e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934. |
For the quarterly period ended April 3, 2011
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934. |
For the transition period from to
Registration number 333-171547
Colt Defense LLC
Colt Finance Corp.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
32-0031950 |
Delaware
|
|
27-1237687 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
|
|
|
547 New Park Avenue, West Hartford, CT
|
|
06110 |
(Address of principal executive offices)
|
|
(Zip Code) |
(860) 232-4489
(Registrants telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities and 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
þ
Indicate by check mark whether the Registrant had submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that
the Registrant was required to submit and post such files). Yes þ No o
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definition 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 þ
|
|
Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.) Yes o No þ
The number of shares outstanding of the Registrants common stock as of May 10, 2011 was none.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Colt Defense LLC and Subsidiaries
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
ASSETS |
|
April 3, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
49,880 |
|
|
$ |
61,444 |
|
Restricted cash |
|
|
671 |
|
|
|
671 |
|
Accounts receivable, net |
|
|
34,162 |
|
|
|
15,218 |
|
Inventories |
|
|
37,226 |
|
|
|
31,641 |
|
Other current assets |
|
|
2,133 |
|
|
|
2,514 |
|
|
|
|
|
|
Total current assets |
|
|
124,072 |
|
|
|
111,488 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
21,903 |
|
|
|
21,741 |
|
Goodwill |
|
|
15,309 |
|
|
|
14,950 |
|
Intangible assets with finite lives, net |
|
|
7,480 |
|
|
|
7,484 |
|
Deferred financing costs |
|
|
9,089 |
|
|
|
9,452 |
|
Other assets |
|
|
2,192 |
|
|
|
2,277 |
|
|
|
|
|
|
Total assets |
|
$ |
180,045 |
|
|
$ |
167,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Capital lease obligations current portion |
|
$ |
1,254 |
|
|
$ |
1,229 |
|
Accounts payable |
|
|
13,614 |
|
|
|
9,180 |
|
Accrued expenses |
|
|
9,456 |
|
|
|
7,075 |
|
Pension and retirement obligations - current portion |
|
|
2,243 |
|
|
|
2,243 |
|
Accrued interest |
|
|
8,434 |
|
|
|
2,862 |
|
Customer advances and deferred income |
|
|
10,537 |
|
|
|
9,185 |
|
Accrued distributions to members |
|
|
12,889 |
|
|
|
15,606 |
|
|
|
|
|
|
Total current liabilities |
|
|
58,427 |
|
|
|
47,380 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
|
246,925 |
|
|
|
246,838 |
|
Capital lease obligations |
|
|
825 |
|
|
|
1,148 |
|
Pension and retirement liabilities |
|
|
11,644 |
|
|
|
11,911 |
|
Other long-term liabilities |
|
|
1,741 |
|
|
|
1,742 |
|
|
|
|
|
|
Total long-term liabilities |
|
|
261,135 |
|
|
|
261,639 |
|
|
|
|
|
|
Total liabilities |
|
|
319,562 |
|
|
|
309,019 |
|
|
|
|
|
|
Commitments and Contingencies (Note 11) |
|
|
|
|
|
|
|
|
Deficit: |
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
(134,229 |
) |
|
|
(135,187 |
) |
Accumulated other comprehensive loss |
|
|
(5,288 |
) |
|
|
(6,440 |
) |
|
|
|
|
|
Total Colt Defense LLC members deficit |
|
|
(139,517 |
) |
|
|
(141,627 |
) |
Non-controlling interest |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Total deficit |
|
|
(139,517 |
) |
|
|
(141,627 |
) |
|
|
|
|
|
Total liabilities and deficit |
|
$ |
180,045 |
|
|
$ |
167,392 |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Colt Defense LLC and Subsidiaries
Consolidated Statements of Operations
(In thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
48,497 |
|
|
$ |
56,339 |
|
Cost of sales |
|
|
35,425 |
|
|
|
39,805 |
|
|
|
|
|
|
Gross profit |
|
|
13,072 |
|
|
|
16,534 |
|
Selling and commissions |
|
|
3,296 |
|
|
|
2,686 |
|
General and administrative |
|
|
4,204 |
|
|
|
3,555 |
|
Amortization of purchased intangibles |
|
|
136 |
|
|
|
136 |
|
|
|
|
|
|
Operating income |
|
|
5,436 |
|
|
|
10,157 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
6,085 |
|
|
|
6,413 |
|
Other (income) expense, net |
|
|
(29) |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
6,056 |
|
|
|
7,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before provision for
foreign income taxes |
|
|
(620) |
|
|
|
3,147 |
|
Provision for foreign income taxes |
|
|
1,139 |
|
|
|
453 |
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(1,759) |
|
|
|
2,694 |
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
- |
|
|
|
(287) |
|
|
|
|
|
|
Net (loss) income |
|
|
(1,759) |
|
|
|
2,407 |
|
|
|
|
|
|
Less: Net loss from discontinued operations attributable
to non-controlling interest |
|
|
- |
|
|
|
(23) |
|
|
|
|
|
|
Net (loss) income attributed to Colt Defense LLC members |
|
$ |
(1,759) |
|
|
$ |
2,430 |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Colt Defense LLC and Subsidiaries
Consolidated Statements of Changes in Cash Flows
(In thousands of dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
Operating Activities |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,759) |
|
|
$ |
2,407 |
|
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities |
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
- |
|
|
|
287 |
|
Depreciation and amortization |
|
|
1,370 |
|
|
|
1,056 |
|
Amortization of financing fees |
|
|
363 |
|
|
|
540 |
|
Deferred foreign income taxes |
|
|
(43) |
|
|
|
(41) |
|
Amortization of debt discount |
|
|
87 |
|
|
|
79 |
|
Amortization of deferred income |
|
|
(47) |
|
|
|
(47) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(18,620) |
|
|
|
347 |
|
Inventories |
|
|
(5,262) |
|
|
|
(5,152) |
|
Prepaid expenses and other assets |
|
|
404 |
|
|
|
500 |
|
Accounts payable and accrued expenses |
|
|
12,225 |
|
|
|
2,067 |
|
Accrued pension and retirement liabilities |
|
|
(171) |
|
|
|
(122) |
|
Other |
|
|
1,143 |
|
|
|
1,412 |
|
|
|
|
|
|
Net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(10,310) |
|
|
|
3,333 |
|
Discontinued operations |
|
|
(28) |
|
|
|
(244) |
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(10,338) |
|
|
|
3,089 |
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(1,215) |
|
|
|
(1,453) |
|
Change in restricted cash |
|
|
- |
|
|
|
1 |
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,215) |
|
|
|
(1,452) |
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Capital lease obligation payments |
|
|
(298) |
|
|
|
(287) |
|
|
|
|
|
|
Net cash used in financing activities: |
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(298) |
|
|
|
(287) |
|
Discontinued operations |
|
|
- |
|
|
|
(5) |
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(298) |
|
|
|
(292) |
|
|
|
|
|
|
Effect of exchange rates on cash |
|
|
287 |
|
|
|
69 |
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(11,564) |
|
|
|
1,414 |
|
Cash and cash equivalents, beginning of period |
|
|
61,444 |
|
|
|
72,705 |
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
49,880 |
|
|
$ |
74,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
63 |
|
|
$ |
216 |
|
Foreign income taxes |
|
|
572 |
|
|
|
1,716 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Notes to Consolidated Financial Statements (unaudited)
(in thousands of dollars)
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements of Colt Defense LLC and Colt Finance
Corp. (the Company, Colt, we, or us) have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all significant
adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of
the financial position, results of operations and cash flows for the three months ended April 3,
2011 and April 4, 2010 have been included. The financial information included in this quarterly
report on Form 10-Q should be read in conjunction with the consolidated financial statements and
notes in the Companys Registration Statement on Form S-4, as amended, for the fiscal year ended
December 31, 2010, which was filed with the Securities and Exchange Commission on April 15, 2011.
The consolidated balance sheet dated December 31, 2010 included in this quarterly report on Form
10-Q has been derived from the audited consolidated financial statements at that time, but does not
include all disclosures required by GAAP.
The accompanying consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Operating results for the three months ended April 3, 2011 are not necessarily indicative of the
results to be expected for any subsequent interim period or for the year ending December 31, 2011.
Recent Accounting Pronouncements
Milestone Method of Revenue Recognition - In April 2010, the FASB issued authoritative guidance
which allows entities to make a policy election to use the milestone method of revenue recognition
and provides guidance on defining a milestone and the criteria that should be met for applying the
milestone method. The scope of this guidance is limited to the transactions involving milestones
relating to research and development deliverables. The guidance includes enhanced disclosure
requirements about each arrangement, individual milestones and related contingent consideration,
substantive milestones and factors considered in that determination. The amendments are effective
prospectively to milestones achieved in fiscal years, and interim periods within those years,
beginning after June 15, 2010. Early application and retrospective application are permitted. The
adoption of this guidance had no impact on our consolidated financial statements.
Improving Disclosures about Fair Value Measurements - In January 2010, the FASB issued new guidance
to enhance disclosure requirements related to fair value measurements by requiring certain new
disclosures and clarifying certain existing disclosures. This new guidance requires disclosure of
the amounts of significant transfers in and out of Level 1 and Level 2 recurring fair value
measurements and the reasons for the transfers. In addition, the new guidance requires additional
information related to activities in the reconciliation of Level 3 fair value measurements. The new
guidance also expands the disclosures related to the disaggregation of assets and liabilities and
information about inputs and valuation techniques. The new guidance related to Level 1 and Level 2
fair value measurements was effective for interim and annual reporting periods beginning after
December 15, 2009 and the new guidance related to Level 3 fair value measurements was effective for
fiscal years beginning after December 15, 2010 and interim periods during those fiscal years. The
adoption of this guidance had no impact on our consolidated financial statements.
Revenue Arrangements with Multiple DeliverablesIn September 2009, the accounting standard for the
allocation of revenue in arrangements involving multiple deliverables was amended. Current
accounting standards require companies to allocate revenue based on the fair value of each
deliverable, even though such deliverables may not be sold separately either by the company itself
or other vendors. The new accounting standard eliminates i) the residual method of revenue
allocation and ii) the requirement that all undelivered elements must have objective and reliable
evidence of fair value before a company can recognize the portion of the overall arrangement fee
that is attributable to items that already have been delivered. This revised accounting standard
was effective for us beginning January 1, 2011 via prospective transition. Early adoption and
retrospective transition are permitted. The adoption of this guidance had no impact on our
consolidated financial statements.
Goodwill
The net carrying amount of goodwill may change from period to period as a result of fluctuations in
exchange rates at our Canadian operation.
2010 revisions
During the first quarter of 2011, we identified a $3.3 million understatement of goodwill related
to our acquisition of Colt Canada and corresponding understatement of deferred tax liabilities. These
understatements are attributable to the initial application of purchase accounting in 2005. We corrected
this immaterial error through revision of our historical financial statements. As a result, our previously reported December 31, 2010
goodwill and deferred tax liabilities increased from $11,622 to $14,950 and $248 to $1,644, respectively.
6
Additionally,
net income for the first quarter of 2010 increased from $2,368 to
$2,407 due to a reduction in our tax provision and
accumulated deficit as of December 31, 2010 decreased from
$(136,911) to $(135,187) to include the historical net income impact
of the revision. Based on an
analysis of qualitative and quantitative factors, this error was deemed immaterial to all
periods previously reported.
Note 2 Discontinued Operations
On December 1, 2010, we closed a non-core business located in Delhi, Louisiana, Colt Rapid Mat,
which was engaged in the manufacture and sale of runway repair systems. Accordingly, Colt Rapid
Mat is presented as a discontinued operation in the consolidated financial statements. There was
no buyer for this business and no significant proceeds as most assets were either disposed of or
absorbed into other parts of the business. In addition, there were no significant costs nor
on-going commitments associated with the closure.
The following table summarizes the components of the discontinued operations for Colt Rapid Mat:
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 4, 2010 |
Net sales |
|
|
- |
|
Loss from discontinued operations |
|
|
($287) |
|
Additionally, included in the loss from discontinued operations in the Consolidated Statements of
Operations is net loss attributed to non-controlling interest of $23 for the three months ended
April 4, 2010.
Note 3 Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of $121 and $216 at April 3, 2011
and December 31, 2010, respectively.
Note 4 Inventories
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
December 31, 2010 |
Materials |
|
|
$22,403 |
|
|
|
$19,338 |
|
Work in process |
|
|
11,234 |
|
|
|
10,257 |
|
Finished products |
|
|
3,589 |
|
|
|
2,046 |
|
|
|
|
|
|
|
|
|
$37,226 |
|
|
|
$31,641 |
|
|
|
|
|
|
Note 5 -- Notes Payable and Long-term Debt
On November 10, 2009, Colt Defense LLC (Parent), our parent company, and Colt Finance Corp, a
100%-owned finance subsidiary of Parent, jointly and severally co-issued $250,000 of unsecured
senior notes (the senior notes). Proceeds from the offering of the senior notes were used to
repay the outstanding balances of our then outstanding senior secured credit facility and senior
subordinated notes ($189,281), settle outstanding interest rate swap agreements ($5,395), pay a
prepayment premium on our senior subordinated notes ($581), pay bank legal costs associated with
the prepayment ($9) and pay financing costs ($12,848). The balance of the proceeds was available
for general corporate purposes.
Concurrently with the issuance of the senior notes, we entered into a senior secured credit
facility, consisting of a $50,000 revolving credit line (the revolver). On November 1, 2010, the
revolver was amended to provide for a $10,000 letter of credit facility only.
Senior Notes
The $250,000 senior notes bear interest at 8.75% and mature November 15, 2017. Interest is payable
semi-annually in arrears on May 15 and November 15, commencing on May 15, 2010. We issued the
senior notes at a discount of $3,522 from their principal value. This discount will be amortized as
additional interest expense over the life of the indebtedness. No principal repayments are
7
required until maturity. However, in the event of a change in control of our company, we are required to
offer to purchase the senior notes at a price equal to 101% of their principal amount, together
with accrued and unpaid interest.
The senior notes are not guaranteed by any of our subsidiaries and do not have any financial
condition covenants that require us to maintain compliance with any financial ratios or
measurements on a periodic basis. The senior notes do contain non-financial condition covenants
that, among other things, limit our ability to incur additional indebtedness, enter into certain
mergers or consolidations, incur certain liens and engage in certain transactions with our
affiliates. Under certain circumstances, we are required to make an offer to purchase our senior
notes offered hereby at a price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase with the proceeds of certain asset dispositions. In
addition, the indenture restricts our ability to pay dividends or make other Restricted Payments
(as defined in the indenture) to our members, subject to certain exceptions, unless certain
conditions are met, including that (1) no default under the indenture shall have occurred and be
continuing, (2) we shall be permitted by the indenture to incur additional indebtedness and (3) the
amount of distributions to our unit holders may not exceed a certain amount based on, among other
things, our consolidated net income. Such restrictions are not expected to affect our ability to
meet our cash obligations for the next 12 months. Additionally, the senior notes contain certain
cross default provisions with other indebtedness, if such indebtedness in default aggregates to
$20,000 or more.
The outstanding loan balances at April 3, 2011 and December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
April 4, 2010 |
Senior notes principal amount |
|
|
$250,000 |
|
|
|
$250,000 |
|
Unamortized discount |
|
|
(3,075) |
|
|
|
(3,162) |
|
|
|
|
|
|
|
|
|
246,925 |
|
|
|
246,838 |
|
|
|
|
|
|
|
|
|
|
Less: current portion |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
$246,925 |
|
|
|
$246,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
Effective interest rate |
|
|
9.0% |
|
|
|
9.1% |
|
Amortization of discount |
|
|
$87 |
|
|
|
$79 |
|
Amortization of deferred financing costs |
|
|
$363 |
|
|
|
$458 |
|
Revolver (Senior Secured Credit Facility)
From November 10, 2009 through October 31, 2010, the Company was party to a $50,000 revolver. On
November 1, 2010, the revolver was amended to provide for a $10,000 letter of credit facility only.
The letter of credit facility exists for the sole purpose of supporting our letter of credit
requirements. Loans under the letter of credit facility bear interest at our option at a rate equal
to LIBOR plus 3.75% or an alternate base rate plus 2.75% (with the base rate defined as the higher
of (a) the prime rate or (b) the Federal funds rate plus 0.50% or (c) the one-month LIBOR rate plus
1.00%). The letter of credit facility matures January 31, 2014. Obligations under this facility are
secured by substantially all of our assets.
We are subject to a non-financial condition covenant limiting our maximum capital expenditures made
in the ordinary course of business in any year to $10,000, with provisions to carryover up to
$5,000 of the unused amounts to the succeeding year. We were in compliance with this non-financial
condition covenant as of and through April 3, 2011.
As of April 3, 2011, there were $632 standby letters of credit outstanding against the $10,000
letter of credit facility.
Note 6 Warranty Costs
We generally warrant our military products for a period of one year and record the estimated costs
of such product warranties at the time the sale is recorded. For direct foreign sales, posting a
warranty bond for periods ranging from one to five years is occasionally required. Our estimated
warranty costs are based upon actual past experience, our current production environment as well as
specific and identifiable warranty activity. The warranty reserve is included in current accrued
expenses in the Consolidated Balance Sheets.
8
A summary of warranty reserve activity follows:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
Balance, as of January 1, |
|
|
$ 116 |
|
|
|
$ 93 |
|
Net provision charged to operations |
|
|
14 |
|
|
|
13 |
|
Payments |
|
|
(1) |
|
|
|
(2) |
|
|
|
|
|
|
Balance, at end of period |
|
|
$129 |
|
|
|
$104 |
|
|
|
|
|
|
Note 7 Income Taxes
As a limited liability company, we are treated as a partnership for U.S. federal and state income
tax reporting purposes and therefore, are not subject to U.S. federal or state income taxes. Our
taxable income (loss) is reported to our members for inclusion in their individual tax returns.
Our Canadian operation files separate income tax returns in Canada. Any year in which U.S. taxable
income is allocated to the members, and to the extent the Board of Directors determines that
sufficient funds are available; distributions to members equal to 45% of the highest taxable income
allocated to any one unit shall be made.
The provision (benefit) for foreign income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
Current |
|
|
$1,182 |
|
|
|
$494 |
|
Deferred |
|
|
(43) |
|
|
|
(41) |
|
|
|
|
|
|
Total |
|
|
$1,139 |
|
|
|
$453 |
|
|
|
|
|
|
Note 8 Colt Defense LLC Deficit
Our authorized capitalization consists of 1,000,000 common units and 250,000 preferred units.
Common units issued and outstanding as of April 3, 2011 and December 31, 2010 were 132,174. No
preferred units have been issued.
In February 2010, our board declared a special distribution to members up to a maximum amount of
$15,606. During the first quarter of 2011, the final liability was
determined to be $12,889. The change in the liability was recognized in accumulated deficit. This
payment was made during the second quarter of 2011.
Note 9 Pension, Savings and Postretirement Benefits
We have two noncontributory, domestic defined benefit pension plans (the Plans) that cover
substantially all eligible salaried and hourly U.S. employees.
We also provide certain postretirement health care coverage to retired U.S. employees who were
subject to our collective bargaining agreement when they were employees. The cost of these
postretirement benefits is determined actuarially and is recognized in our consolidated financial
statements during the employees active working career.
Effective January 1, 2009, we froze the pension benefits under the salaried defined benefit plans.
Accordingly, participants retain the pension benefits already accrued, however no additional
benefits will accrue after the effective date of the freeze.
The components of cost recognized in our Consolidated Statements of Operations for our pension
plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
Service cost |
|
|
$72 |
|
|
|
$119 |
|
Interest cost |
|
|
271 |
|
|
|
279 |
|
Expected return on assets |
|
|
(387) |
|
|
|
(351) |
|
Amortization of unrecognized prior service costs |
|
|
42 |
|
|
|
42 |
|
Amortization of unrecognized loss |
|
|
123 |
|
|
|
88 |
|
|
|
|
|
|
Net periodic cost |
|
|
$121 |
|
|
|
$177 |
|
|
|
|
|
|
9
The components of cost recognized in our Consolidated Statements of Operations for our
post-retirement health plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
Service cost |
|
|
$64 |
|
|
|
$72 |
|
Interest cost |
|
|
167 |
|
|
|
168 |
|
Amortization of unrecognized prior service costs |
|
|
(71) |
|
|
|
(91) |
|
Amortization of unrecognized loss |
|
|
2 |
|
|
|
- |
|
|
|
|
|
|
Net periodic cost |
|
|
$162 |
|
|
|
$149 |
|
|
|
|
|
|
In connection with the renewal of our collective bargaining agreement in 2007, effective April
1, 2007, we capped our monthly contribution to the cost of providing retiree health care benefits
at approximately $250 (not in thousands) per employee. For the year ended December 31, 2010, the
cost per month was $212 (not in thousands) per employee. For the quarter ended April 3, 2011, the
cost per month was $208 (not in thousands) per employee.
Note 10- Transactions with Related Parties
We have a financial advisory agreement with Sciens Management LLC, an affiliate of Sciens Capital
Management. Under the terms of the agreement, we also reimburse the affiliate for expenses incurred
in connection with the financial advisory services provided. The cost for these advisory services
and the expenses are recorded within general and administrative expenses.
We have a license agreement (the License) with New Colt Holding Corp (NCHC), an affiliate, for
the use of certain Colt trademarks. Under the terms of the License, we received a 20-year paid-up
license for the use of the Colt trademarks, which expires December 31, 2023. Thereafter, the
License may be extended for successive five-year periods. Consideration for the License included
the transfer to NCHCs wholly owned subsidiary, Colts Manufacturing of the Colt Match
Target® rifle line of business, inventories of $18 and cash of $2,000. The total
transferred of $2,018 is recorded in other assets and is being amortized over 20 years. This
intangible had an unamortized balance of $1,287 at April 3, 2011 and $1,311 at December 31, 2010.
Effective July 1, 2007, we entered into a service agreement with Colts Manufacturing, an affiliate
entity, which provides for remuneration for certain factory accounting, data processing and
management services provided by us to Colts Manufacturing. Since January 1, 2009, the annual fee
has been $430.
We also lease our West Hartford facility from an affiliate and we sublease a portion of our
facility to Colts Manufacturing. In addition, Colt Security LLC (Security), a wholly owned
subsidiary of E-Plan Holding, provides security guard services to us.
Note 11 - Commitments and Contingencies
A summary of standby letters of credit issued principally in connection with performance and
warranty bonds established for the benefit of certain international customers is as follows:
|
|
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
December 31, 2010 |
Standby letters of credit secured by restricted cash |
|
|
$ 654 |
|
|
|
$654 |
|
Standby letters of credit secured by Revolver |
|
|
632 |
|
|
|
632 |
|
Guarantees of standby letters of credit established
by a sales agent on behalf of Colt |
|
|
804 |
|
|
|
804 |
|
At April 3, 2011 and December 31, 2010, we had unconditional purchase obligations related to
capital expenditures for machinery and equipment of $1,130 and $950, respectively.
We also had certain Industrial Cooperation Agreements, which stipulate terms of cooperation for
commitment of offsetting business over five to six years for the foreign governments that are party
to the related sales contracts. We generally settle our offset purchase commitment under Industrial
Cooperation Agreements through on-going business and/or cooperating with other contractors on their
spending during the related period. Additionally, we identify future purchases and other
satisfaction plans for the remainder of the
10
offset purchase commitment period and should there be a projected net purchase commitment after
such consideration, we accrue the estimated cost to settle the offset purchase commitment.
Our remaining gross offset purchase commitment is the total amount of offset purchase commitments
reduced for claims submitted and approved by the governing agencies. At April 3, 2011 and December
31, 2010, our remaining gross offset purchase commitments totaled $37,975 and $25,807,
respectively. We have evaluated our settlement of our remaining gross offset purchase commitments
through probable planned spending and other probable satisfaction plans to determine our net offset
purchase commitment. We have accrued $519 and $412 as of April 3, 2011 and December 31, 2010,
respectively, based on our estimated cost of settling the remaining net offset purchase commitment.
During 2007, we entered into a contract with one of our vendors to purchase all of our requirements
for the U.S. Army for a specific accessory from this vendor at specified pricing. In consideration
for entering into this agreement, we received a non-refundable payment of $750 from the vendor.
This payment has been recorded as deferred income and is being amortized to income ratably through
the expiration of the commitment in June 2011.
We are involved in various legal claims and disputes in the ordinary course of our business. In
managements opinion, the ultimate disposition of these matters will not have a material adverse
effect on our financial condition, results of operations or cash flows.
Note 12 Segment Information
Our small arms weapons systems segment represents our core business, as substantially all of our
operations are conducted through this segment. Our small arms weapons systems segment consists of
two operating segments which have similar economic characteristics and have been aggregated into
the Companys only reportable segment. The small arms weapons systems segment designs, develops
and manufactures small arms weapons systems for military and law enforcement personnel both
domestically and internationally.
Management uses Adjusted EBITDA from continuing operations to evaluate the financial performance of
and make operating decisions for the small arms weapons systems segment. See the footnotes that
follow the reconciliation tables below for additional information regarding the adjustments made to
arrive at Adjusted EBITDA from continuing operations of the small arms weapons systems segment.
The following table represents a reconciliation of adjusted EBITDA from continuing operations to
net (loss) income from continuing operations:
|
|
|
|
|
|
|
|
|
Statement of Operations Data: |
|
April 3, 2011 |
|
April 4, 2010 |
Adjusted EBITDA from continuing operations |
|
|
$ 6,939 |
|
|
|
$11,321 |
|
Provision for foreign income taxes |
|
|
(1,139) |
|
|
|
(453) |
|
Depreciation and amortization (i) |
|
|
(1,370) |
|
|
|
(1,056) |
|
Interest expense, net |
|
|
(6,085) |
|
|
|
(6,413) |
|
Sciens fees and expenses (ii) |
|
|
(133) |
|
|
|
(108) |
|
Other income (expense), net (iii) |
|
|
29 |
|
|
|
(597) |
|
|
|
|
|
|
Net (loss) income from continuing operations |
|
|
$ (1,759) |
|
|
|
$2,694 |
|
|
|
|
|
|
|
|
|
(i) |
|
Includes depreciation and amortization of intangible assets. |
|
(ii) |
|
Includes fees and expenses pursuant to our financial advisory
agreement with Sciens Management LLC, an affiliate of Sciens Capital
Management. |
|
(iii) |
|
Includes expenses incurred in connection with prior refinancing
activities, transaction costs incurred in connection with our
contemplated merger and acquisition activities, foreign currency
exchange gains or losses, service income from an affiliate and other
less significant charges not related to on-going operations. |
Geographical Information
Geographic external revenues are attributed to the geographic regions based on the customers
location of origin. Our reported net sales in the United States include revenues that arise from
sales to the U.S. Government under its Foreign Military Sales program, which involve product that
is resold by the U.S. Government to foreign governments and that we generally ship directly to the
foreign government.
11
The table below presents net sales for specific geographic regions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
United States |
|
|
$20,694 |
|
|
|
$37,429 |
|
Canada |
|
|
6,323 |
|
|
|
6,663 |
|
Asia |
|
|
7,930 |
|
|
|
3,389 |
|
Europe |
|
|
11,993 |
|
|
|
6,938 |
|
All other |
|
|
1,557 |
|
|
|
1,920 |
|
|
|
|
|
|
|
|
|
$48,497 |
|
|
|
$56,339 |
|
|
|
|
|
|
Long-lived assets are net fixed assets attributed to specific geographic regions:
|
|
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
December 31, 2010 |
United States |
|
|
$18,345 |
|
|
|
$18,538 |
|
Canada |
|
|
3,558 |
|
|
|
3,203 |
|
|
|
|
|
|
|
|
|
$21,903 |
|
|
|
$21,741 |
|
|
|
|
|
|
Major Customer Information
Sales to the U.S. government represented 36% and 61% of net sales for the three months ended April
3, 2011 and April 4, 2010, respectively. For the quarter ended April 3, 2011, direct foreign sales
to customer A and customer B accounted for 17% and 15% of net sales, respectively. Direct foreign
sales to customers A and C each accounted for 12% of net sales for the quarter ended April 4, 2010.
Note 13 - Concentration of risk
Financial instruments, which potentially subject us to concentration of credit risk, consist
primarily of accounts receivable. Accounts receivable due from our most significant customers
were:
|
|
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
December 31, 2010 |
United States Government |
|
|
$8,938 |
|
|
|
$1,838 |
|
Government of Netherlands |
|
|
6,597 |
|
|
|
4,211 |
|
Government of Canada |
|
|
2,870 |
|
|
|
1,082 |
|
Government of Denmark |
|
|
2,610 |
|
|
|
4,745 |
|
Government of Thailand |
|
|
7,040 |
|
|
|
- |
|
Note 14 Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other current assets and liabilities approximate their fair value due to their short
maturities. The carrying value of our long-term debt of $246,925 and $246,838 at April 3, 2011 and
December 31, 2010, respectively, was recorded at amortized cost. The estimated fair value of
long-term debt of approximately $197,540 and $182,660 at April 3, 2011 and December 31, 2010,
respectively, was based on quoted market prices.
Fair value is 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. The inputs used to
measure fair value fall into the following hierarchy:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or
unadjusted quoted prices for identical or similar assets or liabilities in markets that are not
active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3: Unobservable inputs for the asset or liability.
12
As of April 3, 2011 and December 31, 2010, we did not have any financial assets and liabilities
reported at fair value and measured on a recurring basis or any significant nonfinancial assets or
nonfinancial liabilities. Therefore, we did not have any transfers of assets and liabilities
between Level 1 and Level 2 of the fair value measurement hierarchy during the three months ended
April 3, 2011.
Note 15 Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized |
|
|
|
|
|
Foreign |
|
|
|
|
Prior Service |
|
Unrecognized |
|
Currency |
|
|
|
|
Cost |
|
Loss |
|
Translation |
|
Total |
Balance, December 31, 2009 |
|
|
$322 |
|
|
|
$(7,606) |
|
|
|
$1,137 |
|
|
|
$(6,147) |
|
Pension liability |
|
|
42 |
|
|
|
88 |
|
|
|
- |
|
|
|
130 |
|
Change in post-retirement health liability |
|
|
(90) |
|
|
|
(1) |
|
|
|
- |
|
|
|
(91) |
|
Currency translation |
|
|
- |
|
|
|
- |
|
|
|
942 |
|
|
|
942 |
|
|
|
|
|
|
|
|
|
|
Balance, April 4, 2010 |
|
|
274 |
|
|
|
(7,519) |
|
|
|
2,079 |
|
|
|
(5,166) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
|
(201) |
|
|
|
(8,898) |
|
|
|
2,659 |
|
|
|
(6,440) |
|
Pension liability |
|
|
43 |
|
|
|
123 |
|
|
|
- |
|
|
|
166 |
|
Change in post-retirement health liability |
|
|
(71) |
|
|
|
1 |
|
|
|
- |
|
|
|
(70) |
|
Currency translation |
|
|
- |
|
|
|
- |
|
|
|
1,056 |
|
|
|
1,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 3, 2011 |
|
|
$(229) |
|
|
|
$(8,774) |
|
|
|
$3,715 |
|
|
|
$(5,288) |
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income for the three months ended April 3, 2011 and April 4, 2010
was $(607) and $ 3,338, respectively.
Note 16- Subsequent Events
In the second quarter of 2011, the Company paid $12,889 as a special distribution to members.
On May 11, 2011, Colt Defense completed its exchange offer for up to $250.0 million in aggregate
principal amount of our registered 8.75% senior notes due 2017 for up to a like aggregate principal
amount of our outstanding 8.75% senior notes due 2017 issued previously pursuant to Rule 144A. A total of $246.2 million senior notes were
exchanged during this offering. The Company did not recognize any gain or loss for accounting purposes as a result of the exchange offer.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Form 10-Q, including the documents that we incorporate by reference, contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
that are subject to the safe harbor created by those sections. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or our future financial
performance and/or operating performance are not statements of historical fact and reflect only our
current expectations regarding these matters. These statements are often, but not always, made
through the use of words such as may, will, expect, anticipate, believe, intend,
predict, potential, estimate, plan or variations of these words or similar expressions.
These statements inherently involve a wide range of known and unknown uncertainties. Our actual
actions and results may differ materially from what is expressed or implied by these statements.
Factors that could cause such a difference include, but are not limited to, those set forth as
Risk Factors under Section 1A herein and in our Registration Statement on Form S-4 for the fiscal
year ended December 31, 2010, which was filed with the Securities and Exchange Commission on April
15, 2011. Given these factors, you should not rely on forward-looking statements, assume that past
financial performance will be a reliable indicator of future performance nor use historical trends
to anticipate results or trends in future periods. We expressly disclaim any obligation or
intention to provide updates to the forward-looking statements and estimates and assumptions
associated with them.
Certain monetary amounts, percentages and other figures included in this section have been subject
to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the
arithmetic aggregation of the figures that precede them and figures expressed as percentages in the
text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of
the percentages that precede them.
Overview of Our Business
We are one of the worlds leading designers, developers and manufacturers of small arms weapons
systems for individual soldiers and law enforcement personnel, and have been expanding our
portfolio of products and services to meet evolving military and law enforcement requirements
around the world. Our products have proven themselves under the most severe battle conditions,
including the jungles of Vietnam, the deserts of the Middle East, the urban centers of Iraq and the
mountains of Afghanistan.
We have supplied small arms weapons systems to more than 80 countries. We are currently the U.S.
militarys sole supplier of the M4 carbine, the U.S. Armys standard issue rifle, the Canadian
militarys exclusive supplier of the C8 carbine and C7 rifle, and have supplied small arms weapons
systems to U.S., Canadian and international law enforcement agencies. Furthermore, our development
and sales of M4 carbines and the more than 45 years of sales of M16 rifles, have resulted in a
global installed base of more than 7 million of these small arms weapons systems. Our expertise in
developing small arms weapons systems enables us to integrate new technologies and features into
the large installed base, and diversify our revenue sources by adding related products and
services, investing in new technologies and seeking strategic acquisitions, co-production
opportunities and other alliances. Widely-recognized brand name loyalty and weapons already in
stock play a significant role in the selection process of our customers. We have been a leading
supplier of small arms weapons systems to the U.S. military since the Mexican-American War in 1847
and have supplied our products to international customers for nearly as long.
Our facilities in West Hartford, Connecticut and Kitchener, Ontario, Canada manufacture and sell
military rifles, carbines and related products and services as well as law enforcement model
products in the United States and internationally.
Results of Operations
The following table sets forth our results of operations in dollars and as a percentage of total
net sales for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
% |
|
April 4, 2010 |
|
% |
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
$48,497 |
|
|
|
100.0 |
% |
|
|
$56,339 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
35,425 |
|
|
|
73.0 |
|
|
|
39,805 |
|
|
|
70.7 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,072 |
|
|
|
27.0 |
|
|
|
16,534 |
|
|
|
29.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and commissions |
|
|
3,296 |
|
|
|
6.8 |
|
|
|
2,686 |
|
|
|
4.8 |
|
General and administrative |
|
|
4,204 |
|
|
|
8.7 |
|
|
|
3,555 |
|
|
|
6.3 |
|
Amortization of purchased intangibles |
|
|
136 |
|
|
|
0.3 |
|
|
|
136 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
7,636 |
|
|
|
15.7 |
|
|
|
6,377 |
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5,436 |
|
|
|
11.2 |
|
|
|
10,157 |
|
|
|
18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
6,085 |
|
|
|
12.5 |
|
|
|
6,413 |
|
|
|
11.4 |
|
Other (income) expense, net |
|
|
(29) |
|
|
|
(0.1 |
) |
|
|
597 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6,056 |
|
|
|
12.5 |
|
|
|
7,010 |
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before
provision for foreign income taxes |
|
|
(620) |
|
|
|
(1.3 |
) |
|
|
3,147 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
Provision for foreign income taxes |
|
|
1,139 |
|
|
|
2.3 |
|
|
|
453 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(1,759) |
|
|
|
(3.6 |
) |
|
|
2,694 |
|
|
|
4.8 |
|
Loss from discontinued operations |
|
|
- |
|
|
|
0.0 |
|
|
|
(287) |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(1,759) |
|
|
|
(3.6 |
)% |
|
|
2,407 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
Less: net loss attributable to non-controlling interest |
|
|
- |
|
|
|
|
|
|
|
(23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Colt Defense LLC
members |
|
|
$(1,759) |
|
|
|
|
|
|
|
$2,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 3, 2011 Compared to the Three Months Ended April 4, 2010
Net Sales
The following table shows net sales for the three months ended April 3, 2011 and April 4, 2010,
respectively by product category (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
|
% Change |
Weapons systems |
|
|
$30,495 |
|
|
|
$41,142 |
|
|
|
(25.9) |
% |
Spares / other |
|
|
18,002 |
|
|
|
15,197 |
|
|
|
18.5 |
% |
|
|
|
|
|
|
|
Total |
|
|
$48,497 |
|
|
|
$56,339 |
|
|
|
(13.9) |
% |
|
|
|
|
|
|
|
Net sales for the three months ended April 3, 2011 were $48.5 million, a decrease of $7.8 million,
or 13.9%, from $56.3 million in the comparable prior year period.
Weapon system sales declined by $10.6 million in the first three months of 2011 compared to the
same period in 2010. Contributing to this decline was an $18.1 million decrease in sales of
carbines to the U.S. Government from the comparable period in 2010, as the U.S. Government
continued to evaluate its carbine procurement strategy. This decline was partially mitigated by a
$7.7 million increase in international weapon systems sales. The increase in international weapons
systems sales is a direct result of our strategy to diversify our sales base.
Spares/other sales increased $2.8 million or 18.5% from $15.2 million in the first quarter of 2010
to $18.0 million in the first quarter of 2011. The increase is due to higher sales of M249 spare
barrels to the U.S. Government and higher sales on a large international contract for mid-life
upgrades.
Cost of Sales/Gross Profit
Gross margin for the three months ended April 3, 2011 decreased to 27.0% from 29.3% for the three
months ended April 4, 2010. This margin erosion was primarily due to the slowdown of volume and
related production in our West Hartford plant which negatively impacted overall gross margin
resulting in higher per unit manufacturing costs.
Selling and Commissions Expense
For the three-month period ended April 3, 2011, selling and commission expenses increased by $0.6
million to $3.3 million compared to the same period in 2010. The increase was primarily due to
higher commission expense as a result of stronger direct foreign sales in 2011. Typically, we do
not pay commissions on our domestic sales.
General and Administrative Expense
During the three months ended April 3, 2011, general and administrative costs were $4.2 million, an
increase of $0.6 million over the comparable three-month period in 2010. This year over year
increase was mainly driven by increased outside professional fees related
15
to the filing of our
Registration Statement on Form S-4 and the project costs associated with our requirements to be
compliant with Section 404 of the Sarbanes-Oxley Act by the end of fiscal 2012.
Interest Expense
Our interest expense for the three months ended April 3, 2011 was $6.1 million, a decrease of $0.3
million from $6.4 million in the three months ended April 4, 2010. During the first quarter of
2011, we had a $10 million letter of credit facility whereas in the first quarter of 2010, we had a
$50 million revolving credit facility. The interest expense and amortization of deferred financing
fees to interest expense is lower in 2011 as a result of the smaller credit facility. In addition,
we accrued an additional day of interest on the $250 million notes in the first quarter of 2010.
Other (Income) Expense
For the three months ended April 3, 2011, we had other income of $29 thousand compared to other
expense of $0.6 million for the three months ended April 4, 2010. The year over year change is
primarily attributable to foreign currency gains of $0.1 million in 2011 compared to foreign
currency losses of $0.4 million in 2010.
Income Taxes
We are not subject to U.S. federal or state income taxes. For the three-month period ended April
3, 2011, we had foreign income tax expense of $1.1 million compared to $0.5 million for the
comparable 2010 three-month period. Our effective tax rate for the first three months of fiscal
2011 was 183.7% compared to an effective tax rate of 14.4% for the first three months of fiscal
2010. The income tax that we incurred results from Canadian federal and provisional income taxes
as well as withholding tax required on the royalty and interest income received from our Canadian
subsidiary. The difference between our consolidated effective tax rate and the U.S. Federal
statutory tax rate, results primarily from U.S. income (loss) being taxable to our members, the
difference between the U.S. and Canadian statutory rates, Canadian non-deductible expenses, and
withholding taxes on Canadian interest and royalty expenses.
Discontinued Operations
We dissolved Colt Rapid Mat as of December 31, 2010. For the three months ended April 4, 2010, we
recognized a loss from this discontinued operation of $287 thousand.
Liquidity and Capital Resources
Our primary liquidity requirements are for debt service, capital expenditures and working capital.
We have historically funded these requirements through internally-generated operating cash flow.
Our cash requirements for working capital are principally to fund accounts receivable and
inventory. U.S. Government receivables, which historically constitute the majority of our accounts
receivable, are generally collected within 20 days as compared with 30 to 50 days for direct
foreign sales receivables. We have not experienced any significant credit losses. We generally
ship our inventory upon the completion of manufacturing and testing and normally have minimal
finished products in inventory at any given time. Accordingly, our cash generated from operating
activities is generally a reflection of our operating results adjusted for non-cash charges or
credits such as depreciation and the timing of the collection of accounts receivable and our
investment in inventory. Historically, tax distributions to our members have been made in amounts
equal to 45% of our taxable income, as defined, for the applicable period. Our Governing Board may
also from time to time declare other distributions to our members. In addition, our cash
requirements and liquidity could be impacted by potential acquisitions.
The $250 million senior unsecured outstanding notes bear interest at 8.75% and mature November 15,
2017. Interest is payable semi-annually in arrears on May 15 and November 15, commencing on May
15, 2010. We issued the outstanding notes at a discount of $3.5 million from their principal
value. This discount will be amortized as additional interest expense over the life of the
indebtedness. No principal repayments are required until maturity.
The outstanding notes do not have any financial condition covenants which require us to maintain
compliance with any financial ratios or measurements, however, there are cross default provisions
with other indebtedness, if such indebtedness in default aggregates to $20,000 or more. The
outstanding notes do contain covenants that, among other things, limit our ability to incur
additional indebtedness, enter into certain mergers or consolidations, incur certain liens and
engage in certain transactions with our affiliates. Under certain circumstances, we are required
to make an offer to purchase our notes offered hereby at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase with the proceeds of
certain asset dispositions. In addition, the indenture restricts our ability to pay dividends or
make other restricted payments (as defined in the indenture) to our members, subject to certain
exceptions, unless certain conditions are met, including that (1) no default under the indenture
shall have occurred and be continuing, (2) we shall be permitted by the indenture to incur
additional indebtedness and (3) the amount of the
16
dividend or payment may not exceed a certain
amount based on, among other things, our consolidated net income. Such restrictions are not
expected to affect our ability to meet our cash obligations for the next 12 months.
From November 10, 2009 through October 31, 2010, the Company was party to a $50.0 million senior
secured revolving credit facility. On November 1, 2010, the senior secured credit facility was
amended to reduce it to a $10.0 million letter of credit facility. The letter of credit facility
exists for the sole purpose of supporting the Companys letter of credit requirements. Loans under
the letter of credit facility bear interest at our option at a rate equal to LIBOR plus 3.75% or an
alternate base rate plus 2.75% (with the base rate defined as the higher of (a) the prime rate or
(b) the Federal funds rate plus 0.50% or (c) the one-month LIBOR rate plus 1.00%). The letter of
credit facility matures January 31, 2014. Obligations under this facility are secured by
substantially all of our assets.
Under the letter of credit facility, we continue to be subject to a covenant limiting our maximum
capital expenditures made in the ordinary course of business in any year to $10.0 million, with
provisions to carryover up to $5.0 million of the unused amount to the succeeding year. As of
April 3, 2011, we are in compliance with this covenant. The letter of credit facility matures on
January 31, 2014. At April 3, 2011, we had $0.6 million of standby letters of credit outstanding
against the letter of credit facility.
At April 3, 2011, we had cash and cash equivalents totaling $49.9 million. We believe our existing
cash balances and forecasted operating cash flows are sufficient to meet our obligations for the
next twelve months. In the second quarter, we paid a special distribution to our members of
approximately $12.9 million and we plan to make a semi-annual interest payment on the senior notes
of approximately $10.9 million. With the exception of these payments, we are not aware of any
significant events or conditions that are likely to have a material impact on our liquidity.
Cash Flows
The following table sets forth our consolidated cash flows for the three-month periods ended April
3, 2011 and April 4, 2010, respectively ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
|
|
|
|
|
Cash provided by operating activities |
|
|
$(10,338) |
|
|
$3,089 |
Cash used in investing activities |
|
|
(1,215) |
|
|
(1,452) |
Cash used in financing activities |
|
|
(298) |
|
|
(292) |
Cash Flows Provided by Operating Activities
Net cash used by operating activities for the three months ended April 3, 2011 was $10.3 million,
compared to net cash provided by operations of $3.1 million for the three months ended April 4,
2010. This unfavorable variance was partly due to a net loss of $1.8 million in 2011 compared to
net income of $2.4 million in 2010.
During the first three months of 2011, we also used $10.3 million of cash to fund changes in
operating assets and liabilities as compared to $0.9 million to fund changes in operating assets
and liabilities during the first three months of 2010. The net increased use of cash in 2011 as
compared to 2010 is primarily due to two line items; accounts receivable and accounts payable and
accrued expenses. In the first three months of 2011, accounts receivable increased by $18.6 million
compared to a $0.3 million decrease in accounts receivable in 2010. The increase in accounts
receivable in 2011 is primarily due to the timing of sales during the quarter. We billed $7.4
million to the U.S. Government and $7.2 million to a direct international customer during the last
week of the first quarter. In addition, sales increased $4.2 million in the first quarter of 2011
compared to the fourth quarter of 2010. In contrast, during the first quarter of 2010, sales
decreased $12.0 million from the fourth quarter of 2009, which resulted in a decline in accounts
receivable.
In the first three months of 2011, accounts payable and accrued expenses increased $12.2 million
compared to an increase of $2.1 million in the first three months of 2010. The $4.4 million
increase in accounts payable in the first quarter of 2011 was mainly due to higher purchases of
inventory to support the Companys increasing sales compared to a $2.9 million decrease in accounts
payable in the first quarter of 2010 primarily due to declining sales. In addition, accrued
expenses increased $2.8 more in the first quarter of 2011 due to higher accruals for commissions on
direct international sales and outside professional fees.
Cash Flows Used in Investing Activities
Net cash used in investing activities for both periods presented were principally for capital
expenditures. These capital expenditures reflect our ongoing initiative to expand our
manufacturing capabilities, upgrade our machinery and equipment and improve our overall
manufacturing efficiency. We expect our full-year capital expenditures for 2011 to be approximately
$5.0 $7.0 million.
17
Capital expenditures for the three months ended April 3, 2011 were $1.2 million, which included
$0.8 million for the purchase of equipment associated with contracts awarded for new products
including the M240 machine gun and M249 barrel. For the three months ended April 4, 2010, capital
expenditures were $1.5 million, primarily for manufacturing machinery and equipment to modernize
our West Hartford facility and to support new contracts.
Cash Flows Used in Financing Activities
Net cash used in financing activities was $0.3 million for both the first three months of 2011 and
2010. In both periods, the cash was used to make payments on our capitalized lease obligations.
Backlog
Since a substantial portion of our business is of a build-to-order nature, we generally have a
significant backlog of orders to be shipped. Our backlog increased by 37.1% from $165.7 million at
December 31, 2010 to $227.2 million at April 3, 2011, primarily due to a large international order
that we received during the first quarter of 2011. We expect approximately 74% of our backlog of
orders as of April 3, 2011 to be shipped over the next twelve months.
Recent Issued Accounting Standards
Milestone Method of Revenue Recognition - In April 2010, the FASB issued authoritative guidance
which allows entities to make a policy election to use the milestone method of revenue recognition
and provides guidance on defining a milestone and the criteria that should be met for applying the
milestone method. The scope of this guidance is limited to the transactions involving milestones
relating to research and development deliverables. The guidance includes enhanced disclosure
requirements about each arrangement, individual milestones and related contingent consideration,
substantive milestones and factors considered in that determination. The amendments are effective
prospectively to milestones achieved in fiscal years, and interim periods within those years,
beginning after June 15, 2010. Early application and retrospective application are permitted. The
adoption of this guidance had no impact on our consolidated financial statements.
Improving Disclosures about Fair Value Measurements - In January 2010, the FASB issued new guidance
to enhance disclosure requirements related to fair value measurements by requiring certain new
disclosures and clarifying certain existing disclosures. This new guidance requires disclosure of
the amounts of significant transfers in and out of Level 1 and Level 2 recurring fair value
measurements and the reasons for the transfers. In addition, the new guidance requires additional
information related to activities in the reconciliation of Level 3 fair value measurements. The new
guidance also expands the disclosures related to the disaggregation of assets and liabilities and
information about inputs and valuation techniques. The new guidance related to Level 1 and Level 2
fair value measurements was effective for interim and annual reporting periods beginning after
December 15, 2009 and the new guidance related to Level 3 fair value measurements was effective for
fiscal years beginning after December 15, 2010 and interim periods during those fiscal years. The
adoption of this guidance had no impact on our consolidated financial statements.
Revenue Arrangements with Multiple DeliverablesIn September 2009, the accounting standard for the
allocation of revenue in arrangements involving multiple deliverables was amended. Current
accounting standards require companies to allocate revenue based on the fair value of each
deliverable, even though such deliverables may not be sold separately either by the company itself
or other vendors. The new accounting standard eliminates i) the residual method of revenue
allocation and ii) the requirement that all undelivered elements must have objective and reliable
evidence of fair value before a company can recognize the portion of the overall arrangement fee
that is attributable to items that already have been delivered. This revised accounting standard
was effective for us beginning January 1, 2011 via prospective transition. Early adoption and
retrospective transition are permitted. The adoption of this guidance had no impact on our
consolidated financial statements.
Critical Accounting Policies and Estimates
The preparations of our financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. The Companys reaffirms
the significant accounting policies as disclosed in Note 2 of the Notes to the Consolidated
Financial Statements in our Registration Statement on Form S-4 for the fiscal year ended December
31, 2010, which was filed with the Securities and Exchange Commission on April 15, 2011.
Contractual Obligations
As of April 3, 2011, there have been no material changes to our contractual obligations outside the
ordinary course of our business since December 31, 2010.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exposure
We are subject to foreign currency exchange risks relating to receipts from customers, payments to
suppliers and some intercompany transactions. As a matter of policy, we do not engage in currency
speculation and therefore, we have no derivative financial instruments to hedge this exposure. In
our Statements of Operations, we have foreign currency gains of $0.1 million for the three months
ended April 3, 2011 and foreign currency losses of $0.4 million for the three months ended April 4,
2010. Our Statements of Changes in Deficit have a foreign currency translation gain of $1.0
million as of April 3, 2011 and a foreign currency translation gain of $0.9 million as of April 4,
2010. The foreign currency amounts reported in the Statement of Operations and Statement of
Changes in Deficit may change materially should our international business continue to grow or if
changes in the Canadian dollar or Euro versus the U.S. dollar fluctuate materially.
Interest Rate Exposures
We had no variable rate debt outstanding at April 3, 2011.
ITEM 4. CONTROLS AND PROCEDURES
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness
of our internal control over financial reporting. The Company is not currently required to comply
with Section 404 but will be required to do so prior to the filing of our annual report on Form
10-K for the year ended December 31, 2012. In preparation for compliance with Section 404 and the
rules promulgated thereunder, we may identify deficiencies with respect to our internal controls
over financial reporting, and any such deficiencies may be material.
Our principal executive officer and principal financial officer have evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)), as of April 3, 2011. Based on
such evaluation, they have concluded that as of such date, our disclosure controls and procedures
are effective and designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms, and that such information is
accumulated and communicated to management, including our principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings, claims and disputes arising from the ordinary course
of its business. In managements opinion, the ultimate disposition of these matters will not have a
material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
You should carefully consider the risks described below together with all of the other information
included in this report. These risks could have a material adverse effect on our business,
financial position or results of operations. The following risk factors may not include all of the
important factors that could affect our business or our industry or that could cause our future
financial results to differ materially from historic or expected results. If any of the following
risks occur, you could lose all or part of your investment in, and the expected return on, our
senior unsecured notes.
Risks related to our business
We make a significant portion of our sales to a limited number of customers, and a decrease in
sales to these customers could have a material adverse effect on our business.
A significant portion of our net sales is derived from a limited number of customers. For the year
ended December 31, 2010, our top ten customers represented approximately 91% of our net sales. Our
two largest customers accounted for approximately 64% of our net sales for the year ended December
31, 2010. Although we expect sales to our top two customers to decrease as a percentage of total
net sales for the year ending December 31, 2011 and thereafter, we expect to continue to
derive a significant portion of our
19
business from sales to a relatively small number of customers. If we were to lose one
or more of our top customers, or if one or more of these customers significantly decreased orders
for our products, our business would be materially and adversely affected.
We are subject to risks related to a lack of product revenue diversification.
We derive a substantial percentage of our net sales from a limited number of products, especially
our M4 carbine and related small arms weapons systems, and we expect these products to continue to
account for a large percentage of our net sales in the near term. Continued market acceptance of
these products is, therefore, critical to our future success. We cannot predict how long the M4
carbine and related products will continue to be the primary small arms weapons system of choice
for the U.S. Government and certain of our other customers. Our business, operating results,
financial condition, and cash flows could be adversely affected by:
|
|
|
a decline in demand for the M4 carbine and related small arms weapons systems; |
|
|
|
|
a failure to achieve continued market acceptance of our key products; |
|
|
|
|
export restrictions or other regulatory, legislative or multinational actions which
could limit our ability to sell those products to key customers or market segments,
especially existing and potential international customers; |
|
|
|
|
improved competitive alternatives to our products gaining acceptance in the markets
in which we participate; |
|
|
|
|
increased pressure from competitors that offer broader product lines; |
|
|
|
|
technological change that we are unable to address with our products; or |
|
|
|
|
a failure to release new or enhanced versions of our products to our military or
other customers on a timely basis. |
Any of the above events could impact our ability to maintain or expand our business with certain
customers.
In addition, a contractual requirement that the U.S. Army purchase the M4 carbine and critical
spare parts exclusively from us expired on June 30, 2009 and our IDIQ contract with the U.S. Army
for the M4 carbine expired on December 31, 2010. The Army has recently awarded contracts for spare
parts to a competitor following a competitive solicitation. We can give no assurance that the U.S.
military will not select other small arms manufacturers to supply the M4 carbine, or spare parts,
for use by U.S. military personnel in the future or that such competing manufacturers will not be
able to leverage that position to compete with us in other markets. In addition, we can give no
assurance that the U.S. military will not purchase other small arms weapons systems, supplied by
other manufacturers, in lieu of the M4 carbine.
Our long-term growth plan includes the expansion of our global operations. Such global expansion
may not prove successful, and may divert significant capital, resources and management time and
attention and could adversely affect our ongoing operations.
Net direct sales to customers outside the United States accounted for approximately 38.6% of our
net sales for the year ended December 31, 2010. We intend to continue expanding our international
presence, which we expect to grow at a faster rate than our U.S. sales. Expanding our
international presence will require our managements time and attention and may detract from our
efforts in the United States and our other existing markets and adversely affect our operating
results in these markets. Our products and overall marketing approach may not be accepted in other
markets to the extent needed to continue the profitability of our international operations. Any
further international expansion will likely intensify our risks associated with conducting
international operations, including:
|
|
|
difficulty in predicting the timing of international orders and shipments; |
|
|
|
|
increased liquidity requirements as a result of bonding or letters of credit
requirements; |
|
|
|
|
unexpected changes in regulatory requirements; |
|
|
|
|
changes in foreign legislation; |
|
|
|
|
multinational agreements restricting international trade in small arms weapons
systems; |
|
|
|
|
possible foreign currency controls, currency exchange rate fluctuations or
devaluations; |
20
|
|
|
tariffs; |
|
|
|
|
difficulties in staffing and managing foreign operations; |
|
|
|
|
difficulties in obtaining and managing vendors and distributors; |
|
|
|
|
potential negative tax consequences; |
|
|
|
|
greater difficulties in protecting intellectual property rights; |
|
|
|
|
greater potential for violation of U.S. and foreign anti-bribery and export-import
laws; and |
|
|
|
|
difficulties collecting or managing accounts receivable. |
General economic and political conditions in these foreign markets may also impact our
international net sales, as such conditions may cause customers to delay placing orders or to
deploy capital to other governmental priorities. These and other factors may have a material
adverse effect on our future international net sales.
While part of our strategy is to pursue strategic acquisitions, we may not be able to identify
businesses that we can acquire on acceptable terms, we may not be able to obtain necessary
financing or may face risks due to additional indebtedness, and our acquisition strategy may
incur significant costs or expose us to substantial risks inherent in the acquired businesss
operations.
Our strategy of pursuing strategic acquisitions may be negatively impacted by several risks,
including the following:
|
|
|
We may not successfully identify companies that have complementary product lines or
technological competencies or that can diversify our revenue or enhance our ability to
implement our business strategy. |
|
|
|
|
We may not successfully acquire companies if we fail to obtain financing, or to
negotiate the acquisition on acceptable terms, or for other related reasons. |
|
|
|
|
We may incur additional expenses due to acquisition due diligence, including legal,
accounting, consulting and other professional fees and disbursements. Such additional
expenses may be material, will likely not be reimbursed and would increase the aggregate
investment cost of any acquisition. |
|
|
|
|
Any acquired business will expose us to the acquired companys liabilities and to
risks inherent to its industry. We may not be able to ascertain or assess all of the
significant risks. |
|
|
|
|
We may require additional financing in connection with any future acquisition. Such
financing may adversely impact, or be restricted by, our capital structure and our
ability to pay amounts owed under the notes when due and payable. Increasing our
indebtedness could increase the risk of a default that would entitle the holder to
declare all of such indebtedness due and payable, as well as the risk of cross-defaults
under other debt facilities. |
|
|
|
|
Achieving the anticipated potential benefits of a strategic acquisition will depend
in part on the successful integration of the operations, administrative infrastructures
and personnel of the acquired company or companies in a timely and efficient manner.
Some of the challenges involved in such an integration include: |
|
|
|
demonstrating to the customers of the acquired company that the consolidation
will not result in adverse changes in quality, customer service standards or
business focus; |
|
|
|
|
preserving important relationships of the acquired company; |
|
|
|
|
coordinating sales and marketing efforts to effectively communicate the expanded
capabilities of the combined company; and |
|
|
|
|
coordinating the supply chains. |
Any integration is expected to be complex, time-consuming and expensive and may harm the
newly-consolidated companys business, financial condition and results of operations.
21
Our dependence on government customers, including foreign governments, could result in
significant fluctuations in our period-to-period performance.
Our operating results and cash flow are materially dependent upon the timing of securing government
contracts and manufacturing and delivering products according to our customers timetables. For
example, in March 2010, we were notified of a delay in a large
potential contract with an international customer that would delay shipments until 2011 that we had
expected to make in 2010. Similar uncertainty and volatility in the timing of orders is likely to
continue to affect our net sales. We do not recognize sales until delivery of the product or
service has occurred and title and risk of loss have passed to the customer, which may be in a
non-U.S. location. This may extend the period of time during which we carry inventory and may
result in an uneven distribution of net sales from these contracts between periods. As a result,
our period-to-period performance may fluctuate significantly, and you should not consider our
performance during any particular period as indicative of longer-term results.
Our intellectual property rights are valuable, and any inability to protect them could reduce the
value of our products, services and brand.
We license the Colt trademarks and service marks from New Colt Holding Corp. (New Colt), an
affiliate of one of our sponsors that we do not control. There are events that are outside of our
control that pose a risk to these intellectual property rights, including the bankruptcy of New
Colt, or the licensing of the trademarks and service marks to manufacturers that tarnish the
quality, reputation and goodwill of these marks, actions or omissions by New Colt that abandon or
forfeit some or all of its rights to these marks or that diminish the value of the marks, failure
by New Colt to take appropriate action to deter infringement of these marks, and certain breaches
by New Colt of the agreement governing our license to these marks. Any of the foregoing acts or
omissions could impair our use of the Colt trademarks or their value and harm our business.
Despite our efforts to protect our proprietary technology, unauthorized persons may be able to
copy, reverse engineer or otherwise use some of our proprietary technology. It also is possible
that others will develop and market similar or better technology to compete with us. Furthermore,
existing intellectual property laws may afford only limited protection, and the laws of certain
countries do not protect proprietary technology as well as United States law. For these reasons,
we may have difficulty protecting our proprietary technology against unauthorized copying or use,
and the efforts we have taken or may take to protect our proprietary rights may not be sufficient
or effective. Significant impairment of our intellectual property rights could harm our business
or our ability to compete. Protecting our intellectual property rights is costly and time
consuming and we may not prevail. In addition, prosecuting certain claims could depend, in part,
on the participation of New Colt, and any delay or refusal to cooperate in such dispute could
adversely prejudice our rights. Our intellectual property rights are valuable, and any inability
to protect them could reduce the value of our products, services and brand.
Government contracts are subject to competitive bidding, and bidding for such contracts may
require us to incur additional costs.
We expect to obtain a greater portion of our U.S. Government and other government contracts in the
future through a competitive bidding process than has been the case in the recent past due to the
expiration on June 30, 2009 of the U.S. Armys contractual obligation to purchase the M4 carbine
exclusively from us. We may not win all of the contracts for which we compete and, even if we do,
these contracts may not result in a profit. We are also subject to risks associated with the
substantial expense, time and effort required to prepare bids and proposals for competitively
awarded contracts that may not be awarded to us. In addition, our customers may require terms and
conditions that require us to reduce our price or provide more favorable terms if we provide a
better price or terms under any other contract for the same product. Such most favored nation
clauses could restrict our ability to profitably compete for government and other contracts.
We may lose money on our fixed unit price contracts, and our contract prices may be adjusted to
reflect price reductions or discounts that are requested by our customers.
We provide our products and services primarily through fixed unit price contracts. In a fixed unit
price contract, we provide our products and services at a predetermined price, regardless of the
costs we incur. Accordingly, we must fully absorb any increases in our costs that occur during the
life of the contract, notwithstanding the difficulty of estimating all of the costs we will incur
in performing these contracts and in projecting the ultimate level of sales that we may achieve.
Our failure to estimate costs accurately, including as a result of price volatility relating to raw
materials, or to anticipate technical problems of a fixed unit price contract may reduce our
profitability or cause a loss. From time to time, we have also accommodated our customers
requests for price reductions or discounts in the past, and customers may continue to make such
requests in the future.
We may not receive the full amount of orders authorized under indefinite delivery, indefinite
quantity contracts.
Our contracts with the U.S. Government are ordinarily indefinite delivery, indefinite quantity
(IDIQ) contracts under which the U.S. Government may order up to a maximum quantity specified in
the contract but is only obligated to order a minimum quantity. We
22
may incur capital or other
expenses in order to be prepared to manufacture the maximum quantity that may not be fully recouped
if the U.S. Government orders a smaller amount. The U.S. Government may order less than the
maximum quantity for any number of reasons, including a decision to purchase the same product from
others despite the existence of an IDIQ contract. Our failure to realize anticipated revenues from
IDIQ contracts could negatively affect the results of our operations.
We intend to incur additional costs to develop new products and variations that diversify our
product portfolio, and we may not be able to recover these additional costs.
The development, of additional products and product variations, is speculative and may require
additional and, in some cases, significant expenditures for marketing, research, development and
manufacturing equipment. The new products or product variations that we introduce may not be
successful, or they may not generate an amount of net sales that is sufficient to fully recover the
additional costs incurred for their development. In addition, we may not successfully develop
technical data packages (TDPs) for new products or product variations with proprietary
intellectual property rights that are superior to products offered by other companies.
If we lose key management or are unable to attract and retain qualified individuals required for
our business, our operating results and growth may suffer.
Our ability to operate our business is dependent on our ability to hire and retain qualified senior
management. Our senior management is intimately familiar with our small arms weapons systems and
those offered by our competitors, as well as the situations in which small arms weapons systems are
utilized in combat and law enforcement activities. Our senior management also brings an array of
other important talents and experience to the Company, including managerial, financial,
governmental contracts, sales, legal and compliance. We believe their backgrounds, experience and
knowledge gives us expertise that is important to our success. Losing the services of these or
other members of our management team, particularly if they depart the Company to join a
competitors business, could harm our business and expansion efforts. The Companys success also
is dependent on its ability to hire and retain technically skilled workers. Competition for some
qualified employees, such as engineering professionals, is intense and may become even more
competitive in the future. If we are unable to attract and retain qualified employees, our
operating results, growth and ability to obtain future contracts could suffer.
Our manufacturing facilities may experience disruptions adversely affecting our financial
position and results of operations.
We currently manufacture our products primarily at our facilities in West Hartford, Connecticut and
Kitchener, Ontario, Canada. Any natural disaster or other serious disruption at these facilities
due to a fire, electrical outage or any other calamity could damage our capital equipment or
supporting infrastructure or disrupt our ability to ship our products from, or receive our supplies
at, either of these facilities. Any such event could materially impair our ability to manufacture
and deliver our products. Even a short disruption in our production output could delay shipments
and cause damage to relationships with customers, causing them to reduce or eliminate the amount of
products they purchase from us. Any such disruption could result in lost net sales, increased
costs and reduced profits.
We lease our West Hartford facility from an affiliate of one of our sponsors. The term of this
lease expires October 25, 2012. This lease does not provide for renewal of the term and after the
stated lease maturity we may not be able to continue to occupy that property on acceptable terms or
be able to find suitable replacement manufacturing facilities on satisfactory terms and conditions.
If we must find new facilities, we may be required to incur construction and similar costs,
including architect, legal and other costs, which may be significant, and to remediate
environmental conditions, which might require us to provide indemnifications and post bonds or
other collateral, among other measures. In addition, if we were to relocate a substantial distance
from our current facility, we might lose the services of administrative and factory personnel who
are familiar with our operations and could experience difficulty attracting qualified replacements
on a timely basis or at all. Any disruption in our business or manufacturing operations resulting
from the relocation of our West Hartford facility or otherwise could result in lost net sales,
increased costs (including increased rent payments) and reduced profits.
Some of our contracts with foreign governments are or will be subject to the fulfillment of
offset commitment or industrial cooperation agreement that could impose additional costs on us
and that we might not be able to timely satisfy, possibly resulting in the assessment of
penalties or even debarment from doing further business with that government.
Some countries that we are or are planning on doing business with impose offset purchase
commitments, or industrial cooperation commitments in return for purchasing our products and
services. These commitments vary from country to country and generally stipulate us to commit to
make direct or indirect purchases, investments or other satisfaction methods of an investment in
the local economy The gross amount of the offset purchase commitment is typically the gross value
of the related sales contract to date. Although certain approved purchases qualify for a
multiplier of satisfaction, failure to timely satisfy the purchase commitment also can lead to a
penalty of additional offset purchase requirements based on a multiplier. Each offset program is
measured against a schedule that requires performance within a specified period. Some countries we
may do business with require a direct investment in the country, often by in-country manufacture of
part or all of the products sold, the transfer of manufacturing technology or both. Others allow
for offsets to be satisfied indirectly by our purchasing unrelated products manufactured
in-country. Sometimes, offset
23
purchase commitments can be traded to other parties holding credits,
but doing so incurs a transaction cost that is typically 3% of the commitment. For certain
countries we may do business with in the future, the commitment cannot be traded and must be
fulfilled with direct or indirect purchases. Failure to satisfy offset purchase commitments can
result in penalties or blacklisting against awards of future contracts. We have paid penalties
that were assessed by foreign governments and incurred transaction costs to trade credits to
satisfy offset purchase commitments in the past. We may be subject to future penalties or
transaction costs or even disbarment from doing business with a government.
Our U.S. and Canadian Government contracts are generally multi-year contracts that are funded by
government appropriations annually. A reduction in the defense budget of our government
customers would have a material adverse effect on our business.
Our primary contracts with the U.S. Government are indefinite delivery, indefinite quantity
contracts under which the customer places orders at its discretion. Although these contracts
generally have a four- or five-year term, they are funded annually by government appropriations.
Furthermore, our primary contracts with the Canadian Government are funded annually by Canadian
Government appropriations. Agreements with other foreign governments may also have similar
conditions or may otherwise be dependent on initial or continued funding by such governments.
Accordingly, our net sales from year to year with respect to such customers are dependent on annual
appropriations and subject to uncertainty. The U.S. or Canadian Government, or a foreign
government, may decide to reduce government defense spending in the programs in which we
participate. The loss of, or significant reduction in, government funding, for any program in
which we participate, could have a material adverse effect on our sales and earnings and thus
negatively affect our business. The U.S. Governments ability to place orders under our most
recent IDIQ contract for the M4 carbine expired on December 31, 2010.
In order for us to sell our products overseas, we are required to obtain certain licenses or
authorizations, which we may not be able to receive or retain.
Export licenses are required for us to export our products from the United States and Canada and
issuance of an export license lies within the discretion of the issuing government. In the United
States, substantially all of our export licenses are processed and issued by the Department of
Defense Trade Controls (DDTC) within the U.S. Department of State. In the case of large
transactions, DDTC is required to notify Congress before it issues an export license. Congress may
take action to block the proposed sale. As a result, we may not be able to obtain export licenses
or to complete profitable contracts due to domestic political or other reasons that are outside of
our control. We cannot be sure, therefore, of our ability to obtain the governmental
authorizations required to export our products. Furthermore, our export licenses, once obtained,
may be terminated or suspended by the U.S. or Canadian Government at any time. Failure to receive
required licenses or authorizations or any termination or suspension of our export privileges could
have a material adverse effect on our financial condition, results of operations and cash flow.
Our government contracts are subject to audit and our business could suffer as a result of a
negative audit by government agencies.
As a U.S. and Canadian Government contractor, we are subject to financial audits and other reviews
by the U.S. and Canadian Governments of our costs, performance, accounting and other business
practices relating to certain of our significant U.S. and Canadian Government contracts. We are
audited and reviewed on a continual basis. Based on the results of their audits, the U.S. and
Canadian Governments may challenge the prices we have negotiated for our products, our procurement
practices and other aspects of our business practices. Although adjustments arising from
government audits and reviews have not caused a material decline in our results of operations in
the past, future audits and reviews may have such effects. In addition, under U.S. and Canadian
Government purchasing regulations, some of our costs, including most financing costs, amortization
of intangible assets, portions of our research and development costs, and some marketing expenses
may not be reimbursable or allowed in our negotiation of fixed-price contracts. Further, as a U.S.
and Canadian Government contractor, we are subject to a higher risk of investigations, criminal
prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities than
purely private sector companies, the results of which could cause our results of operations to
suffer.
Failure to comply with applicable firearms laws and regulations in the U.S. and Canada could have
a material adverse effect on our business.
As a firearms manufacturer doing business in the U.S. and Canada, we are subject to the National
Firearms Act and the Gun Control Act in the U.S. and the Firearms Act in Canada, together with
other federal, state or provincial, and local laws and regulations that pertain to the manufacture,
sale and distribution of firearms in and from the U.S. and Canada. In the U.S., we are issued a
Federal Firearms License by, and pay Special Occupational Taxes, to the Bureau of Alcohol, Tobacco,
Firearms and Explosives of the U.S. Department of Justice to be able to manufacture firearms and
destructive devices in the U.S. Similarly, in Canada, we are issued a Business Firearms License by
the Chief Provincial Firearms Officer of Ontario, to enable us to manufacture firearms and
destructive devices in Canada. These federal agencies also require the serialization of receivers
or frames of our firearm products and recordkeeping of our production and sales. Our places of
business are subject to compliance inspections by these agencies.
24
Compliance failures, which
constitute violations of law and regulation, could result in the assessment of fines and penalties
by these agencies, including license revocation. Any curtailment of our privileges to manufacture,
sell, or distribute our products could have a material adverse effect on our business.
Third parties may assert that we are infringing their intellectual property rights.
Although we do not believe our business activities infringe upon the rights of others, nor are we
aware of any pending or contemplated actions to such effect, it is possible that one or more of our
products infringe, or any of our products in development will infringe, upon the intellectual
property rights of others. We may also be subject to claims of alleged infringement of
intellectual property rights asserted by third parties whose products or services we use or combine
with our own intellectual property and for which we may have no right to intellectual property
indemnification. Our competitors may also assert that our products infringe intellectual property
rights held by them. Moreover, as the number of competitors in our markets grows, the possibility
of an intellectual property infringement claim against us may increase. In addition, because
patent applications are maintained under conditions of confidentiality and can take many years to
issue, our products may potentially infringe upon patent applications that are currently pending of
which we are unaware and which may later result in issued patents. If that were to occur and we
were not successful in obtaining a license or redesigning our products, we could be subject to
litigation.
Regardless of the merits of any infringement claims, intellectual property litigation can be
time-consuming and costly. Determining whether a product infringes a patent involves complex legal
and factual issues that may require the determination of a court of law. An adverse finding by a
court of law may require us to pay substantial damages or prohibit us from using technologies
essential to our products covered by third-party intellectual property, or we may be required to
enter into royalty or licensing agreements that may not be available on terms acceptable to us, if
at all. Inability to use technologies or processes essential to our products could have a material
adverse effect on our financial condition, results of operations and cash flow.
Labor disruptions by our employees could adversely affect our business.
The United Automobile, Aerospace & Agricultural Implement Workers of America (UAW) represents our
West Hartford work force pursuant to a collective bargaining agreement that expires on March 31,
2012. It is possible that a new agreement to replace the expiring agreement will not be reached
without a work stoppage or strike or will not be reached on terms satisfactory to us. Labor
organizing activities could result in additional employees becoming unionized. Any prolonged work
stoppage or strike at either of our manufacturing facilities or unexpected increases in labor costs
could materially harm our results of operations. Additionally, the workforce of Colts
Manufacturing Company LLC (Colts Manufacturing), an affiliate of one of our sponsors that we do
not control, shares space with us at our West Hartford manufacturing facility, and is subject to
the same UAW collective bargaining agreement as our West Hartford employees. Labor stoppages may
occur in the future. Union action asserted against Colts Manufacturing could also adversely
affect our operations.
Significant risks are inherent in the day-to-day operations in our business.
The day-to-day activities of our business involve the operation of machinery and other operating
hazards, including worker exposure to lead and other hazardous substances. As a result, our
operations can cause personal injury or loss of life, severe damage to and destruction of property
and equipment, and interruption of our business. In addition, our weapon systems are designed to
kill and therefore can cause accidental damage, injury or death or can potentially be used in
incidents of workplace violence.
We could be named as a defendant in a lawsuit asserting substantial claims upon the occurrence of
any of these events. Although we maintain insurance protection in amounts we consider to be
adequate, this insurance could be insufficient in coverage and may not be effective under all
circumstances or against all hazards to which we may be subject. If we are not fully insured
against a successful claim, there could be a material adverse effect on our financial condition and
result of operations.
Our West Hartford, Connecticut facility is inspected from time to time by the U.S. Occupational
Safety and Health Administration and similar agencies. We have been cited for violation of U.S.
occupational safety and health regulations in the past and could be cited again in the future. A
violation of these regulations can result in substantial fines and penalties. We are subject to
similar regulations at our Canadian manufacturing facility.
Environmental laws and regulations may subject us to significant costs and liabilities.
We are subject to various U.S. and Canadian environmental, health and safety laws and regulations,
including those related to the discharge of hazardous materials into the air, water or soil and the
generation, storage, treatment, handling, transportation, disposal, investigation and remediation
of hazardous materials. Certain of these laws and regulations require our facilities to obtain and
operate under permits or licenses that are subject to periodic renewal or modification. These
laws, regulations or permits can require the installation of pollution control equipment or
operational changes to limit actual or potential impacts to the environment. A violation of these
laws, regulations or permit conditions can result in substantial fines or penalties.
25
Certain environmental laws impose strict as well as joint and several liability for the
investigation and remediation of spills and releases of hazardous materials and damage to natural
resources, without regard to negligence or fault on the part of the person being held responsible.
In addition, certain laws require and we have incurred costs for, the investigation and remediation
of contamination upon the occurrence of certain property transfers or corporate transactions. We
are potentially liable under these and other environmental laws and regulations for the
investigation and remediation of contamination at properties we currently or have formerly
owned, operated or leased and at off-site locations where we may be alleged to have sent hazardous
materials for treatment, storage or disposal. We may also be subject to related claims by private
parties alleging property damage or personal injury as a result of exposure to hazardous materials
at or in the vicinity of these properties. Environmental litigation or remediation, new laws and
regulations, stricter or more vigorous enforcement of existing laws and regulations, the discovery
of unknown contamination or the imposition of new or more stringent clean-up requirements may
require us to incur substantial costs in the future. As such, we may incur material costs or
liabilities in the future.
As a U.S. and Canadian Government contractor, we are subject to a number of procurement rules and
regulations.
We must comply with and are affected by laws and regulations relating to the award, administration,
and performance of our U.S. and Canadian Government contracts. Government contract laws and
regulations affect how we do business with our customers and vendors and, in some instances, impose
added costs on our business. In many instances, we are required to self-report to the responsible
agency if we become aware of a violation of applicable regulations. In addition, we have been, and
expect to continue to be, subjected to audits and investigations by government agencies regarding
our compliance with applicable regulations. A violation of specific laws and regulations could
result in the imposition of fines and penalties or the termination of our contracts or debarment
from bidding on future contracts. These fines and penalties could be imposed for failing to follow
procurement integrity and bidding rules, employing improper billing practices or otherwise failing
to follow cost accounting standards, receiving or paying kickbacks, filing false claims, or failing
to comply with other applicable procurement regulations. Additionally, the failure to comply with
the terms of our government contracts also could harm our business reputation. It also could
result in payments to us being withheld. If we violate specific laws and regulations, it could
result in the imposition of fines and penalties or the termination of our contracts or debarment
from bidding on contracts, which could have a material adverse effect on our net sales and results
of operations.
Our contracts with foreign governments often contain ethics and other requirements that subject us
to some of the same risks. Violation of those contractual terms could interfere with our ability
to collect payment under the contract. Also, we and our representatives are required to comply
with numerous laws and regulations, including the U.S. Foreign Corrupt Practices Act and similar
anti-bribery laws in other jurisdictions.
The defense industry is highly competitive, and this competitiveness may limit our ability to win
and retain government contracts.
We face significant domestic and international competition for government contracts. Some
competitors have greater financial, technical, marketing, manufacturing and distribution resources
than we do, or may have broader product lines. Our ability to compete for government contracts
depends on our ability to offer better product performance than our competitors at a lower cost and
on the readiness and capacity of our facilities, equipment and personnel to produce quality
products on a consistent and timely basis. In addition, some of our competitors may operate in
less regulated countries or environments and therefore have advantages over us in certain
situations.
Our government and other sales contracts contain termination provisions such that they can be
cancelled at any time at the governments sole discretion.
We are subject to business risks specific to companies engaged in supplying defense-related
equipment and services to the U.S. Government and other governments. These risks include the
ability of the U.S. Government and other government counterparties to suspend or permanently
prevent us from receiving new contracts or from extending existing contracts based on violations or
suspected violations of procurement laws or regulations, terminate our existing contracts or not
purchase the full agreed-upon number of small arms weapons systems or other products to be
delivered by us.
U.S. Government and other government counterparties may terminate contracts with us either for
their convenience or if we default by failing to perform. Termination for convenience provisions
generally would enable us to recover only our costs incurred or committed, and settlement expenses
and profit on the work completed, prior to termination. Termination for default provisions do not
permit these recoveries and make us liable for excess costs incurred by the U.S. Government or
other government counterparties in procuring undelivered items from another source. In addition, a
termination arising out of our default could expose us to liability and have a material adverse
effect on our ability to compete for future contracts and orders.
26
Misconduct by employees or agents could harm us and is difficult to detect and deter.
Our employees or agents may engage in misconduct, fraud or other improper activities that could
have adverse consequences on our prospects and results of operations, including engaging in
violations of the U.S. Arms Export Control Act or Foreign Corrupt Practices Act or numerous other
state and federal laws and regulations, as well as the corresponding laws and regulations in the
foreign jurisdictions into which we sell products. Misconduct by employees or agents, including
foreign sales representatives, could include the export of defense articles or technical data
without an export license, the payment of bribes in order to obtain business, failures to comply
with applicable U.S. or Canadian Government or other foreign government procurement regulations,
violation of government requirements concerning the protection of classified information and
misappropriation of government or third-party property and
information. The occurrence of any such activity could result in our suspension or debarment from
contracting with the government procurement agency, as well as the imposition of fines and
penalties, which would cause material harm to our business. It is not always possible to deter
misconduct by agents and employees and the precautions we take to detect and prevent this activity
may not be effective in all cases.
Our sponsors control us and may have conflicts of interest with us or you now or in the future.
Through their respective affiliates Sciens Capital Management LLC and funds managed by an affiliate
of The Blackstone Group, L.P., beneficially own a substantial portion of the Companys limited
liability company interests. Under the terms of the Companys limited liability company agreement,
our sponsors and our union have the right to appoint our Governing Board and our sponsors, subject
to maintaining certain equity ownership levels, have specified veto or approval rights which may be
exercised in their discretion. As such, our sponsors have the ability to prevent specified
transactions that might be in the best interests of the noteholders or to cause the Company to
engage in transactions in which the sponsors have interests that might conflict with the interests
of the noteholders. Members of the Companys Governing Board are not required to abide by the same
standard of care under the Delaware Limited Liability Company Act as the standard of care required
of directors of a Delaware corporation. Additionally, Sciens Capital and The Blackstone Group are
in the business of making investments in companies and may from time to time acquire and hold
interests in businesses that may directly or indirectly compete with or otherwise be adverse to us.
They may also pursue acquisition opportunities that may be complementary to our business and, as a
result, those acquisition opportunities may not be available to us.
We may have to utilize significant cash to meet our unfunded pension obligations, and
post-retirement health care liabilities and these obligations are subject to increase.
Our union employees at our West Hartford facility participate in our defined benefit pension plan.
We also have a salaried pension plan, the benefits of which were frozen on January 1, 2009. At
December 31, 2010, our aggregate unfunded pension liability totaled $2.0 million. Declines in
interest rates or the market values of the securities held by the plans, or other adverse changes,
could materially increase the underfunded status of our plans and affect the level and timing of
required cash contributions. To the extent we use cash to reduce these unfunded liabilities, the
amount of cash available for our working capital needs would be reduced. Under the Employee
Retirement Income Security Act of 1974, as amended, or ERISA, the Pension Benefit Guaranty
Corporation, or PBGC, has the authority to terminate an underfunded tax-qualified pension plan
under limited circumstances. In the event our tax-qualified pension plans are terminated by the
PBGC, we could be liable to the PBGC for the underfunded amount and, under certain circumstances,
the liability could be senior to the notes.
We also have a post-retirement health plan for our union employees. The post-retirement health
plan is unfunded. We derive post-retirement benefit expense from an actuarial calculation based on
the provisions of the plan and a number of assumptions provided by us including information about
employee demographics, retirement age, future health care costs, turnover, mortality, discount
rate, amount and timing of claims, and a health care inflation trend rate. In connection with the
renewal of our collective bargaining agreement in 2004, we capped the monthly cost of providing
retiree health care benefits at approximately $206 (not in thousands) per employee per month. In
connection with the renegotiation of our union contract effective April 2007, the cap was raised to
approximately $250 (not in thousands) per employee per month. For the year ended December 31,
2010, the cost per employee per month was $212 (not in thousands). The unfunded post-retirement
health care benefit obligation was $12.2 million at December 31, 2010.
Because we are not currently subject to the reporting requirements of the Securities Exchange Act
of 1934 or the Sarbanes-Oxley Act of 2002, we have not, either alone or with our auditors,
performed an evaluation or an audit of our internal controls over financial reporting
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness
of our internal control over financial reporting. The Company is not currently required to comply
with Section 404 but will be required to do so prior to the filing of our annual report on Form
10-K for the year ending December 31, 2012. In preparation for compliance with Section 404 and the
rules promulgated thereunder, we may identify deficiencies with respect to our internal controls
over financial reporting, and any such deficiencies may be material.
27
We face risks associated with international currency exchange.
While we transact business primarily in U.S. dollars and bill and collect most of our sales in U.S.
dollars, a portion of our net sales results from goods that are purchased, in whole or in part,
from foreign customers, primarily in Canadian dollars and Euros, thereby exposing us to some
foreign exchange fluctuations. In the future, customers may make or require payments in non-U.S.
currencies, such as the Canadian dollar and the Euro or other currencies.
Fluctuations in foreign currency exchange rates could affect the sale of our products or the cost
of goods and operating margins and could result in exchange losses. In addition, currency
devaluation can result in a loss to us if we hold deposits of that currency.
Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We
do not enter into any market risk sensitive instruments for trading purposes. We cannot predict
the impact of future exchange rate fluctuations on our operating results.
28
Item 6. Exhibits
The following list of exhibits includes exhibits submitted with this Form 10-Q as filed with the
Securities and Exchange Commission and those incorporated by reference to other fillings.
|
|
|
31.1
|
|
Certification of Gerald R. Dinkel pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Scott B. Flaherty pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|
|
|
31.3 |
|
Certification of Cynthia J. McNickle pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
29
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrants have duly caused
this report to be signed on its behalf by the undersigned, hereunto duly authorized, in West
Hartford, Connecticut, on the 16th day of May, 2011.
|
|
|
|
|
COLT DEFENSE LLC |
|
|
COLT FINANCE CORP. |
|
|
By: /s/ Scott B. Flaherty |
|
|
Scott B. Flaherty |
|
|
Senior Vice President and Chief Financial Officer |
30