Colt Defense LLC Financial health declining, overall position now very weak FHR: 21 Risk Level: High Risk Default Characteristics Indicator: --- Annual Delta: -3 rating points Ticker: 533839Z Table 1: Financial Health Rating (FHR) Financial Period: Sep 28, 214, (fiscal Q3 214) Publication Date: February 12, 215 Sector: US Consumer Products (174 firms) History Current Sector 211 212 213 Q3 214 214 Financial Period End 12/31/11 12/31/12 12/31/13 9/28/14 9/3/14* Financial Health Rating 55 34 53 21 5.1 Annual Delta 19-21 19-3 -2. Very Low Risk (8 1) Low Risk (6 79) Medium Risk (4 59) High Risk (2 39) Very High Risk ( 19) * 9/3/14 represents the most frequent period end date current for companies in the sector. Figure 1: FHR Trend, YE 211 to Q3 214 Colt Defense LLC's Financial Health Rating (FHR ) was a very unimpressive 21 (=worst, 1=best) for the four quarters ending September 28, 214, and represents a 3 point downgrade as compared to a year earlier. Colt Defense LLC is currently rated lower than the US sector average, at 21 compared to 5.1. The orange line in Figure 1 above represents the equal weighted average for the sector. Section 1: Colt Defense LLC's Peer Ratio Analysis Table 2: Financial Ratios Profitability Ratios 211 212 213 Q3 214 Sector Gross Profit Margin (%) 31.39 23.98 27.6 19.2 37.67 Sales to Assets Ratio 1.27 1.31 1.5.92 1.29 Return on Assets (%) 3.15-4.33 9.72-9.28 4.52 Liquidity Ratios Current Ratio 2.62 2.5 1.64.27 2.15 Quick Ratio 1.75 1.57.64.6 1.19 Leverage Ratios Debt to Equity Ratio -1.73-1.64-2.21-1.81.29 Operating Profit to Interest Expense (x) 1.36.76 1.49.38 8.11 Longterm Debt to Assets (%) 149.85 151.91 19.47. 16.46 Turnover Ratios Inventory Days 92.28 91.28 12.92 151.7 15.22 Payable Days 28.3 29.37 25.47 35.71 45.8 Receivable Days 53.44 38.8 29.52 23.54 39.8 Other Ratios FHR 1 8 6 4 2 Sector Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 R&D/Operating Profit.19.28.16.64.9 Capital Ex/Cash From Operations -8.12.36 2.85 -.19 -.31 FHR Rapid Ratings All rights reserved Rapid Ratings International 215 Page 1 of 8
Section 2: Executive Summary The bottom line: Colt Defense LLC is situated in our High Risk group, displays weakness in in all four of our performance categories, demonstrates substantial underperformance in ROCE and was downgraded in the most recent period. This suggests that to those for whom Colt Defense LLC represents an existing exposure, such exposure should be closely monitored. For those considering Colt Defense LLC as a new or increased exposure, caution is warranted. Credit quality has deteriorated: Colt Defense LLC has suffered a substantial decline in financial health, as evidenced by a 3 point FHR decrease, largely reflecting deterioration in the company's performance in net profitability, cost structure efficiency and operating profitability. At the same time, the rating now depicts a High Risk credit profile as operating profitability, net profitability, cost structure efficiency and capital structure efficiency are at low levels. Clearly, these are areas in need of the management's attention. The company demonstrates no areas of strength in the current period. Peer Ratio Analysis: In its most recent period, Colt Defense LLC underperforms the sector with respect to Gross Margin, Net Margin, Sales to Assets, Return on Assets, Current Ratio and Operating Profit to Interest Expense. Colt Defense LLC has a lower Total Debt to Assets ratio than the sector. The cash flow story is negative: Colt Defense LLC displayed negative Cash from Operations in the most recent year-end period. As such, the company was unable to cover any portion of capital expenditures or debt balances through internally generated cash flow. Section 3: Performance Scores Table 3 below presents the Performance Scores from YE 211 to Q3 214. Table 3: Performance Scores Performance Scores 211 212 213 Q3 214 Sector Operating Profit 55 32 38 14 43.4 Net Profit 53 27 6 14 51.4 Capital Structure Efficiency 36 32 24 35 3.4 Cost Structure Efficiency 7 49 71 31 7.1 Section 4: Colt Defense LLC's Financial Highlights Table 4: Financial Highlights Balance Sheet items in USD Millions 211 212 213 Q3 214 Sector Cash 38.24 42.37 12.59 3.96 Inventory 36.22 4.56 66.67 76.55 Goodwill 14.71 14.95 51.23 5.75 Total Assets 164.96 162.97 264.74 246.53 Total Debt 248.34 247.58 31.9 37.46 Total Liabilities 38.13 314.26 41.52 416.82 Total Equity -143.17-151.29-136.79-17.29 Income Statement items in USD Millions 211 212 213 Q3 214 Sector Revenues 28.81 213.33 277.95 227.44 COGS 143.27 162.18 21.24 184.19 Operating Profit 32.71 18.56 41.14 12.6 Interest Expense 24.1 24.58 27.69 31.44 Net Profit 5.2-7.5 25.73-22.88 Other Items in USD Millions 211 212 213 Q3 214 Sector Cash from Operations -.69 12.42 3.2-19.6 Capital Expenditure 5.6 4.41 8.6 3.69 The company's headquarters are located at 547 New Park Avenue, West Hartford, CT, United States. Rapid Ratings All rights reserved Rapid Ratings International 215 Page 2 of 8
Section 5: Colt Defense LLC's Key Financial Indicators Figure 2: Gross Profitability 3 25 Gross Profitability: The figure to the left and the table below present the sales and cost of goods sold (COGS) figures (if reported) in USD millions per period. 2 Millions 15 1 5 211 212 213 214 Q3 Table 5: Gross Profitability USD Millions 211 212 213 Q3 214 Sector Sales 28.81 213.33 277.95 227.45 COGS 143.27 162.18 21.24 184.19 Gross Profit 65.54 51.15 76.71 43.26 GP Margin (%) 31.39 23.98 27.6 19.2 37.67 Sales COGS Millions 5 4 3 2 1-1 -2-3 Figure 3: Earnings Measures 211 212 213 214 Q3 2% 15% 1% 5% % -5% -1% -15% Operating Profit Net Income Operating Margin Net Margin Earnings Measures: The figure to the left and the table below display the operating and net margin in percentage, and the inputs for each in USD millions. Table 6: Earnings Measures USD Millions 211 212 213 Q3 214 Sector Revenues 28.81 213.33 277.95 227.44 Op Profit 32.71 18.56 41.14 12.6 Net Income 5.2-7.5 25.73-22.88 Op Margin (%) 15.66 8.7 14.8 5.3 6.67 Net Margin (%) 2.49-3.3 9.26-1.6 3.77 Figure 4: Rates of Return 15% 1% 5% % -5% -1% -15% 211 212 213 214 Q3 ROA ROS ROE Rates of Return: The figure to the left displays the Return on Assets (ROA), Return on Sales (ROS) and Return on Equity (ROE). The table below shows these percentage returns, and the inputs for each measure in USD millions. Table 7: Rates of Return USD Millions 211 212 213 Q3 214 Sector Net Income 5.2-7.5 25.73-22.88 Total Assets 164.96 162.97 264.74 246.53 Sales 28.81 213.33 277.95 227.45 Total Equity -143.17-151.29-136.79-17.29 ROA (%) 3.15-4.33 9.72-9.28 4.52 ROS (%) 2.49-3.3 9.26-1.6 3.77 ROE (%) n/a n/a n/a n/a 11.59 n/a: This data point is either Not Available or Not Applicable Rapid Ratings All rights reserved Rapid Ratings International 215 Page 3 of 8
Section 6: Colt Defense LLC's Key Financial Indicators Figure 5: Interest Coverage 45 4 Interest Coverage: The figure to the left displays Operating Profit and Interest Expense in USD millions. Millions 35 3 25 2 15 1 5 211 212 213 214 Q3 Operating Profit Interest Expense Table 8: Interest Coverage USD Millions 211 212 213 Q3 214 Sector Operating Profit 32.71 18.56 41.14 12.6 Int Expense 24.1 24.58 27.69 31.44 Int Coverage (x) 1.36x.76x 1.49x.38x 8.24x Figure 6: Liability Structure 45 4 35 3 Liability Structure: The figure to the left displays the breakdown of Accounts Payable, Short Term Debt, Long Term Debt and Other Liabilities. The table below presents the contribution of each liability class to Total Liabilities in USD millions. Millions 25 2 15 1 5 211 212 213 214 Q3 Acc Payable Short Term Debt Long Term Debt Other Liabilities Table 9: Liability Structure USD Millions 211 212 213 Q3 214 Sector Acc Payable 11.11 13.5 14.4 18.2 Short Term Debt 1.15.1 12.8 37.46 Long Term Debt 247.19 247.57 289.82. Other Liabilities 48.68 53.63 85.58 91.34 Figure 7: Asset Structure 3 25 2 15 1 5 211 212 213 214 Q3 Otr Term Assets Int. Assets Fixed Assets Otr Cnt Assets Cash + AR Asset Structure: The figure to the left displays the breakdown of Cash plus Accounts Receivable, Other Current Assets, Fixed Assets, Intangible Assets and Other Long Term Assets. The table below presents the contribution of each asset class to Total Assets in USD millions. Table 1: Asset Structure USD Millions 211 212 213 Q3 214 Sector Cash + AR 68.81 65.5 35.7 18.63 Otr Cnt Assets 39.94 44.76 74.37 8.51 Fixed Assets 22.59 22.13 3.73 27.75 Intangible Asset 21.35 2.98 16.33 15.13 Otr Term Assets 12.27 1.5 18.24 14.51 Rapid Ratings All rights reserved Rapid Ratings International 215 Page 4 of 8
Section 7: Colt Defense LLC's Simulated FHR to adjust for Abnormal Items Colt Defense LLC's current rating is marginally affected by abnormal items. Current FHR: 21 High Risk Simulated FHR: 24 High Risk Simulated FHR is 24, High Risk. This period includes an abnormal item. When the rating for this period is simulated with the abnormal item excluded, the company's health is marginally better, suggesting the line item is having little effect on the rating for this period. The simulated risk category remains High Risk. The company's year-on-year rating delta using the simulated rating is -12 compared to the published delta of -3. Colt Defense LLC's current trailing twelve month financial period includes an abnormal loss of $2.27 million USD. This item represents 15.84% of pre-item operating income, but has had a marginal effect on the rating. Table 11: Performance Scores FHR Simulation Review YE 211 History YE 212 YE 213 Current Financial Period End 12/31 12/31 12/31 9/28 Actual FHR 55 34 53 21 Actual Annual Delta 19-21 19-3 Simulated FHR (adjusted for abnormal item) 55 34 41 24 Simulated Annual Delta 19-21 7-12 Financial Item Review (USD M) Pre-Abnormal Item Operating Profit 32.71 18.56 27.8 14.33 Abnormal Item.. 13.34-2.27 Abnormal Item / Pre-Ab. Item Op. Profit (%) % % 48% 16% Post-Abnormal Item Operating Profit 32.71 18.56 41.14 12.6 Q3 214 An isolated negative abnormal event may only be a temporary setback and hence should be put in perspective in terms of your relationship with the firm. It is common for firms to occasionally report abnormal items. It reflects a bump in the restructuring road if it leads to a loss or a boost in sustaining recovery if it leads to a profit. The key is how management handles the shock if there is a loss and whether or not the company returns to financial health quickly if there is a loss. Thus, closer scrutiny is called for if the abnormal leads to a loss. This simulation does not account for the tax implications of excluding the abnormal item from the company s performance. Rapid Ratings All rights reserved Rapid Ratings International 215 Page 5 of 8
Section 8: Liquidity Module Liquidity: Consistent with its High Risk level, Colt Defense LLC has a very weak liquidity position. Unfortunately, all three of the liquidity ratios presented have been weakening. The Cash Ratio shows that the firm has $.1 in Cash for each $1. of Current Liabilities, which we consider weak. This firm urgently needs to take steps to improve its very weak liquidity position. Figure 8: Liquidity Ratios 3. 2.5 2. Table 12: Liquidity Ratios 212 213 Q3 214 SIGNAL Sector Current Ratio 2.5 1.64.27 WEAK 2.15 Quick Ratio 1.57.64.6 WEAK 1.19 Cash Ratio.96.19.1 WEAK.32 1.5 1..5. 212 213 214 Q3 Current Ratio Quick Ratio Cash Ratio Section 9: Activity Module Activity: Days of Payables have been rising and the firm currently has 35.7 days of payables. Currently, Colt Defense LLC collects from its customers in only 23.5 days, but waits an average of 35.7 days to pay its suppliers, a cash advantage of 12.2 days. The Cash Conversion Cycle shows that the firm is taking 139.5 days to convert its inputs into cash. In terms of how effectively the firm is utilizing its assets, Asset Turnover shows that in the most recent 12-month period, the firm has generated $.92 for each dollar of assets. Performance on this metric has been falling. Figure 9: Activity Ratios 16 14 12 1 8 6 Table 13: Activity Ratios 212 213 Q3 214 Signal Sector Days of Invent. 91.3 12.9 151.7 RISING 15.22 Days of Receiv. 38.8 29.5 23.5 FALLING 39.8 Days of Pay. 29.4 25.5 35.7 RISING 45.8 Cash Conv. Cyc. 1.7 125. 139.5 RISING 99.22 Asset Turnover 1.31 1.5.92 FALLING 1.29 4 2 212 Days of Inventory 213 Days of Receivables 214 Q3 Days of Payables Cash Conversion Cycle Rapid Ratings All rights reserved Rapid Ratings International 215 Page 6 of 8
Glossary Annual Delta Asset Turnover Cash Conversion Cycle Cash Ratio Current Ratio Days Of Inventory Days of Payables Days of Receivables Default Characteristic Score (DCI) Financial Period Net Margin Operating Margin Performance Score Quarterly Delta Quick Ratio Return on Assets (ROA) Return on Capital Employed (ROCE) Return on Equity (ROE) Rating point change in the FHR vs the same period 12 months ago. An n/a indicates the period from 12 months ago was not rated. Asset Turnover measures how efficiently a firm uses its Assets to generate Revenue. It is computed as Total Revenue / Total Assets. The Cash Conversion Cycle Provides an estimate of how long firms take to tern resource inputs into cash flows. It is computed as Days of Inventory + Days of Sales - Days of Payables. Cash Ratio is equal to Cash divided by Current Liabilities. This is the strictest measure of liquidity and indicates the extent to which a company could pay its short term obligations with cash on hand. Current Ratio is equal to Current Assets divided by Current Liabilities (CA/CL). The Current Ratio is an indication of a company's ability to meet short-term debt obligations. A higher ratio indicates greater liquidity. If the ratio is >2, then that company is generally considered to have strong short-term financial strength. If the ratio is <1 (current liabilities > current assets), then the company may have problems meeting its short-term obligations. Inventory divided by COGS multiplied by 365. Represents the number of days it takes a company to sell its inventory. The higher the number the longer it is taking for a company to sell its product. Accounts Payable divided by COGS multiplied by 365. Represents the number of days the company takes to pay its trade creditors. Accounts Receivable divided by Sales multiplied by 365. Represents the number of days the company takes to collect revenues after the sale has been made. The Default Characteristics Indicator (DCI) reviews all companies with FHRs below 4 and flags a subset which have characteristics that provide resilience against default or bankruptcy. This resilient profile includes attributes relating to balance sheet strength, cost structure, and working capital robustness. In these cases, even though the FHR shows poor financial efficiency, the actual risk of default or bankruptcy is significantly lower than the FHR would typically indicate. Identifies the date and fiscal quarter end of the 12 month period used to generate the FHR. For example, June 3, 211, (fiscal Q2 211) indicates that the ratings covers the 4 quarters up to and including the second fiscal quarter of the 211 financial year, which is the 12 months ending June 3, 211. Rapid Ratings employs a rolling 12 month perspective, so as information is released to the market this is incorporated into the analysis and the corresponding period from the prior fiscal year is dropped. Net Profit divided by Total Revenues, expressed as a percentage. Operating Profit divided by Total Revenues. Scores for four key areas of Financial Health measured by Rapid Ratings. Each of the 62 ratios is allocated to a Performance Score category to provide guidance on areas of strength and weakness. Point change in the FHR vs the prior quarter. An n/a indicates the prior quarter was not rated. Quick Ratio is equal to Current Assets less Inventory, divided by Current Liabilities. An alternative to the Current Ratio, the Quick Ratio, provides the same analysis but takes into account the possible illiquidity of Inventories. Net Income divided by Total Assets, expressed as a percentage. Operating Profit divided by Net Operating Assets (NOA), expressed as a percentage. ROCE provides a rate of return comparing the operational earnings of the company against capital deployed in operating assets. NOA is defined as Net Term Assets (total term assets minus term non debt liabilities) plus net working capital (current operating assets minus current operating liabilities and excluding short term debt and bank overdraft). Net Income divided by Total Shareholder Equity, expressed as a percentage. Peer Group Constituents: US Consumer Products Sector Rapid Ratings All rights reserved Rapid Ratings International 215 Page 7 of 8
Contact Details Corporate and Sales 86 Chambers Street, Suite 71 New York, NY 17 Ph: +1-646-233-46 Email: information@rapidratings.com www.rapidratings.com Rating, Product and Technical Support: Ph: +1-646-233-4563 Email: support@rapidratings.com Private Company Financial Statement Submissions: requests@rapidratings.com Feedback: www.rapidratings.com/feedback Rating Scale Explanation FHR Range EPD (%)* Explanation *The EPDs (estimated 95-1.6 Minimal Risk of non-payment and insolvency probabilities of default) for each rating notch represent a 9-94.1 Exceptionally Low Risk seventeen year average 85-89.5 Very Low Risk (1991-27) and may be 8-84.1 Very Low Risk adjusted by Rapid Ratings 75-79.4 Low Risk customers to reflect temporal 7-74.8 Low Risk and somewhat subject to fluctuations in market conditions assumptions. 65-69.22 Low to Moderate Risk / subject to market conditions 6-64.42 Moderate Risk 55-59.74 Medium to Moderate Risk and generally subject to market fluctuations 5-54 1.26 Generally Medium Risk 45-49 2.4 Medium Risk / more subject to market conditions 4-44 2.94 Medium Risk that can worsen with market conditions 35-39 3.96 Medium to Moderately High Risk and very subject to fluctuations in market conditions 3-34 4.88 Moderately High Risk / Increasingly At Risk 25-29 5.56 High Risk 2-24 5.86 High Risk of non-payment -2 5.9 Very High Risk with serious issues that need to be addressed to achieve long term sustainability. While the Rapid Ratings scale appears to be linear, this is not really the case. Owing to the way the statistical distributions underlying the models for each sector have been constructed, and the sector specific-weights for each variable, companies make non-linear movements over time on Rapid Ratings' scale. The Rapid Ratings probability of default (PD) model originally showed a downward slope in default probabilities for all companies in the last 2 rating points on the bottom of the rating scale (i.e. in the very high risk category). This reveals that some very weak companies continue to survive while many companies in their cohort have defaulted. To facilitate modeling by clients, Rapid Ratings has capped the PD at the peak so that client models can fully reflect the underlying risk but avoid getting caught up in the reality of weak survivors. Disclaimer: A Financial Health Rating (FHR ) or equity recommendation from Rapid Ratings is not a recommendation or opinion that is intended to substitute for a financial advisor's or investor's independent assessment of whether to buy, sell or hold any financial products. The FHR is a statement of opinion derived objectively through our software from public information about the relevant entity. This information and the related FHR s and related analysis provided in the reports by Rapid Ratings do not represent an offer to trade in securities. The research information contained therein is an objective and independent reference source, which should be used in conjunction with other information in forming the basis for an investment decision. Rapid Ratings believes that all of its reports are based on reliable data and information, but Rapid Ratings has not verified this or obtained an independent verification to this effect. Rapid Ratings provides no guarantee with respect to the accuracy or completeness of the data relied upon, nor the conclusions derived from the data. Each FHR is a relative, probabilistic assessment of the credit risk of the relevant entity and its potential to meet financial obligations. It is not a statement that default will or will not occur given that circumstances change and management can adopt new strategies. Reports have been prepared at the request of, and for the purpose of, the subscribers to our service only, and neither Rapid Ratings nor any of our employees accept any responsibility on any ground whatsoever, including liability in negligence, to any other person. Finally, Rapid Ratings and its employees accept no liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of its ratings and rating research in any way whatsoever, unless Rapid Ratings is negligent in misinterpreting or manipulating the data, in which case, our maximum liability to our client is the amount of our fee for the report. Industry: The Rapid Ratings Industry Classification for this company is IND_289. Data Source: Bloomberg Rapid Ratings All rights reserved Rapid Ratings International 215 Page 8 of 8