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Business As Usual As Colt Reunites Military, Civilian Gun Manufacturing

By KENNETH R. GOSSELIN

July 22, 2013

The two halves of the gun making company Samuel Colt established in Hartford in the 1850s are coming back together, with plans that include keeping a combined 750 employees in West Hartford, a company executive said Monday.

Colt Defense LLC's $60.5 million acquisition of Colt's Manufacturing LLC and its parent company will reunite Colt's military and civilian handgun businesses, a decade after they were split apart. The merger is intended to usher in a new era of growth for the company, said Gerry Dinkel, chief executive of Colt Defense, as it faces the prospect of paying off $250 million in debt.

"Both businesses have been growing because of the demand for civilian firearms," Dinkel said. "We're still adding employees here, in both businesses."

The largest portion of the Colt Defense's business is now in sporting rifles, a line of business the company got back into in 2011. Military orders have been on the decline since 2009, Dinkel said.

Colt Manufacturing has been selling those rifles for Colt Defense under a licensing agreement, and the merger will bring the manufacturing and sale operation under one company, Dinkel said.

Although separate, the two companies continued to occupy the same space on New Park Avenue in West Hartford.

Dinkel said the decision was not related to recent changes in the state's gun laws, prompted by the mass shooting at Sandy Hook Elementary School in December.

Although tougher restrictions on assault-style weapons were not supported by Colt, the company has yet to see its business impacted, Dinkel said. The company plans to remain in West Hartford, but Dinkel said Colt will continue to monitor the situation. At least one company, PTR Industries in Bristol has announced it will move to South Carolina and other gun manufacturers are considering leaving the state.

"The bigger the company, the harder it is to move," Dinkel said, but he added: "It all remains to be seen."

Dinkel said the deal wasn't driven by the looming debt, but analysts say they are concerned that even the combined company will have a difficult time meeting the obligations on the debt.

"The commercial business has done better than we thought, so that'll be a bit of an offset, but still it's not nearly enough to come up with the money to pay off those notes," said Christopher Denicolo, an analyst at S&P whose CCC-rating on Colt Defense bonds indicate they're "currently vulnerable" to non-payment. "One of the ways out would be to do a distressed exchange."

Colt Defense is privately-held, but its debt — in the form of bonds — is publicly traded. That requires Colt Defense to file earnings and annual reports with securities regulators. Colt's Manufacturing Co., a subsidiary of New Colt Holding Corp., also is privately held but does not have the public debt.

According to its latest earnings filing, net sales rose 45 percent in the quarter ended March 31, compared with a year earlier. Profits were $5.1 million in the same quarter compared with a loss of $7 million in the first quarter of 2012, according to the filing.

The gun maker's total assets of $159 million on March 31 were $162 million less than its liabilities, the biggest deficit since at least 2011, Bloomberg data show. While the company has more than four years to prepare for a maturity that exceeds trailing 12-month cash from operations by more than 30 times, its current finances signal refinancing the bonds may be difficult, according to Noel Hebert of Concannon Wealth Management.

"With negative equity you will have a hard time securing new debt," said Hebert, whose Bethlehem, Pa.-based firm oversees about $250 million of assets. "Funding at 15 percent seems out of the question," though "it is a problem that is a while off, and if you have manic credit markets or manic gun buying, it may not be that big of a deal," he said.

By combining the two companies following a 2003 split, Colt Defense has eliminated the risk that its contract with Colt's Manufacturing to sell commercial firearms to civilian sportsmen and hunters under its namesake brand wouldn't be extended beyond March 2014, according to Moody's Investors Service.

A Bloomberg News report was included in this story.