New York, 05-02-97 -- Moody's Investors Service confirmed the B3 rating of Remington Arms Company, Inc.'s $100 million of 9.5% senior subordinated notes due 2003, and assigned B1 ratings to its $150 million secured revolving credit facility and $86.4 million term loan. The rating outlook is negative. MOODY'S CONFIRMS SR. SUB. RATING OF REMINGTON ARMS COMPANY, INC. AND ASSIGNS B1 TO ITS SECURED CREDIT FACILITIES
The ratings are restrained by Remington's continued high leverage; a decline in sales of firearms and ammunition, which has significantly eroded cash flow and debt protection; its reliance on commodity-oriented ammunition sales; its dependence on relatively few large customers; and the notes' subordination to senior debt ($145.4 million at 12/31/96). However, the ratings continue to take into account Remington's leading position in the rifle, shotgun and fishingline markets, and the endurance and popularity of its Remington and Stren brands. The B1 credit facility ratings further acknowledge the benefits of the collateral package.
Sales in fiscal 1996 dropped 8.6% to $390.4 million due to lower demand for firearms and ammunition. Demand dropped, in large part, because of tighter inventory control practices instituted by several key customers, including Wal-Mart, which accounts for 18% of Remington's sales. Lower volume together with higher manufacturing costs, increased R&D expenditures, and $11.2 million of non-recurring charges depressed margins and resulted in a $20.8 million pretax loss. EBITDA of $29.4 million (normalized for $11.2 million of nonrecurring and restructuring expenses) covered interest expense of $25.1 million by only 1.2 times, and the consolidated fixed charge coverage ratio was only 0.7. The cash deficiency was increased by $13.6 million of term loan amortization and $22.5 million in capital expenditures. Remington financed its cash shortfall by borrowing a net $36 million on its credit facilities to cover fixed charges, capital additions, and other needs, increasing debt-to-book capitalization to 76%, from 70% in 1995.
Moody's expects that margins, cash flow, and debt coverage will improve in fiscal 1997. Though the markets for shotguns, rifles, and ammunition are mature, they are growing consistently at a modest pace. In addition, the acute effects of customers' tighter inventory control practices should ameliorate as the company continues to adjust its inventory, which is currently high at 135 days, up from 124 at fiscal 1995, to improve productivity, and to reduce production, employment, and overhead. The company began these changes in October 1996, and took a $3.6 million pre-tax charge. The company has completed its aggressive capital expenditure program totaling $41.4 million during the past two years. Approximately $13.5 million was spent in 1996 for a new firearms manufacturing facility, a new corporate headquarters building, and equipment at a new R&D facility. The company projects capital expenditures of about $10.4 million for 1997, about the same as depreciation. Debt-to-cash flow, exceedingly high at 8.7 times, is expected to decrease as cash flow improves. As of December 31, 1996, the company could not incur additional debt without violating the indenture's fixed charge coverage ratio test for incurring debt. If cash flow does not increase in fiscal 1997 as expected, Moody's will likely downgrade the company's ratings.
The two notch rating differential on the credit facilities reflects the subordination of the notes and the quality of the pledged collateral. The term loan and revolving credit borrowings are secured by a pledge of Remington's capital stock and by the stock of its domestic subsidiaries (65% of non-U.S. subsidiaries), and by security interests in substantially all of Remington's tangible and intangible assets. Outstandings are guaranteed by its parent, RACI Holding, Inc., which has no significant assets other than the stock of Remington. Tangible collateral consists of accounts receivable, inventories (with a book value of $101.9 million, 62% of which is finished goods) and net plant of $98.4 million (of which 66% is machinery and equipment). Tangible coverage is barely sufficient to cover the debt after deducting customer prepayments, retiree benefits and employee-related accrued liabilities. However, coverage is better if the value of the Remington trademarks is considered, which the company owns for use in its firearms and ammunition product lines.
Borrowing under the revolving credit is expected to peak seasonally in the spring and summer months. There is no borrowing base, but the mandatory 30-consecutive-day clean down period commencing each December 1 (at which time borrowings on the revolving credit are limited to $60 million or less) should preclude further use of the revolving credit to finance longer-term needs. Since September 1995, the credit agreement has been amended four times to reflect the adverse effects of decreasing ammunition and firearms sales, increased interest expense from higher seasonal borrowings, and the large capital expenditures. Moody's believes that the term loan amortization schedule will need to be modified to give the company more leeway than is allowed by the higher repayment schedule for the years 1997 through 2000.
With executive offices in Madison, North Carolina, Remington Arms Company, Inc. designs, manufactures, and sells firearms, ammunition, and hunting and gun care accessories under the Remington name and fishing products under the Stren name. Remington has strong domestic market shares in each of its product categories, and is the only domestic company to manufacture both firearms and ammunition (accounting for, respectively, 41% and 45% of 1996 sales).
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