Is this major gun maker about to go bankrupt?
What was once an upbeat mood in the gun industry, fostered by a multi-year rally in weapon sales, has now become a major hangover. The most obvious indicator of that change: Privately-held Remington Outdoor is now at risk of declaring bankruptcy after a collapse in sales and profits.
The rifle and shotgun manufacturer's third-quarter sales plunged 41% as demand for firearms dried up. That led Remington to report adjusted earnings before interest, taxes, depreciation, and amortization that were 78% lower year over year. Over the first nine months of 2017, the company has produced a $60.5 million net loss, compared to a $19.1 million gain in the prior-year period.
And with its credit rating in the trash bin, the future is bleak for "America's oldest gunmaker".
A side effect of the "Trump slump"
The boom years have given way to bust -- other leading firearms manufacturers like American Outdoor Brands (NASDAQ:AOBC), Sturm, Ruger (NYSE:RGR), and Vista Outdoor (NYSE:VSTO) similarly saw sales decline.
Yet unlike those companies, Remington carries the extra burden of a large debt balance thanks to its private equity owners.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| AOBC | n.a. | n.a. | n.a. | n.a. |
| RGR | STURM RUGER & CO. INC. | 46.12 | +0.50 | +1.10% |
| VSTO | VISTA OUTDOOR INC. | 32.17 | +0.20 | +0.63% |
Remington is the largest manufacturer of rifles and the second largest manufacturer of shotguns. Its storied history stretches all the way back to 1816, nearly 40 years before Smith & Wesson or Colt Manufacturing. However, its current difficulties have a more recent origin: Its sale to Cerberus Capital Management, which took the company private in 2007 for $118 million with the assumption of $252 million worth of debt.
Today, debt on the company's books has ballooned to almost $1 billion, the result of a failed IPO bid in 2011 and outrage over the Sandy Hook shootings a year later. That tragedy caused some of Cerberus' biggest investors to demand it sell the firearms company or cash them out, but it was unable to find a buyer. Remington ended up taking on debt to buy shares from Cerberus.
After this latest earnings disaster, the Standard & Poor's ratings agency cut Remington's corporate credit rating two full notches, from the already junk bond status of CCC+ to CCC-, a move that will force it to pay even more to borrow money, even as its high-yield debt becomes less attractive to investors.
Wit the firearms and ammunition manufacturer burning through cash as a result of falling sales, S&P expects it will undertake a restructuring within the next year. Although the ratings agency says it's not a certainty, it forecasts Remington's sales and profits will be under extreme pressure "at least through early 2018, resulting in insufficient cash flow for debt service and fixed charges."
History repeating
This story is reminiscent of the recent history of Colt, which went bankrupt two years ago during the so-called "Obama boom years", because its private owners weighed it down with debt as well. The difference between the two companies was that Colt had relied too heavily on the government for contracts. When it lost its decades-old deal to produce the U.S. military's M4 carbines and M16 rifles, it had few civilian customers to fall back on.
Yet all gunmakers are feeling the effects of the slide in consumer gun sales following the election of Donald Trump as president. Many manufacturers are now looking to the holiday shopping season to get their weapons moving again, but despite a huge Black Friday surge, such sales are a double-edged sword for Remington.
While retailers may sell down their excess inventory with a holiday rush, it's likely buyers were treated to significant discounts. Those will take a bite out of profits that Remington cannot afford.
Few options open
Forbes says Remington's leverage at the end of the third quarter was "an eye-watering 18 times multiple of its $53 million in LTM EBITDA." By comparison, rival Sturm, Ruger's multiple stood at 5.8 times and American Outdoor Brands at 4.8 times.
Vista Outdoor's situation is also under review by Moody's after it turned in second-quarter losses of $2 per share, a dramatic reversal from the $1.23 per share profit it posted in the year-ago period. Both American Outdoor and Ruger have clean balance sheets, so while sales and profits are down, they're able to withstand the current storm.
But Remington may end up another cautionary tale of what happens when private equity buys into a firearms manufacturer as a strategic opportunity without the fortitude to withstand the political winds or changing fortunes of this industry.
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