Remington Outdoor Company reported sharply higher losses in the first quarter ended March 29, shedding new light on why it has been so difficult for Cerberus Capital Management to sell the country's oldest gun manufacturer.
The country's largest manufacturing of firearms reported sales of $201.3 million for the quarter ended March 29, a decline of $53.9 million, or 21.2 percent from the first quarter of 2014. Though owned by private equity funds, Remington is required to publish its financial results because its bonds are traded publicly.
The Madison, NC-based company reported Firearms sales declined 27.6 percent to $89.4 million, compared with the first quarter of 2014, as all major product categories saw declines. Sales of modern sporting rifles (MSRs) and centerfire guns decreased $16.2 million. Sales of shotguns decreased $15.7 million, primarily due to softness in demand for tactical shotguns and SKU reductions. In addition, sales of handguns decreased $3.5 million, while sales of rimfire rifles decreased $1.5 million. These decreases were partially offset by increases in sales of our other firearm products of $2.8 million.
Ammunition sales declined 14.8 percent to $86.3 million, or 42.9 percent of sales. Sales of the centerfire ammunition used in most modern firearms, decreased $9.7 million, while sales of shotshell ammunition decreased $2.8 million. In addition, sales in our other ammunition product lines decreased $2.9 million. The decreases were partially offset by $400,000 in higher sales of rimfire ammunition used by smaller caliber – .22 and.17 caliber – guns.
Consumer sales, which include air guns and gun parts, fell 15.8 percent to $25.6 million as higher sales of airguns accessories were more than offset by lower sales of parts.
Post-surge market conditions continued
The company said “post-surge markets” continued through the first quarter of 2014, particularly in the market for MSRs, centerfire rifles and 1911 style handguns. Ammunition sales returned to more normal, pre-surge levels.
“The results are driven by continued retail focused product incentives in the first couple of months of 2015, a downward trend in sales mix to lower price point and lower margin products, and production delays associated with poor weather conditions on the Southeast and East Coasts,” the company reported. “The ammunition market is also returning to a more historic sales level coming off the surge that continued throughout the first quarter of 2014 and we continue to see depleted channel inventory for ammunition recover, in particular our shotshell ammunition.”
Gross margin fell just 110 basis points to 21.4 percent during the quarter due largely to a $25.3 million charge taken in the first quarter of 2014 for the company’s costly XMP trigger recall. Remington did not recognize any additional expenses during the more recent quarter for its April, 2014 recall of certain bolt action centerfire rifles equipped with an XMP trigger that can cause unintentional discharges. In addition to the recall costs, Remington has expensed $29.7 million toward a reserve fund it will use to settle claims lawsuits related to the trigger, although none of those were reported in the first quarter. In December, 2014, for instance, it offered to replace triggers on rifles owned by nearly 8 million people to settle a class action lawsuit filed on behalf of plaintiffs in Missouri and Washington, according the CNBC. The company currently expects to expense another $28.1 million to settle lawsuits related to the XMP trigger.
The absence of those one-time charges offset significant deterioration in profits at the company’s Firearms and Ammunition businesses during the quarter. Gross margin plunged 1,080 basis points to 19.7 percent in Firearms due to lower sales, particularly of higher margin MSRs, handguns and centerfire rifles. To reduce inventory of those guns, Remington increased its use of discounts and deals during the quarter. By the end of the quarter, inventories fell by $102.6 million, or 34.2 percent to $197.0 million, which finished goods accounting for virtually all of the decline.
In the Ammunition business, gross margin fell 670 basis points to 28.6 percent, due to lower sales and a shift in sales mix and higher manufacturing costs attributed to weather delays.
Despite cutting selling, general and administration expenses 9.5 percent, they rose to 21.3 percent of net sales, compared with 18.5 percent a year earlier.
The company reported an operating loss of $6.2 million, up 44 percent from the year earlier quarter. Adjusted EBITDA fell 76.3 percent to $9.2 million. Net loss reached $13.2 million, or $78.56 per diluted common share, compared with a loss of $11.8 million, or $70.83 per diluted share. The results reflected a restructuring charge of $1.4 million related to a major consolidation of its manufacturing at its facility in Huntsville, AL. Remington has so far recognized $22.5 million of the up to $30 million in expenses it expects to incur with that restructuring.
Cerberus buyback not to exceed $60 million
The results demonstrate why after more than two years of failing to find a buyer for Remington, Cerberus Capital Management last month offered to buy out shares of Remington held by limited partners of its private equity funds. Cerberus had been under pressure from California State Teachers' Retirement System (CalSTRS) and other activist investors to divest Remington since December, 2012, when a man used a Remington Bushmaster sport rifle and other guns in an attack that killed 20 children and six adults at Sandy Hook Elementary School in Connecticut. In its first quarter filing, Remington said it does not expect to pay out more than $60 million to buy back those shares.
Remington ended the quarter with cash and cash equivalents of $160.5 million, which was flat with a year earlier. Trade receivables declined 4.4 percent to $162 million, while long-term debt increased 2.8 percent to $863.2 million.
Remington said it is moving forward with plans to introduce a new shotgun platform, the V3 and new handgun platforms, the R51 and the RM 380, to significantly expand its handgun offering beyond its current 1911 range and participate in new handgun market segments.
