1 million, premiums paid for Company owned life insurance of $0.3 million, offset by $3.7 million of cash received on the surrender of the Company owned life insurance and $3.0 million in cash received on the sale of the unconsolidated joint venture.

          Net cash used in investing activities for the five month period ended May 31, 2007 was $12.1 million and was due to the payment of transaction costs of $5.1 million, seller-related payments paid by Remington of $4.7 million, $2.1 million related to the purchase of property, plant and equipment and premiums paid for Company owned life insurance of $0.2 million.

          Net cash provided by financing activities for the year ended December 31, 2008 was $59.6 million and was primarily due to higher borrowings from our revolving credit facility of $51.8 million and cash contributions from our parent companies of $18.2 million, offset by a reduction in the book overdraft of $5.3 million and payments of long-term debt of $5.1 million.

          Net cash used in financing activities for the seven month period ended December 31, 2007 was $49.6 million and resulted from $85.2 million in lower borrowing needs under the Amended and Restated Credit Agreement, debt issuance costs of $0.5 million, and principal payments on long-term debt of $0.3 million, offset by $25.0 million in proceeds from the Term Loan, $6.1 million in cash contributions from FGI and an increase in the book overdraft of $5.3 million.

          Net cash provided by financing activities for the five months ended May 31, 2007 was $56.9 million and resulted from $65.8 million in higher borrowing needs under the Amended and Restated Credit Agreement, $4.7 million in cash withheld from sellers provided by FGI, offset by $5.2 million in deferred financing costs that were written off as a result of the FGI Acquisition, $3.8 million in amounts paid to Holding related to the FGI Acquisition and a reduction in the book overdraft of $4.5 million.

Contractual Obligations and Commercial Commitments

          We have various purchase commitments for services incidental to the ordinary conduct of business, including, among other things, a services contract with our third party warehouse provider. We do not believe such commitments are at prices in excess of current market prices. Included in those purchase commitments are purchase contracts with certain raw materials suppliers, for periods ranging from one to five years, some of which contain firm commitments to purchase minimum specified quantities. However, such contracts had no material impact on our financial condition, results of operations, or cash flows during the reporting periods presented herein.

          We support service and repair facilities for all of our firearm products in order to meet the service needs of our distributors, customers and consumers nationwide. We provide consumer warranties against manufacturing defects in all firearm products we manufacture in the United States. Estimated future warranty costs are accrued at the time of sale. Product modifications or corrections are voluntary steps taken by us to assure proper usage or performance of a product by consumers. The cost associated with product modifications and or corrections are recognized in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“SFAS 5”), and charged to operations. The cost of these programs is not expected to have a material adverse impact on our operations, liquidity or capital resources.

41



          The following represents our contractual obligations and other commercial commitments as of December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Total
Amounts
Committed

 

Less
Than
1 Year

 

1-3
Years

 

3-5
Years

 

Over
5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in millions)

 

Contractual Obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10½% Senior Notes due 2011

 

 

$

200.0

 

 

 

$

 

 

 

$

200.0

 

 

 

$

 

 

 

$

 

 

Expected interest payments associated with the Notes

 

 

 

43.4

 

 

 

 

21.0

 

 

 

 

22.8

 

 

 

 

 

 

 

 

 

 

Required pension contributions

 

 

 

7.5

 

 

 

 

13.6

 

 

 

 

11.4

 

 

 

 

11.5

 

 

 

 

11.6

 

 

Term Loan

 

 

 

20.3

 

 

 

 

6.2

 

 

 

 

14.1

 

 

 

 

 

 

 

 

 

 

Expected interest payments associated with the Term Loan (a)

 

 

 

1.0

 

 

 

 

0.7

 

 

 

 

0.3

 

 

 

 

 

 

 

 

 

 

Working Capital Facility Borrowings

 

 

 

51.8

 

 

 

 

 

 

 

 

51.8

 

 

 

 

 

 

 

 

 

 

Due to RACI Holding, Inc.

 

 

 

0.7

 

 

 

 

 

 

 

 

 

 

 

 

0.5

 

 

 

 

0.2

 

 

Capital Lease Obligations

 

 

 

0.9

 

 

 

 

0.5

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

Operating Lease Obligations

 

 

 

2.1

 

 

 

 

1.0

 

 

 

 

1.1

 

 

 

 

 

 

 

 

 

 

Other Long-term Purchase Obligations (b)

 

 

 

9.2

 

 

 

 

5.7

 

 

 

 

2.6

 

 

 

 

0.9

 

 

 

 

 

 

 

 

                                               

 

Total Contractual Cash Obligations

 

 

$

336.9

 

 

 

$

48.7

 

 

 

$

304.5

 

 

 

$

12.9

 

 

 

$

11.8

 

 

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Commercial Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standby Letters of Credit

 

 

$

7.1

 

 

 

$

7.1

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

 

                                               

 

Total Commercial Commitments

 

 

$

7.1

 

 

 

$

7.1

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

 

                                               

 


 

 

 

 

(a)

Expected interest payments related to the Term Loan is estimated based on the LIBOR rate plus 200 basis points at December 31, 2008, or 3.88%.

 

 

 

 

(b)

Other Long-term Purchase Obligations includes minimum obligations due under various contracts, including a services contract with our third party warehouse provider, and minimum purchases associated with certain materials necessary for the manufacturing process.

Off Balance Sheet Arrangements

          We do not have any off balance sheet arrangements.

Results of Operations

          As a result of the FGI Acquisition in 2007, the financial results for the twelve months ended December 31, 2007 have been separately presented, split between the “Predecessor” entity, covering the period January 1 through May 31, 2007 and the “Successor” entity, covering the period June 1, 2007 through December 31, 2007 and the year ended December 31, 2008. For comparative purposes, we combined the two periods through December 31, 2007 in our discussion below. We believe this presentation provides the reader with a more accurate comparison and the combined results of operations are what management relies on internally when making business decisions. The following table shows, for the periods indicated, the percentage relationships to net sales of selected financial data. Our management’s discussion and analysis of our results of operations compares results for the year ended December 31, 2008 to the year ended December 31, 2007 and the year ended December 31, 2007 to the year ended December 31, 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

Predecessor

 

 

 

 

 

 

June 1-
December 31

 

January 1-
May 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%

 

Cost of Goods Sold

 

75.6

 

 

83.6

 

 

70.2

 

 

75.9

 

 

Gross Profit

 

24.4

 

 

16.4

 

 

29.8

 

 

24.1

 

 

Operating Expenses

 

26.5

 

 

16.8

 

 

17.1

 

 

17.5

 

 

Operating Profit

 

(2.1

)

 

(0.4

)

 

12.7

 

 

6.6

 

 

Net Income/(Loss) from Continuing Operations

 

(6.7

)

 

(3.3

)

 

5.4

 

 

0.1

 

 

42



Year Ended December 31, 2008 as Compared to Year Ended December 31, 2007

          Net Sales. The following table compares net sales by reporting segment for each of the years ended December 31, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor
January 1 -
December 31
2008

 

Percent
of Total

 

Successor
June 1 -
December 31
2007

 

 

Predecessor
January 1-
May 31
2007

 

Combined
2007

 

Percent
of Total

 

$
Increase/
(Decrease)

 

%
Increase/
(Decrease)

 

 

                               

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Firearms

 

$

295.2

 

49.9

%

 

$

138.7

 

 

$

80.5

 

$

219.2

 

44.8

%

 

$

76.0

 

34.7

%

Ammunition

 

 

275.9

 

46.7

 

 

 

169.3

 

 

 

78.9

 

 

248.2

 

50.8

 

 

 

27.7

 

11.2

 

All Other

 

 

20.0

 

3.4

 

 

 

14.0

 

 

 

7.6

 

 

21.6

 

4.4

 

 

 

(1.6

)

(7.4

)

 

 

                                               

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

591.1

 

100.0

%

 

$

322.0

 

 

$

167.0

 

$

489.0

 

100.0

%

 

$

102.1

 

20.9

%

 

 

                                               

          Firearms

          The increase in net sales of $76.0 million for the year ended December 31, 2008, including sales of firearms from the Marlin Acquisition, compared to the prior year end was due primarily to increased sales volumes of certain rifles of $62.2 million, increased sales volumes of domestic sourced products of $13.4 million, increased sales volumes of international sourced products of $0.3 million, and increased sales volumes of certain shotguns of $3.6 million, offset by reduced part and service sales of $0.9 million and $2.6 million of increased discounts and rebates.

          Ammunition

          The increase in net sales of $27.7 million for the year ended December 31, 2008 over the prior year end was due predominantly to $44.1 million associated with realized price increases, offset by lower overall sales volumes of $16.4 million. The lower sales volumes are comprised primarily of lower sales volumes of certain shotshell ammunition of $12.1 million, lower sales volumes of certain rimfire ammunition of $4.5 million, lower sales volumes of components and other of $3.6 million and higher accrued discounts of $0.3 million, offset by higher sales volumes of certain pistol and revolver ammunition of $4.1 million.

          All Other (including Accessories, Licensing Income, Clay Targets, Powder Metal Products, Technology Products and Apparel)

          The decrease in net sales of $1.6 million for the year ended December 31, 2008 over the prior year end was due primarily to lower technology products sales of $2.3 million, lower clay target sales of $0.3 million, offset by higher powder metal product sales of $0.3 million, higher accessory sales of $0.5 million and sales in our EOTAC joint venture of $0.2 million.

          Cost of Goods Sold. The table below depicts the cost of goods sold by reporting segment for the years ended December 31, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor
January 1-
December 31
2008

 

Percent of
Net Sales

 

Successor
June 1 -
December 31
2007

 

 

Predecessor
January 1-
May 31
2007

 

Combined
2007

 

Percent of
Net Sales

 

$
Increase/
(Decrease)

 

%
Increase/
(Decrease)

 

 

                               

Cost of Goods Sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Firearms

 

$

231.6

 

78.5

%

 

$

108.8

 

 

$

55.0

 

$

163.8

 

74.7

%

 

$

67.8

 

41.4

%

Ammunition

 

 

198.8

 

72.1

 

 

 

150.1

 

 

 

56.7

 

 

206.8

 

83.3

 

 

 

(8.0

)

(3.9

)

All Other

 

 

16.5

 

82.5

 

 

 

10.4

 

 

 

5.6

 

 

16.0

 

74.1

 

 

 

0.5

 

3.1

 

 

 

                                               

Consolidated

 

$

446.9

 

75.6

%

 

$

269.3

 

 

$

117.3

 

$

386.6

 

79.0

%

 

$

60.3

 

15.6

%

 

 

                                               

43



          Firearms

          In connection with accounting for the FGI Acquisition and the Marlin Acquisition as business combinations using the purchase method of accounting, inventories were required to be written up to their current fair value less a reasonable selling profit. As a result, inventory subsequently sold has impacted cost of goods sold. The impact for the year ended December 31, 2008 was approximately $2.8 million, compared to the impact for the year ended in 2007 of $15.0 million, a net decrease to cost of goods sold of $12.2 million.

          The increase in cost of goods sold of $67.8 million for the year ended December 31, 2008 over the prior year end was due primarily to overall higher sales volumes, as discussed above in Net Sales, that increased cost of sales by approximately $57.4 million; higher manufacturing costs of $20.3 million, which includes costs associated with our efforts to improve manufacturing efficiencies, higher depreciation expense and higher slow-moving and obsolete reserve expense; and higher pension expense of $2.3 million; offset by the $12.2 million impact of purchase accounting as discussed above.

          Ammunition

          In connection with accounting for the FGI Acquisition as a business combination using the purchase method of accounting, inventories were required to be written up to their current fair value less a reasonable selling profit. As a result, inventory subsequently sold in 2007 increased cost of goods sold. The impact for the year ended December 31, 2007 was approximately $13.1 million and was included in cost of goods sold.

          The decrease in cost of goods sold of $8.0 million for the year ended December 31, 2008 over the prior year end was primarily related to lower overall sales volumes, as noted previously, that contributed to cost of sales being lower by $13.2 million; the rollout of the purchase accounting adjustment incurred in 2007 but not in 2008 as discussed above, which reduced cost of sales by $13.1 million; reduced pension costs of $1.6 million; offset by increases associated with raw material costs of approximately $11.1 million; increases in other manufacturing costs related to obsolete reserves and scrap sales of approximately $2.3 million; and lower hedging gains of approximately $6.5 million.

          All Other (including Accessories, Licensing Income, Clay Targets, Powder Metal Products, Technology Products and Apparel)

          In connection with accounting for the FGI Acquisition as a business combination using the purchase method of accounting, inventories were required to be written up to their current fair value less a reasonable selling profit. As a result of this write-up, estimated inventory subsequently sold increased cost of goods sold. The impact for the year end December 31, 2007 was approximately $0.6 million and was included in cost of goods sold.

          The increase in cost of goods sold of $0.5 million for the year ended December 31, 2008 over the prior year end was due primarily to the $3.1 million write-off of the technology products inventory, offset by decreased sales volumes of the categories noted above in Net Sales as well as the $0.6 million purchase accounting adjustment incurred in 2007 but not in 2008, as discussed above.

          Operating Expenses. Operating expenses consist of selling, general and administrative expense, research and development expense and other expense. The table below depicts the operating expenses by reporting segment for the years ended December 31, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Millions)

 

 

                     

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

       

 

 

 

 

 

 

 

 

January 1-
December 31,
2008

 

June 1 –
December 31,
2007

 

 

January 1 –
May 31,
2007

 

Combined
2007

 

$
Increase/ (Decrease)

 

%
Increase/ (Decrease)

 

 

                       

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A

 

$

104.0

 

$

52.1

 

 

$

30.3

 

$

82.4

 

$

21.6

 

26.2

%

R&D

 

 

7.1

 

 

3.6

 

 

 

2.7

 

 

6.3

 

 

0.8

 

12.7

 

Impairment Charges

 

 

47.4

 

 

 

 

 

 

 

 

 

47.4

 

100.0

 

Other (Income) Expense

 

 

(1.7

)

 

(1.7

)

 

 

(4.5

)

 

(6.2

)

 

4.5

 

72.6

 

 

 

   

 

   

 

 

   

 

   

 

   

 

 

 

Consolidated

 

$

156.8

 

$

54.0

 

 

$

28.5

 

$

82.5

 

$

74.3

 

90.1

%

 

 

   

 

   

 

 

   

 

   

 

   

 

 

 

44



          The increase in selling, general and administrative expenses for the year ended December 31, 2008 over the prior year period of $21.6 million was primarily attributable to higher costs associated with incentive compensation and salaries and benefits expense of $10.3 million as a result of the increase in management depth as discussed previously, higher marketing expenses of $1.6 million, higher distribution expenses of $1.7 million, higher travel expenses of $1.8 million, higher professional fees of $1.5 million, higher depreciation expense of $1.3 million, higher legal fees of $0.7 million, higher bad debt expense of $0.4 million and higher expenses related to information technology of $0.3 million. The $47.4 million non-cash impairment charge was the result of our annual impairment testing. The decrease in other income of $4.5 million for the year ended December 31, 2008 over the prior year was primarily related to the recognition of a $4.9 million gain in 2007 for hedging contracts related to the FGI Acquisition which did not occur in 2008.

          Interest Expense. Interest expense for the year ended December 31, 2008 was $24.6 million, a decrease of $0.9 million as compared to $25.5 million for the year ended December 31, 2007. The decrease in interest expense from the same period in 2007 resulted primarily from lower weighted average interest rates under the Amended and Restated Credit Agreement (4.05% in 2008 compared to 7.09% in 2007), which decreased interest expense by $1.1 million, decreased interest expense of $0.3 million as a result of reduced actuarial liabilities for workers’ compensation and product liability reserves, as well as $0.4 million in additional amortization income on the bond premium on the Notes, offset by $1.0 million in additional interest expense for the Term Loan.

          Taxes. Our effective tax rate was 6.2% for the twelve months ended December 31, 2008. The effective tax rate was (36.0)% for the successor period June 1, 2007 through December 31, 2007 and 12.6% for the predecessor period January 1, 2007 through May 31, 2007. The difference between the actual effective tax rate for the respective periods above and the U.S. federal statutory rate of 35% is principally due to permanent differences, including the impairment to goodwill, utilization of research and development tax credits and the impact of the valuation allowance.

          As of December 31, 2008, a valuation allowance of $0.1 million was established, as compared to no valuation allowance as of December 31, 2007, against deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”). The $0.1 million change in the valuation allowance consisted of certain state tax benefits related to net operating loss carryforwards and tax credits that we do not believe will be realized before the benefits expire. The valuation allowance was $22.9 million prior to allocation of the purchase price with the acquisition of the shares of Holding, the sole stockholder of Remington by FGI on May 31, 2007.

          We are currently subject to ongoing audits by various state tax authorities. Depending on the outcome of these audits, we may be required to pay additional taxes. However, we do not believe that any additional taxes and related interest or penalties would have a material impact on Remington’s financial position, results of operations, or cash flows.

          We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of Statement of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”) (“SFAS 109”), on January 1, 2007. As a result of the implementation of FIN 48, we recognized no material adjustment in our liability for unrecognized tax benefits. At December 31, 2008 we had $5.6 million of unrecognized tax benefits. At both December 31, 2007 and the adoption date of January 1, 2007, we had $1.3 million of unrecognized tax benefits.

Year Ended December 31, 2007 as Compared to Year Ended December 31, 2006

          Net Sales. The following table compares net sales by reporting segment for each of the years ended December 31, 2007 and 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Millions)

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

Predecessor

 

 

 

 

 

 

 

 

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 1 -
December 31
2007

 

 

January 1 -
May 31
2007

 

Combined
2007

 

Percent
of Total

 

2006

 

Percent
of Total

 

$
Increase/
(Decrease)

 

%
Increase/
(Decrease)

 

 

 

                                 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Firearms

 

$

138.7

 

 

$

80.5

 

$

219.2

 

 

44.8

%

$

223.4

 

 

50.1

%

$

(4.2

)

 

(1.9

)%

Ammunition

 

 

169.3

 

 

 

78.9

 

 

248.2

 

 

50.8

 

 

204.9

 

 

45.9

 

 

43.3

 

 

21.1

 

All Other

 

 

14.0

 

 

 

7.6

 

 

21.6

 

 

4.4

 

 

17.7

 

 

4.0

 

 

3.9

 

 

22.0

 

 

 

                                                 

Consolidated

 

$

322.0

 

 

$

167.0

 

$

489.0

 

 

100.0

%

$

446.0

 

 

100.0

%

$

43.0

 

 

9.6

%

 

 

                                                 

45



          Firearms

           The decrease in net sales of $4.2 million for the twelve months ended December 31, 2007 over the prior year period was due primarily to lower sales volumes of shotguns of $22.2 million, offset by higher sales volumes of centerfire and rimfire rifles of $3.5 million, higher volumes of part and service sales of $2.0 million and higher sales volumes of international sourced products of $1.1 million, as well as realized price increases of $11.4 million.

          Ammunition

          The increase in net sales of $43.3 million for the twelve months ended December 31, 2007 over the prior year period was due predominantly to $28.1 million associated with realized price increases, which were initiated to generally offset high core commodity costs, as well as higher sales volumes of $15.2 million. The year-to-date sales volumes are comprised primarily of higher sales volumes of certain centerfire ammunition of $12.1 million, higher components and other sales volumes of $3.8 million, and higher sales volumes of rimfire ammunition of $2.0 million, offset by lower sales volumes of shotshell ammunition of $2.7 million.

          All Other (including Accessories, Licensing Income, Clay Targets, Powder Metal Products, and Technology Products)

          The increase in net sales of $3.9 million for the twelve months ended December 31, 2007 over the prior year period was due primarily to higher accessories sales of $1.3 million, higher powder metal products of $1.3 million, higher target sales of $0.8 million associated with higher pricing, and higher technology product sales of $0.5.

          Cost of Goods Sold. The table below depicts the cost of goods sold by reporting segment for the years ended December 31, 2007 and 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Millions)

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

  Predecessor    

 

 

 

 

 

 

 

 

 

       

 

 

 

 

             

 

 

 

 

 

 

 

 

 

June 1 -
December 31
2007

 

 

January 1 -
May 31
2007

 

Combined
2007

 

Percent of
Net Sales

 

2006

 

Percent of
Net Sales

 

$
Increase/
(Decrease)

 

%
Increase/
(Decrease)

 

 

 

                                 

Cost of Goods Sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Firearms

 

$

108.8

 

 

$

55.0

 

$

163.8

 

 

74.7

%

$

169.6

 

 

75.9

%

$

(5.8

)

 

(3.4

)%

Ammunition

 

 

150.1

 

 

 

56.7

 

 

206.8

 

 

83.3

 

 

156.0

 

 

76.1

 

 

50.8

 

 

32.6

 

All Other

 

 

10.4

 

 

 

5.6

 

 

16.0

 

 

74.1

 

 

12.8

 

 

72.3

 

 

3.2

 

 

25.0

 

 

 

                                                 

Consolidated

 

$

269.3

 

 

$

117.3

 

$

386.6

 

 

79.0

%

$

338.4

 

 

76.0

%

$

48.2

 

 

14.2

%

 

 

                                                 

          Firearms

          In connection with accounting for the FGI Acquisition as a business combination using the purchase method of accounting, inventories that were on hand at May 31, 2007 were required to be written up to their current fair value less a reasonable selling profit. As a result of this estimated $16.2 million increase within the firearms business unit, inventory subsequently sold will increase costs of goods sold, as will higher depreciation expense associated with a similar adjustment to write up property, plant and equipment to estimated fair value.

          The decrease in cost of goods sold of $5.8 million for the twelve months ended December 31, 2007 over the prior year period was due primarily to lower overall sales volumes, which resulted in lower cost of goods sold of $15.3 million, as well as lower pension and post-retirement costs of $8.2 million, offset by an increase of $15.0 million resulting from the purchase accounting adjustments as discussed above, unfavorable manufacturing variances of $1.4 million, and higher excess/obsolete inventory expense of $1.2 million. The $15.3 million in lower cost of goods sold was comprised primarily of lower sales volumes of shotguns, which caused cost of goods sold to be lower by $19.0 million; higher sales volumes of international sourced products, which caused cost of goods sold to be higher by $2.2 million; and higher volumes of parts and service sales of $1.4 million.

46



          Ammunition

          In connection with accounting for the FGI Acquisition as a business combination using the purchase method of accounting, inventories that were on hand at May 31, 2007 were required to be written up to their current fair value less a reasonable selling profit. As a result of this estimated $13.1 million increase within the ammunition business unit, inventory subsequently sold will increase costs of goods sold, as will higher depreciation expense associated with a similar adjustment to write up property, plant and equipment to estimated fair value.

          The increase in cost of goods sold of $50.8 million for the twelve months ended December 31, 2007 over the prior year period was primarily related to higher sales volumes across all categories of ammunition, except shotshell, which caused cost of goods sold to be higher by $33.5 million; an increase of $13.1 million resulting from the purchase accounting adjustments as discussed above; lower hedging gains of $4.0 million; and higher pension and post-retirement costs of $2.1 million, all of which were offset by favorable manufacturing variances of $1.8 million.

          All Other (including Accessories, Licensing Income, Clay Targets, Powder Metal Products and Technology Products)

          In connection with accounting for the FGI Acquisition as a business combination using the purchase method of accounting, inventories that were on hand at May 31, 2007 were required to be written up to their current fair value less a reasonable selling profit. As a result of this estimated $1.4 million increase within the All Other business unit, inventory subsequently sold will increase cost of goods sold, as will higher depreciation expense associated with a similar adjustment to write up property, plant and equipment to estimated fair value.

          The increase in cost of goods sold of $3.2 million for the twelve months ended December 31, 2007 over the prior year period was due primarily to the costs associated with increased sales volumes of the categories noted above in Net Sales as well as a $0.6 million adjustment resulting from the purchase accounting adjustments as discussed above.

          Operating Expenses. Operating expenses consist of selling, general and administrative expense, research and development expense and other expense. The table below depicts the operating expenses by reporting segment for the years ended December 31, 2007 and 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Millions)

 

 

 

 

 

 

Successor

 

 

Predecessor

 

Predecessor

 

 

 

 

 

 

       

 

           

 

 

 

 

 

 

June 1 –
December 31
2007

 

 

January 1 –
May 31
2007

 

Combined
2007

 

2006

 

$
Increase/
(Decrease)

 

%
Increase/
(Decrease)

 

 

 

                         

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A

 

$

52.1

 

 

$

30.3

 

$

82.4

 

$

73.7

 

$

8.7

 

 

11.8

%

R&D

 

 

3.6

 

 

 

2.7

 

 

6.3

 

 

6.4

 

 

(0.1

)

 

(1.6

)

Impairment Charges

 

 

 

 

 

 

 

 

 

0.2

 

 

(0.2

)

 

(100.0

)

Other (Income) Expense

 

 

(1.7

)

 

 

(4.5

)

 

(6.2

)

 

(2.3

)

 

(3.9

)

 

169.6

 

 

 

                                     

Consolidated

 

$

54.0

 

 

$

28.5

 

$

82.5

 

$

78.0

 

$

4.5

 

 

5.8

%

 

 

                                     

          The increase in selling, general and administrative expenses for the twelve months ended December 31, 2007 over the prior year period of $8.7 million was primarily attributable to higher costs associated with incentive compensation, salaries and benefits expense of $8.0 million (due primarily to the Company exceeding performance objectives as well as employing additional executives since May 31, 2007), non-recurring transaction expenses of $2.2 million as a result of the FGI Acquisition, higher marketing expense of $1.5 million and higher travel expense of $0.8 million, offset by lower legal and professional expenses of $1.6 million, lower expense for bad debts of $0.9 million and lower commissions expense of $0.8 million. The increase in other income of $3.9 million is primarily related to the recognition of a $4.9 million non-cash gain for hedging contracts not yet settled at May 31, 2007, offset in part by the recording of $1.5 million in compensation expense for the option cancellations as a result of the FGI Acquisition.

          In connection with accounting for the FGI Acquisition as a business combination using the purchase method of accounting, fixed assets associated with selling, general and administrative expense have been written up and increased depreciation expense in selling, general and administrative expenses by $0.1 million for the seven month period ending December 31, 2007. Also in connection with accounting for the FGI Acquisition as a business combination using the purchase method of accounting, amortization expense associated with intangible assets subject

47



to amortization has been recorded and increased selling, general and administrative expenses by $0.7 million for the seven month period ending December 31, 2007.

           Interest Expense. Interest expense for the twelve months ended December 31, 2007 was $25.5 million, a decrease of $2.5 million as compared to the twelve months ended December 31, 2006. The decrease in interest expense from the same period in 2006 resulted primarily from reduced interest expense of $1.9 million due to lower average borrowings under the Amended and Restated Credit Agreement, as well as a $0.6 million reduction in interest expense recorded in connection with accounting for the FGI Acquisition due to the fact that the bond was at a premium. This premium was recorded as a reduction to interest expense and is estimated to be approximately $1.0 million annually.

          Taxes. Our effective tax rate was (36.0%) for the successor period June 1, 2007 through December 31, 2007 and 12.6% for the predecessor period January 1, 2007 through May 31, 2007. The effective tax rate was 75.0% for the twelve months ended December 31, 2006. The difference between the actual effective tax rate for the respective periods above and the U.S. federal statutory rate of 35% is principally due to permanent differences, the benefits of our tax sharing agreement with RACI Holding and the impact of the valuation allowance which was eliminated in application of the purchase price method of accounting for business combinations.

          As of December 31, 2007, no valuation allowance was required as compared to a valuation allowance of approximately $27.3 million established against deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) as of December 31, 2006. The $27.3 million change in the valuation allowance consisted of the following predecessor period amounts: a $3.7 million net decrease primarily related to the $4.1 million decrease in net deferred tax assets and an increase of $0.4 million due to an increase in deferred tax liabilities associated with indefinite-lived intangible assets that have an indefinite reversal period; and a $0.7 million net decrease consisting of $0.9 million recorded as a change in equity as a component of other comprehensive income as a result of a net decrease in the net deferred tax asset associated with other comprehensive income and $0.2 million credit to equity from the cumulative effect of a change in accounting principle with the adoption of Financial Standards Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”); the remaining balance of $22.9 million was eliminated in the allocation of purchase price accounting adjustments.

          We are currently subject to ongoing audits by various state tax authorities. Depending on the outcome of these audits, we may be required to pay additional taxes. However, we do not believe that any additional taxes and related interest or penalties would have a material impact on Remington’s financial position, results of operations, or cash flows.

           We adopted the provisions of FIN 48, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”), on January 1, 2007. As a result of the implementation of FIN 48, we recognized no material adjustment in our liability for unrecognized tax benefits. At both December 31, 2007 and the adoption date of January 1, 2007, we had $1.3 million of unrecognized tax benefits.

Recent Accounting Pronouncements

          In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any non-controlling interest at their fair values as of the acquisition date. SFAS 141(R) also requires that acquisition-related costs be recognized separately from the acquisition. SFAS 141(R) amends the goodwill impairment test requirements in SFAS 142. For a goodwill impairment test as of a date after the effective date of SFAS 141(R), the value of the reporting unit and the amount of implied goodwill, calculated in the second step of the test, will be determined in accordance with the measurement and recognition guidance on accounting for business combinations under SFAS 141(R). This change could effect the determination of what amount, if any, should be recognized as an impairment loss for goodwill recorded before the effective date of SFAS 141(R). This accounting became required effective January 1, 2009 for the Company and applies to goodwill related to acquisitions accounted for originally under SFAS 141 as well as those accounted for under SFAS 141(R). The

48



adoption of SFAS 141(R) is not expected to have a material impact on our results of operations, financial condition and equity.

          In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). This standard will improve, simplify, and converge internationally the reporting of noncontrolling interests in consolidated financial statements. SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. Moreover, SFAS 160 requires that transactions between an entity and noncontrolling interests be treated as equity transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact that adopting SFAS 160 will have on our results of operations, financial condition and equity.

          In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The new standard is also intended to improve transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. SFAS 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk–related and requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 is not expected to have a material impact on our results of operations, financial condition and equity.

          In April 2008, the FASB issued Final FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). The guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets, and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), Business Combinations, and other guidance under U.S. generally accepted accounting principles (“GAAP”). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is prohibited. The adoption of FSP 142-3 is not expected to have an impact on our results of operations, financial condition and equity.

          In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS 162 is not expected to have an impact on our results of operations, financial condition and equity.

          In September 2008, the FASB issued FASB Staff Position (FSP) No. 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“FSP 133-1”). FSP 133-1 is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. It amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The FSP also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. FSP 133-1 was effective for reporting periods (annual or interim) ending after November 15, 2008. The adoption of FSP 133-1 did not have an impact on our results of operations, financial condition and equity.

          In November 2008, the FASB issued Emerging Issues Task Force Issue 08-6 (“EITF 08-6”), Equity Method Investment Accounting Considerations. EITF 08-6 addresses questions about the potential effect of FASB Statement 141R Business Combinations and FASB Statement 160 Noncontrolling Interests in Consolidated Financial Statements on equity-method accounting under Opinion 18. EITF 08-6 would be effective prospectively for fiscal

49



years beginning on or after December 15, 2008. We are currently evaluating the potential impact of adopting EITF 08-6.

          In December 2008, the FASB issued FSP FAS 132(R)-1 (“FSP 132R-1”), Employers’ Disclosures about Postretirement Benefit Plan Assets. This FASB Staff Position (FSP) amends FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The effective date for FSP 132R-1 is for fiscal years ending after December 15, 2009, although early adoption is permitted. Comparative disclosures for earlier periods are not required at initial adoptions, although comparative disclosures are required for periods subsequent to initial adoption. We are currently evaluating the potential impact of adopting FSP 132R-1.

          Critical Accounting Policies and Estimates:

          Management has addressed and reviewed our critical accounting policies and considers them appropriate. We believe the following critical policies utilize significant judgments and estimates used in the preparation of our audited consolidated financial statements:

          Consolidated Joint Venture:

          As a result of the EOTAC joint venture, Remington owns 61.8% of EOTAC and other members own 38.2%. As Remington is the primary beneficiary, EOTAC meets the consolidation criteria and is being accounted for under the rules of ARB 51.

          Membership Interest Purchase and Investment Agreement:

          As a result of the 27.1% membership interest purchase and investment agreement in INTC USA, Remington accounts for its investment under the equity method of accounting as outlined in the provisions of APB Opinion 18.

          Fair Value Measurements:

          Remington adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”), and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), on January 1, 2008. SFAS 157 (1) creates a single definition of fair value, (2) establishes a framework for measuring fair value, and (3) expands disclosure requirements about items measured at fair value. SFAS 157 applies to both items recognized and reported at fair value in the financial statements and items disclosed at fair value in the notes to the financial statements. SFAS 157 does not change existing accounting rules governing what can or what must be recognized and reported at fair value in Remington’s financial statements, or disclosed at fair value in Remington’s notes to the financial statements. Additionally, SFAS 157 does not eliminate practicability exceptions that exist in accounting pronouncements amended by SFAS 157 when measuring fair value. As a result, Remington will not be required to recognize any new assets or liabilities at fair value.

          Prior to SFAS 157, certain measurements of fair value were based on the price that would be paid to acquire an asset, or received to assume a liability (an entry price). SFAS 157 clarifies the definition of fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price). The exit price is based on the amount that the holder of the asset or liability would receive or need to pay in an actual transaction (or in a hypothetical transaction if an actual transaction does not exist) at the measurement date. In some circumstances, the entry and exit price may be the same; however, they are conceptually different.

          Fair value is generally determined based on quoted market prices in active markets for identical assets or liabilities. If quoted market prices are not available, Remington uses valuation techniques that place greater reliance on observable inputs and less reliance on unobservable inputs. In measuring fair value, Remington may make adjustments for risks and uncertainties, if a market participant would include such an adjustment in its pricing.

          SFAS 157 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and Remington’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a

50



whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The hierarchy consists of three broad levels as follows:

 

 

 

          Level 1 – Quoted market prices in active markets for identical assets or liabilities;

 

 

          Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable; and

 

 

          Level 3 – Unobservable inputs developed using Remington’s estimates and assumptions, which reflect those that market participants would use.

          The following table presents information about assets and liabilities measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2008 using:

 

       

 

 

Quoted prices in active markets
for identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

                   

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

                   

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Contract

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

Not applicable

 

 

$0.8 million

 

 

Not applicable

 

 

$0.8 million

 

Marlin Life Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

Policies

 

 

$0.1 million

 

 

Not applicable

 

 

Not applicable

 

 

$0.1 million

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

None

 

 

Not applicable

 

 

Not applicable

 

 

Not applicable

 

 

Not applicable

 

          As shown above, commodity contract derivatives valued by using quoted prices are classified within level 2 of the fair value hierarchy. Marlin life insurance policies valued by using cash surrender values, net of related policy loans, are classified within level 1 of the fair value hierarchy. The determination of where an asset or liability falls in the hierarchy requires significant judgment. Remington evaluates its hierarchy disclosures each quarter based on various factors, and it is possible that an asset or liability may be classified differently from quarter to quarter. However, Remington expects that changes in classifications between different levels will be rare.

          Most derivative contracts are not listed on an exchange and require the use of valuation models. Consistent with SFAS 157, Remington attempts to maximize the use of observable market inputs in its models. When observable inputs are not available, Remington defaults to unobservable inputs. Derivatives valued based on models with significant unobservable inputs and that are not actively traded, or trade activity is one way, are classified within level 3 of the fair value hierarchy.

          Some financial statement preparers have reported difficulties in applying SFAS 157 to certain nonfinancial assets and nonfinancial liabilities, particularly those acquired in business combinations and those requiring a determination of impairment. To allow the time to consider the effects of the implementation issues that have arisen, the FASB issued FSP FAS 157-2 (“FSP 157-2”) on February 12, 2008 to provide a one-year deferral of the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed in financial statements at fair value on a recurring basis (that is, at least annually). As a result of FSP 157-2, Remington has not yet adopted SFAS 157 for nonfinancial assets and liabilities (such as those related to the Marlin Acquisition) that are valued at fair value on a non-recurring basis. Remington is evaluating the impact that the application of SFAS 157 to those nonfinancial assets and liabilities will have on its financial statements.

          In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 provides Remington with an option to elect fair value as the initial and subsequent measurement attribute for most financial assets and liabilities and certain other items. The fair value option election is applied on an instrument-by-instrument basis (with some exceptions), is irrevocable, and is applied to an entire instrument. The election may be made as of the date of initial adoption for existing eligible items. Subsequent to initial adoption, Remington may elect the fair value option at initial recognition of eligible items, on entering into an eligible firm commitment, or when certain specified reconsideration events occur. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings.

51



          Upon adoption of SFAS 159 on January 1, 2008, Remington did not elect to account for any assets and liabilities under the scope of SFAS 159 at fair value. In October 2008, the FASB issued FSP FAS 157-3 (“FSP 157-3”), Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active, which clarifies the application of SFAS 157 in a market that is not active.

          Our discussion and analysis of our financial condition, results of operations, and cash flows are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to inventories, supplies, accounts receivable, warranties, long-lived assets, product liability, revenue recognition (inclusive of cash discounts, rebates, and sales returns), advertising and promotional costs, self-insurance, pension and post-retirement benefits, deferred tax assets, and goodwill. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As noted below, in some cases, our estimates are also based in part on the findings of independent advisors. Actual results may differ from these estimates under different assumptions or conditions.

          Revenue Recognition:

          Sales, net of an estimate for discounts, returns and allowances, and related cost of sales are recorded when goods are shipped, at which time risk of loss and title transfer to the customer. We continually evaluate our sales terms against criteria outlined in SEC Staff Accounting Bulletin 104, Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial Statements. While we have historically followed the industry practice of selling firearms pursuant to a “dating” plan, allowing the customer to purchase these products commencing in December (the start of our dating plan year) and to pay for them on extended terms, we have now commenced to shorten the duration of these terms. Historically, use of the dating plan has had the effect of shifting some firearms sales from the second and third quarters to the first and fourth quarters. As a competitive measure, we have also historically offered extended terms on select ammunition purchases. However, use of the dating plans also results in deferral of collection of accounts receivable until the latter part of the year. Customers do not have the right to return unsold product. Management uses historical trend information as well as other economic data to estimate future discounts, returns, rebates and allowances.

          Allowance for Doubtful Accounts:

          We maintain an allowance for doubtful receivables for estimated losses resulting from the inability of our trade customers to make required payments. We provide an allowance for specific customer accounts where collection is doubtful and also provide an allowance for customer deductions based on historical collection and write-off experience. Additional allowances would be required if the financial conditions of our customers deteriorated.

          Inventories:

          Our inventories are valued at the lower of cost or market. We evaluate the quantities of inventory held against past and future demand and market conditions to determine excess or slow moving inventory. For those product classes of inventory identified, we estimate their market value based on current and projected selling prices. If the projected market value is less than cost, we provide an allowance to reflect the lower value of that inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold.

          As part of the Marlin Acquisition, Remington now accounts for a portion of its inventory under a Last In First Out (“LIFO”) assumption under the double extension method. The Marlin Acquisition resulted in a new basis for the value of our inventory. Accordingly, inventory was adjusted to its estimated fair value as of February 1, 2008, which was estimated to be approximately $11.5 million over its previous net book value, of which $8.5 million represents the LIFO reserve that was eliminated as part of purchase accounting. As of December 31, 2008, $1.9 million of that write-up was recognized in cost of goods sold and $1.1 million was reflected in the LIFO reserve.

52



          Property, Plant and Equipment:

           Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is determined on a straight-line basis over the estimated lives of the assets. The estimated useful lives are principally 1 to 43 years for buildings and improvements, and 1 to 15 years for machinery and equipment.

          The FGI Acquisition resulted in a new basis for the value of the Company’s property, plant and equipment. Accordingly, property, plant and equipment was adjusted to its estimated fair value as of May 31, 2007, which was estimated to be approximately $37.7 million over its previous net book value. Subsequent to May 31, 2007, property, plant and equipment was adjusted upward by $0.3 million based on additional information relating to applying the purchase method of accounting.

          As part of the application of purchase accounting resulting from the Marlin Acquisition, on February 1, 2008, the Company recorded an initial estimate associated with property, plant and equipment of $15.6 million.

          In accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), management assesses property, plant and equipment for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. To analyze recoverability, management projects undiscounted future cash flows resulting from the use of the asset over the remaining life of the asset. If these projected cash flows are less than the carrying amount of the asset, an impairment loss is recognized, resulting in a write-down of property, plant and equipment with a corresponding charge to operating income. Any impairment loss is measured based upon the difference between the carrying amount of the asset and the present value of future cash flows. The Company uses a discount rate equal to its average cost of funds to discount the expected future cash flows.

          Maintenance and repairs are charged to operations; replacements and betterments are capitalized. Computer hardware and software costs under capital leases are amortized over the term of the lease. The cost and related accumulated depreciation applicable to assets sold or retired are removed from the accounts and the gain or loss on disposition is recognized in operations, included in the other income and expenses.

          Interest is capitalized in connection with the construction of major projects. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s useful life.

          Goodwill, Goodwill Impairment, Intangible Assets and Debt Issuance Costs:

           Prior to January 1, 2002, intangibles, consisting primarily of goodwill, trade names and trademarks, were amortized on a straight-line basis over their estimated useful lives of 40 years. The Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) on January 1, 2002 and has accounted for its goodwill, intangible assets, and debt issuance costs pursuant to SFAS 142 since that time. Each year the Company tests for impairment of goodwill according to a two-step approach. In the first step, the Company estimates the fair values of its reporting units using the present value of future cash flows approach, subject to a comparison for reasonableness to its market capitalization at the date of valuation. If the carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. In the second step the implied fair value of the goodwill is estimated as the fair value of the reporting unit used in the first step less the fair values of all other net tangible and intangible assets of the reporting unit. If the carrying amount of the goodwill exceeds its implied fair market value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. In addition, goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For other intangible assets, the impairment test consists of a comparison of the fair value of the intangible assets to their respective carrying amount. The Company uses a discount rate equal to its average cost of funds to discount the expected future cash flows. Debt issuance costs are amortized over the life of the related debt or amendment.

          As part of the application of purchase accounting resulting from the FGI Acquisition, on May 31, 2007, the Company recorded an initial estimate associated with goodwill and identifiable intangible assets to each reporting segment of $67.0 million and $73.9 million, respectively. Subsequent to May 31, 2007, goodwill was adjusted downward by $43.0 million to $24.0 million, primarily due to the impairment charges discussed above in “Recent

53



Developments” and intangible assets were adjusted downward by $0.9 million to $73.0 million based on additional information relating to applying the purchase method of accounting.

          As part of the application of purchase accounting resulting from the Marlin Acquisition, on February 1, 2008, the Company recorded an initial estimate associated with goodwill and identifiable intangible assets to each reporting segment of $6.0 million and $10.9 million, respectively. Subsequent to February 1, 2008 and through December 31, 2008, goodwill has been adjusted downward to zero, primarily due to the impairment charges discussed above in “Recent Developments” and identifiable intangible assets has been adjusted downward approximately $3.1 million based on additional information relating to applying the purchase method of accounting, as well as impairment charges discussed above in “Recent Developments”.

          Reserves for Product Liability:

          We provide for estimated defense and settlement costs related to product liabilities when it becomes probable that a liability has been incurred and reasonable estimates of such costs are available. Estimates for accruals for product liability matters are based on historical patterns of the number of occurrences, costs incurred and a range of potential outcomes. We also utilize independent advisors to assist in analyzing the adequacy of such reserves. Due to the inherently unpredictable nature of litigation, actual results will likely differ from estimates and those differences could be material. As part of the application of purchase accounting resulting from the FGI Acquisition, product liability accruals were adjusted as of May 31, 2007, based on valuation data and subsequently were adjusted based on updated valuation data relating to the product liability reserves.

          Warranty Accrual:

          We provide consumer warranties against manufacturing defects in all firearm products we sell in North America. Estimated future warranty costs are accrued at the time of sale, using the percentage of actual historical repairs to shipments for the same period, which is included in other accrued liabilities. Product modifications or corrections are voluntary steps taken to assure proper usage or performance of a product by consumers. The cost associated with product modifications and or corrections are recognized in accordance with SFAS 5 and charged to operations.

          Employee Benefit Plans:

          We have defined benefit plans that cover a significant portion of our salaried and hourly paid employees. As a result of amendments to our defined benefit plans in 2006 and 2007, future accrued benefits for all employees were frozen as of January 1, 2008. For the year ended December 31, 2008, we had ($0.3) million of total pension benefit expense. We derive pension benefit expense from an actuarial calculation based on the defined benefit plans’ provisions and management’s assumptions regarding discount rate, rate of increase in compensation levels and expected long-term rate of return on assets. Management determines the expected long-term rate of return on plan assets based upon historical actual asset returns and the expectations of asset returns over the expected period to fund participant benefits based on the current investment mix of our plans. In 2008 we had returns on plan assets of approximately (15.6%) as compared to an assumption of 8.0%. Management sets the discount rate based on the yield of high quality fixed income investments expected to be available in the future when cash flows are paid. The rate of increase in compensation levels is established based on management’s expectations of current and foreseeable future increases in compensation. In addition, management also consults with independent actuaries in determining these assumptions. See Note 12 to our audited consolidated financial statements for the year ended December 31, 2008, appearing elsewhere in this annual report, for more information on our employee benefit plans.

          Deferred Compensation:

          As a result of the Marlin Acquisition, Remington assumed certain deferred compensation agreements with certain officers and key employees. These agreements provide for payment of specified amounts over ten years beginning at the time of retirement or death of the individuals. Remington accrues the future liability over the anticipated remaining years of service of such individuals. Amounts are accrued on a present value discounted basis during the employee’s service and retirement periods and have been included in other accrued liabilities on the consolidated balance sheet.

54



          Self-Insurance:

         We are self-insured for elements of our employee benefit plans including, among others, medical, workers’ compensation and elements of our property and liability insurance programs, but limit our liability through stop-loss insurance and annual plan maximum coverage limits. Self-insurance liabilities are based on claims filed and estimates for claims incurred but not yet reported.

          Reserves for Workers’ Compensation Liability:

          We provide for estimated medical and indemnity compensation costs related to workers’ compensation liabilities when it becomes probable that a liability has been incurred and reasonable estimates of such costs are available. Estimates for accruals for workers compensation liability matters are based on historical patterns of the number of occurrences, costs incurred and a range of potential outcomes. We also utilize independent advisors to assist in analyzing the adequacy of such reserves. As part of the application of purchase accounting resulting from the FGI Acquisition, workers compensation liability accruals were adjusted as of May 31, 2007, based on preliminary valuation data and subsequently were adjusted based on updated valuation data relating to the workers’ compensation reserves.

          Income Taxes:

          Income tax expense is based on pretax financial accounting income. We recognize deferred tax assets and liabilities based on the difference between the financial reporting and tax bases of assets and liabilities, applying tax rates applicable to the year in which the differences are expected to reverse, in conjunction with SFAS 109. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized. As of December 31, 2008, a valuation allowance of $0.1 million has been established against specific state tax credits and state net operating losses. Because we file our income taxes in a consolidated tax return with FGI, the 100% owner of our sole stockholder, Holding, the cash taxes paid or received supplemental cash flow disclosure reflects the total impact of any cash taxes paid or received on behalf of the Company.

Information Concerning Forward-Looking Statements

          This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in the operations and financial results and the business and the products of Remington, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions.

          Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on Remington. Such forward-looking statements are not guarantees of future performance. The following important factors, and those important factors described elsewhere in this annual report on Form 10-K, including the matters set forth under Item 1A, “Risk Factors,” and in our other SEC filings, could affect (and in some cases have affected) our actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements.

 

 

We are subject to the effects of general global economic and market conditions. Increases in commodity prices, higher levels of unemployment, higher consumer debt levels, declines in consumer confidence, uncertainty about economic stability and other economic factors that may affect consumer spending or buying habits could adversely affect the demand for products we sell. If the current economic conditions and the related factors remain uncertain or persist, spread or deteriorate further, our business, results of operations or financial condition could be materially adversely affected.

 

 

Continued volatility and disruption in the credit and capital markets as a result of the global financial crisis may negatively impact our revenues and our, or our suppliers’ or customers’, ability to access financing on favorable terms or at all.

 

 

Our ability to make scheduled payments of principal or interest on, or to refinance our obligations with respect to, our indebtedness, as well as our ability to comply with the covenants and restrictions contained in the instruments governing such indebtedness, will depend on our future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels, and financial, competitive,

55



 

 

 

business and other factors beyond our control including the responses of competitors, changes in customer inventory management practices, changes in customer buying patterns, regulatory developments and increased operating costs.

 

 

The degree to which we are leveraged could have important consequences, including the following: (i) our ability to obtain additional financing for working capital or other purposes in the future may be limited; (ii) a substantial portion of our cash flow from operations is dedicated to the payment of principal and interest on our indebtedness, thereby reducing funds available for operations; (iii) certain of our borrowings are at variable rates of interest, which could cause us to be vulnerable to increases in interest rates; and (iv) we may be more vulnerable to economic downturns and be limited in our ability to withstand competitive pressures.

 

 

Our ability to meet our debt service and other obligations depends in significant part on customers purchasing our products during the fall hunting season. Notwithstanding our cost containment initiatives and continuing management of costs, a decrease in demand during the fall hunting season for our higher priced, higher margin products would require us to further reduce costs or increase our reliance on borrowings under our credit facility to fund operations. If we are unable to reduce costs or increase our borrowings sufficiently to adjust to such a reduction in demand, our financial condition and results of operations could be adversely affected.

 

 

Lead, copper, steel and zinc prices have experienced significant increases over the past five years primarily due to increased demand (including increased demand from India and China). Furthermore, fuel and energy costs have increased over the same time period, although at a slower rate of increase. We currently purchase copper and lead options contracts to hedge against price fluctuations of anticipated commodity purchases. With the volatility of pricing that we have recently experienced, there can be no assurance that we will not see further material adverse changes in commodity pricing or energy costs, and such further changes, were they to occur, could have a material adverse impact on our consolidated financial position, results of operations, or cash.

 

 

Because of the nature of our products, we anticipate that we will continue to be involved in product liability litigation in the future. Our ability to meet our product liability obligations will depend (among other things) upon the availability of insurance, the adequacy of our accruals, the 1993 Sellers’ ability to satisfy their obligations to indemnify us against certain product liability cases and claims and the 1993 Sellers’ agreement to be responsible for certain post-Asset Purchase shotgun related costs.

 

 

Achieving the benefits of our acquisitions will depend in part on the integration of products and internal operating systems in a timely and efficient manner. Such integration may be unpredictable, and subject to delay because the products and systems typically were developed independently and were designed without regard to such integration. If we cannot successfully integrate such products and internal operating systems on a timely basis, we may lose customers and our business and results of operations may be harmed.

 

 

We face significant competition and our competitors vary according to product line. Certain of these competitors are subsidiaries of large corporations with substantially greater financial resources than us. There can be no assurance that we will continue to compete effectively with all of our present competition, and our ability to so compete could be adversely affected by our leveraged condition.

 

 

Sales made to Wal-Mart accounted for approximately 18% of our total net revenues in 2008 and 15% of the accounts receivable balance as of December 31, 2008. Our sales to Wal-Mart are generally not governed by a written contract between the parties. In the event that Wal-Mart were to significantly reduce or terminate its purchases of firearms and/or ammunition from us, our financial condition or results of operations could be adversely affected.

 

 

We utilize numerous raw materials, including steel, zinc, lead, brass, plastics and wood, as well as manufactured parts, which are purchased from one or a few suppliers. Any disruption in our relationship with these suppliers could increase the cost of operations. Such a disruption may result from or be amplified by the recent volatility of and uncertainty in the U.S. and global financial markets.

 

 

The purchase of firearms is subject to federal, state and local governmental regulation. Regulatory proposals, even if never enacted, may affect firearms or ammunition sales as a result of consumer perceptions. While we do not believe that existing federal and state legislation relating to the regulation of firearms and ammunition

56



 

 

 

has had a material adverse effect on our sales from 2004 through 2008, no assurance can be given that more restrictive regulations, if proposed or enacted, will not have a material adverse effect on us in the future.

 

 

As a manufacturer of firearms, we were previously named as a defendant in certain lawsuits brought by municipalities or organizations challenging manufacturers’ distribution practices and alleging that the defendants have also failed to include a variety of safety devices in their firearms. Our insurance excludes coverage regarding such claims. In the event that additional such lawsuits were filed, or if certain legal theories advanced by plaintiffs were to be generally accepted by the courts, our financial condition and results of operations could be adversely affected.

 

 

As part of our annual impairment testing conducted with outside valuation experts under SFAS 144 and SFAS 142, we recorded non-cash impairment charges related to goodwill of $44.3 million and certain trademarks of $3.1 million for the year ended December 31, 2008. The charge eliminated the goodwill amounts from both our Firearms and All Other reporting segments. Our future results of operations may be impacted by the prolonged weakness in the current economic environment which may result in an impairment of any goodwill recorded in the future and/or other long-lived assets, which could adversely affect our results of operations or financial condition.

           Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this annual report.

57



 

 

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          We are exposed to market risk in the normal course of our business operations due to our purchases of certain commodities and our ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to such risks.

          Certain of our financial instruments are subject to interest rate risk. As of December 31, 2008 and December 31, 2007, we had long-term borrowings of $269.1 million and $225.0 million, respectively, of which $65.9 million and $20.8 million, respectively, were issued at variable rates. Assuming no changes in the monthly average variable-rate debt levels of $71.8 million and $47.1 million from the latest twelve months ended December 31, 2008 and December 31, 2007, respectively, we estimate that a hypothetical change of 100 basis points in the LIBOR and Alternate Base Rate interest rates would impact annual interest expense by $0.8 million and $0.5 million, respectively, on a pretax basis. We were not a party to any interest rate cap or other protection arrangements with respect to our variable rate indebtedness as of December 31, 2008 or December 31, 2007.

          The estimated value of our debt at December 31, 2008 was $234.9 million ($233.3 million at December 31, 2007) compared to a carrying value of $279.0 million ($227.1 million at December 31, 2007). All fixed rate indebtedness was valued based on current market quotes. All variable rate indebtedness is assumed at market.

          The Company purchases copper and lead options (and zinc in 2007) contracts to hedge against price fluctuations of anticipated commodity purchases. Lead and copper prices have experienced significant increases over the past five years primarily due to increased demand (including increased demand from India and China). The amount of premiums paid for commodity contracts outstanding at December 31, 2008 and December 31, 2007 were $6.4 million and $8.8 million, respectively. At December 31, 2008 the market value of our outstanding contracts relating to firm commitments and anticipated purchases up to twelve months from the respective date was $0.8 million as determined with the assistance of the Company’s commodity brokers. At December 31, 2007 the market value of our outstanding contracts relating to firm commitments and anticipated purchases up to eighteen months from the respective date was $6.8 million as determined with the assistance of the Company’s commodity brokers. Assuming a hypothetical 10% increase in lead and copper commodity prices which are currently hedged at December 31, 2008 and December 31, 2007, we would experience an approximate $1.5 million and $4.0 million, respectively, increase in the cost of related inventory purchased, partially offset by an approximate $0.1 million and $0.6 million, respectively, increase in our value of related hedging instruments. With the volatility of pricing the Company has experienced, we believe that significant changes in commodity pricing could have a future material impact on our consolidated financial position, results of operations, or cash flows of the Company.

          We also purchase steel supplies for use in the manufacture of certain firearms, ammunition, and accessory products. Assuming a hypothetical 10% increase in steel prices at December 31, 2008 and December 31, 2007, we would experience an approximate $0.8 million and $0.7 million, respectively, increase in our cost of related inventory purchased.

          We do not believe that we have a material exposure to fluctuations in foreign currencies.

58



 

 

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Remington Arms Company, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Remington Arms Company, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 2008 and 2007 (Successor), and the related consolidated statements of operations, stockholder’s equity (deficit), and comprehensive income (loss), and cash flows for the year ended December 31, 2008 (Successor), and for the periods from June 1, 2007 to December 31, 2007 (Successor), and January 1, 2007 to May 31, 2007 (Predecessor) and the year ended December 31, 2006 (Predecessor). Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Remington Arms Company, Inc. and subsidiaries as of December 31, 2008 and 2007 (Successor), and the related consolidated statements of operations, stockholder’s equity (deficit), and comprehensive income (loss), and cash flows for the year ended December 31, 2008 (Successor), and for the periods from June 1, 2007 to December 31, 2007 (Successor), and January 1, 2007 to May 31, 2007 (Predecessor) and the year ended December 31, 2006 (Predecessor), in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 18 to the consolidated financial statements, the Predecessor adopted Financial Accounting Standards Board Statement (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, as of January 1, 2007. Also, as discussed in Note 12 to the consolidated financial statements, the Successor adopted FASB No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” as of December 31, 2007.

Grant Thornton LLP
Charlotte, North Carolina
March 27, 2009

59



Remington Arms Company, Inc.
Consolidated Balance Sheets
(Dollars in Millions, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

66.7

 

$

23.4

 

Accounts Receivable Trade - net

 

 

93.1

 

 

72.8

 

Inventories - net

 

 

102.0

 

 

116.9

 

Supplies Inventory - net

 

 

6.5

 

 

6.3

 

Prepaid Expenses and Other Current Assets

 

 

17.8

 

 

18.2

 

Assets Held for Sale

 

 

1.9

 

 

 

Deferred Tax Assets

 

 

9.9

 

 

11.1

 

 

 

   

 

   

 

Total Current Assets

 

 

297.9

 

 

248.7

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment - net

 

 

117.0

 

 

102.7

 

Goodwill and Intangibles - net

 

 

101.0

 

 

132.6

 

Debt Issuance Costs - net

 

 

3.1

 

 

4.7

 

Other Noncurrent Assets

 

 

15.1

 

 

13.4

 

 

 

   

 

   

 

Total Assets

 

$

534.1

 

$

502.1

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts Payable

 

$

35.3

 

$

30.4

 

Book Overdraft

 

 

 

 

5.3

 

Short-Term Debt

 

 

3.2

 

 

3.5

 

Current Portion of Long-Term Debt

 

 

6.7

 

 

4.8

 

Current Portion of Product Liability

 

 

2.8

 

 

3.1

 

Income Taxes Payable

 

 

 

 

0.1

 

Other Accrued Liabilities

 

 

46.6

 

 

34.9

 

 

 

   

 

   

 

Total Current Liabilities

 

 

94.6

 

 

82.1

 

 

Long-Term Debt, net of Current Portion

 

 

269.1

 

 

225.0

 

Retiree Benefits, net of Current Portion

 

 

85.0

 

 

42.8

 

Product Liability, net of Current Portion

 

 

10.6

 

 

9.3

 

Deferred Tax Liabilities

 

 

9.7

 

 

28.4

 

Other Long-Term Liabilities

 

 

13.0

 

 

6.5

 

 

 

   

 

   

 

Total Liabilities

 

 

482.0

 

 

394.1

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholder’s Equity

 

 

 

 

 

 

 

Class A Common Stock, par value $.01; 1,000 shares authorized and outstanding at December 31, 2008 and December 31, 2007, respectively

 

 

 

 

 

Paid in Capital

 

 

143.6

 

 

124.2

 

Accumulated Other Comprehensive Loss

 

 

(41.6

)

 

(5.7

)

Accumulated Deficit

 

 

(49.9

)

 

(10.5

)

 

 

   

 

   

 

Total Stockholder’s Equity

 

 

52.1

 

 

108.0

 

 

 

   

 

   

 

Total Liabilities and Stockholder’s Equity

 

$

534.1

 

$

502.1

 

 

 

   

 

   

 

The accompanying notes are an integral part of these consolidated financial statements.

60



Remington Arms Company, Inc.
Consolidated Statements of Operations
(Dollars in Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

Predecessor

 

 

 

 

 

 

 

 

 

January 1 -
December 31
2008

 

June 1 -
December 31
2007

 

January 1 -
May 31
2007

 

January 1 -
December 31
2006

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

591.1

 

$

322.0

 

$

167.0

 

$

446.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

446.9

 

 

269.3

 

 

117.3

 

 

338.4

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

144.2

 

 

52.7

 

 

49.7

 

 

107.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General and Administrative Expenses

 

 

104.0

 

 

52.1

 

 

30.3

 

 

73.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and Development Expenses

 

 

7.1

 

 

3.6

 

 

2.7

 

 

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Charges

 

 

47.4

 

 

 

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

 

 

(1.7

)

 

(1.7

)

 

(4.5

)

 

(2.3

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit (Loss)

 

 

(12.6

)

 

(1.3

)

 

21.2

 

 

29.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

24.6

 

 

14.6

 

 

10.9

 

 

28.0

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes, Equity in Losses from Unconsolidated Joint Venture and Minority Interest in Consolidated Subsidiary

 

 

(37.2

)

 

(15.9

)

 

10.3

 

 

1.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Provision (Benefit)

 

 

2.3

 

 

(5.9

)

 

1.3

 

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in Losses from Unconsolidated Joint Venture

 

 

 

 

0.5

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority Interest in Consolidated Subsidiary

 

 

(0.1

)

 

 

 

 

 

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(39.4

)

$

(10.5

)

<