REMINGTON OUTDOOR COMPANY, INC. (Exact name of company as specified in its charter)

Transcription

1 ANNUAL REPORT For the fiscal year-ended: December 31, 2013 REMINGTON OUTDOOR COMPANY, INC. (Exact name of company as specified in its charter) Also known as Freedom Group, Inc. Delaware (State or other jurisdiction of incorporation or organization) 870 Remington Drive P.O. Box 1776 Madison, North Carolina (Address of principal executive offices) (Zip Code) (336) (Company s telephone number, including area code)

2 REMINGTON OUTDOOR COMPANY, INC. (Also known as Freedom Group, Inc.) December 31, 2013 INDEX 1. BUSINESS A. RISK FACTORS PROPERTIES LEGAL PROCEEDINGS SELECTED FINANCIAL DATA MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE PRINCIPAL ACCOUNTING FEES AND SERVICES

3 Information Concerning Forward-Looking Statements This annual report contains statements which constitute forward-looking statements, including statements relating to trends in the operations, financial results, businesses and the products of Remington Outdoor Company, Inc. (also known as Freedom Group, Inc.) as well as other statements including words such as anticipate, believe, plan, estimate, expect, intend and other similar expressions. Forward-looking statements are made based upon management s current expectations and beliefs concerning future developments and their potential effects on us. Such forward-looking statements are not guarantees of future performance. The following important factors, and those important factors described elsewhere in this annual report, including the matters set forth under the section entitled Risk Factors, could affect (and in some cases have affected) our actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements. We are subject to the effects of general global economic and market conditions. Increases in commodity prices, higher levels of unemployment, higher consumer debt levels, declines in consumer confidence, uncertainty about economic stability and other economic factors that may affect consumer spending or buying habits could adversely affect the demand for products we sell. Persistent economic uncertainty or a deterioration of economic conditions could have a material adverse effect on our business, results of operations and financial condition. Our ability to make scheduled payments of principal or interest on, or to refinance our obligations with respect to, our indebtedness, as well as our ability to comply with the covenants and restrictions contained in the instruments governing such indebtedness, will depend on our future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels, and financial, competitive, business and other factors beyond our control including the responses of competitors, changes in customer inventory management practices, changes in customer buying patterns, regulatory developments and increased operating costs, all of which could materially adversely affect our business. The degree to which we are leveraged could have important consequences, all of which could materially adversely affect our business, including the following: (i) our ability to obtain additional financing for working capital or other purposes in the future may be limited; (ii) a substantial portion of our cash flow from operations is dedicated to the payment of principal and interest on our indebtedness, thereby reducing funds available for operations; (iii) certain of our borrowings are at variable rates of interest, which could cause us to be vulnerable to increases in interest rates; and (iv) we may be more vulnerable to economic downturns and be limited in our ability to withstand competitive pressures. The development of rural property in many locations has curtailed or eliminated access to private and public lands previously available for hunting, and the continuation of the development of rural property could materially adversely affect our industry as well as our business and results of operations. A portion of our sales are seasonal. As a result of the seasonal nature of our sales, our historical working capital financing needs generally have exceeded cash provided by operations during certain parts of the year. Our ability to meet our debt service and other obligations depends in significant part on customers purchasing our products during the fall hunting season. Notwithstanding our continuing management of costs, a decrease in demand during the fall hunting season for our higher priced, higher margin products would require us to further reduce costs or increase our reliance on borrowings under our credit facility to fund operations. If we are unable to reduce costs or increase our borrowings sufficiently to adjust to such a reduction in demand, our financial condition and results of operations could be adversely affected. Lead, copper, steel, brass and zinc prices historically have experienced significant increases and volatility primarily due to increased global demand and industry supply issues. Furthermore, fuel and energy costs have increased and have remained volatile over the same time period, although at a slower rate of increase. We currently purchase copper and lead commodity option and swap contracts to hedge against price fluctuations of anticipated commodity purchases. With the volatility of pricing that we have recently experienced, there can be no assurance that we will not see further material adverse changes in commodity pricing or energy costs, and such further changes, were they to occur, could have a material adverse impact on our consolidated financial position, results of operations, or cash flows.

4 We utilize numerous raw materials, including steel, zinc, lead, copper, brass, plastics, gunpowder, and wood, as well as manufactured parts, which are purchased from one or a few suppliers. Any disruption in our relationship with these suppliers could increase our cost of operations. Such a disruption may result from or be amplified by the volatility of and uncertainty in the U.S. and global financial markets. Achieving the benefits of our acquisitions will depend in part on the integration of products and internal operating systems in a timely and efficient manner. Such integration may be unpredictable, and subject to delay because the products and systems typically were developed independently and were designed without regard to such integration. If we cannot successfully integrate such products and internal operating systems on a timely basis, we may lose customers and our business and results of operations may be harmed. We face significant domestic and international competition and our competitors vary according to product line. Certain of these competitors are subsidiaries of large corporations with substantially greater financial resources than we have. There can be no assurance that we will continue to compete effectively with all of our present competition, and our ability to so compete could be adversely affected by the degree to which we are our leveraged. Sales made to Wal-Mart accounted for approximately 11%, 16% and 15% of our total sales for the years ended December 31, 2013, 2012, and 2011, respectively. Our sales to Wal-Mart are generally not governed by a written long-term contract between the parties. In the event that Wal-Mart were to significantly reduce or terminate its purchases of firearms, ammunition and/or other products from us, our financial condition or results of operations could be adversely affected. The manufacture, sale and purchase of firearms and ammunition are subject to extensive governmental regulation on the federal, state and local levels. Changes in regulation could materially adversely affect our business by restricting the types of products we manufacture or sell or by imposing additional costs on us or our customers in connection with the manufacture or sale of our products. Regulatory proposals, even if never enacted, may affect firearms or ammunition sales as a result of consumer perceptions. While we do not believe that existing federal and state legislation relating to the regulation of firearms and ammunition will have a material adverse effect on our sales, no assurance can be given that more restrictive regulations, if proposed or enacted, will not have a material adverse effect on us in the future. As a manufacturer of firearms, we were previously named as a defendant, and may in the future be named as a defendant, in certain lawsuits brought by municipalities or organizations challenging manufacturers distribution practices and alleging that the defendants have also failed to include a variety of safety devices in their firearms. Our insurance primarily excludes coverage regarding such claims. In the event that additional such lawsuits are filed, or if certain legal theories advanced by plaintiffs are generally accepted by the courts, our financial condition and results of operations could be adversely affected. Unfavorable publicity or public perception of the firearms industry could adversely impact our operating results and reputation. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this annual report.

5 1. BUSINESS References in this report to (1) the terms we, us, our, the Company, Remington Outdoor Company and Remington Outdoor refer to Remington Outdoor Company, Inc. and its subsidiaries on a consolidated basis, (2) the terms FGI and Freedom Group refer to Freedom Group, Inc., the former legal name of the Company, (3) the term FGI Holding refers to FGI Holding Company, LLC, (4) the term FGI Opco refers to FGI Operating Company, LLC, (5) the term FGI Finance refers to FGI Finance, Inc., (6) the term Remington refers to Remington Arms Company, LLC and its direct and indirect subsidiaries, (7) the term Outdoor Services refers to Outdoors Services, LLC, (8) the term EOTAC refers to EOTAC, LLC, (9) the term Mountain Khakis refers to Mountain Khakis, LLC, (10) the term AAC refers to Advanced Armament Corp., LLC, (11) the term Barnes refers to Barnes Bullets, LLC, (12) the term Para refers to Para USA, LLC, (13) the term TAPCO refers to The American Parts Company, Inc., (14) the term LAR refers to LAR Manufacturing, Inc., (15) the term Dublin Dog refers to Dublin Dog Company, (16) the term TMRI refers to TMRI, Inc., (17) the term Remington UK refers to Remington Outdoor (UK) Ltd., (18) the term SMK refers to Tech Group (UK) Ltd., (19) the term Storm Lake refers to Storm Lake, Inc., (20) the term Great Outdoors refers to Great Outdoors Holdco, LLC and (21) 2020 Notes, Term Loan B, ABL, and ABL Revolver have the respective meanings given to them in the Notes to Consolidated Financial Statements note 8 Debt. Company Overview Our Company We are a leading global manufacturer of firearms, ammunition and related products for commercial, military and law enforcement markets with a diverse portfolio of category-defining brands, including Remington, Marlin, Bushmaster, Barnes Bullets, Para and DPMS, among others. We were formed through a series of focused acquisitions over the past eight years and have assembled a premier brand portfolio that offers a wide suite of outdoor products, from value to premium price points. Our strategic goals are to leverage our brand equity to achieve market leading positions in each of our product categories, create scale in our distribution channels, develop and introduce new products that achieve market leading positions in their categories, and optimize our manufacturing operations and supply chain to continuously improve profitability. We have held the #1 or #2 market position in the United States for all long gun categories and modern sporting rifles ( MSRs ) and the #3 market position for ammunition (#1 in hunting calibers) since We are America s oldest and among its largest firearms and ammunition manufacturers, with our flagship Remington brand founded in As of December 2013, we have sold over 5.8 million of our Remington Model 700 Bolt Action rifles, which celebrated its 50 th anniversary during 2012, demonstrating the multigenerational appeal of our products also marked the 50 th anniversary of the Remington Model 1100, one of the most popular shotguns of all time, with nearly 4 million sold as of December In 2014, we will celebrate the 75 th anniversary of the Remington Core-Lokt, our best-selling centerfire hunting ammunition. In 2012, Remington ranked as top shotgun brand (19.7% of all purchases), top rifle ammunition brand (21.4% of all purchases) and tied for top rifle brand (11.5% of all purchases) in the United States, based on Hunter/Shooter survey data from Southwick Associates. We believe that our rich heritage and reputation for quality have resulted in strong brand recognition and customer loyalty for all of our products and that our Remington brand represents an enduring symbol of American values that is trusted and respected by generations of sportsmen. We intend to leverage the strength of the Remington brand by selling an increasing variety of outdoor products under this name, which we believe will provide an opportunity to grow our share of the equipment, apparel and accessories upon which the outdoorsman relies. We believe that the strength and scale of our brand portfolio, led by Remington, has enabled us to develop a strong and differentiated distribution channel. By leveraging our portfolio of 17 brands within our distribution channel, we have significantly expanded the sales opportunities for the brands that we have acquired. For example, Para USA Inc., which we acquired at the beginning of 2012, doubled its revenue in the year following the acquisition, demonstrating the power of our manufacturing and distribution strength. Unlike many of our competitors that sell their products exclusively to distributors, approximately 45% of our commercial net sales in 2013 were directly to major retail and sporting goods chains, such as Cabela s, Gander Mountain, Academy Sports + Outdoors, Wal-Mart, Bass Pro Shops, and Dick s Sporting Goods. We believe our relationships with leading 1

6 retailers enable us to collaboratively develop favorable product mix and stocking strategies, ensuring that our full suite of firearms and ammunition is widely available to consumers. The aggregate commercial firearms, ammunition and accessories markets in the United States were approximately $12 billion in As a result of favorable industry-wide trends, including broader participation in hunting and shooting sports, an increasing number of female shooters, an increased focus on home and self-defense and recent rises in demand brought about by regulatory and legislative concerns, our markets have expanded over the past five years, and recently have resulted in significant demand in excess of our production capacity. Given this unsatisfied demand experienced in the market and for our products, we have continued to invest in new product development and additional manufacturing capacity. We believe our scale and product breadth are unmatched within our industry, with approximately 1.8 million firearms and 3.1 billion rounds of ammunition sold by us during the year ended December 31, 2013, and approximately 1.4 million firearms and 2.1 billion rounds of ammunition sold by us during the year ended December 31, We are one of only two major U.S. companies that manufacturers both firearms and ammunition, which we believe provides a competitive advantage, supports our market leadership position and adds a recurring revenue component to our sales. We also believe that our portfolio of products is more diverse and expansive than those of other manufacturers of both firearms and ammunition based on the number of product categories in which we participate. Due to the scale and strength of our brand portfolio, we have been able to capitalize on favorable industry trends to generate net sales, Adjusted EBITDA and net income of $1,268.2 million, $236.4 million and $59.6 million, respectively, in 2013 and $931.9 million, $156.5 million and $7.3 million, respectively, in Between 2008 and 2012, our net sales and Adjusted EBITDA increased at compound annual growth rates ( CAGR ) of 6.6% and 10.6%, respectively. Our Defense Division has been active in the Law Enforcement, International Military, and U.S. Federal and Military markets for ammunition, shotgun, carbine, sniper rifle, and suppressor categories in We are one of the market leaders in the law enforcement sniper rifle and shotgun markets and a major provider of service and training ammunition. Remington Defense is a sniper rifle vendor of choice for the U.S. Military as we provide the U.S. Army the M2010 Sniper Rifle and SOCOM the Precision Sniper Rifle (PSR). This government contract, awarded to Remington Defense in 2013, provides SOCOM with a total sniper rifle solution including rifle, suppressor, ammunition and parts. This helps to establish Remington Defense as a market leader in the sniper rifle space. Additionally, our work in shaping International requirements for the last 5 years has resulted in an estimated $50.0 million carbine contract with the Republic of the Philippines. This is the largest scale small arms procurement in the Philippines history and will support this U.S. ally in domestic and regional security operations. We believe that our commitment to researching and developing creative new products with end user input, along with our commitment to providing the highest quality firearm solutions available for law enforcement and military customers provides an opportunity for attractive revenue diversification while reinforcing the strength of our brands with consumers. We have been led by our Chief Executive Officer, George K. Kollitides II, since March Under the direction of Mr. Kollitides, we have developed a focused acquisition strategy while positioning all of our firearm and ammunition products, across all brands, to achieve top market share in their respective categories. Mr. Kollitides has also enhanced our management team with experienced leaders from the automotive and medical device industries, in part because we believe that the highly refined production and manufacturing best practices associated with those industries can be implemented across our organization. Our team has implemented margin improvement programs, capacity expansions and supply chain and production efficiencies that, together with the increase in demand we have experienced over recent years, have bolstered profitability. As a result, our Adjusted EBITDA margin has expanded from 15.5% of net sales in 2011 to 16.8% in 2012 and 18.6% in We expect that these initiatives will continue to drive significant margin improvement in the future. In connection with our operational improvement programs, we have also invested approximately $60 million in capital equipment and new product innovation in In addition to the profitability improvements, we believe that these initiatives will also help to increase production output and satisfy the unsatisfied demand for our products that we have experienced in recent years. We currently manufacture our products in 12 primary facilities with an aggregate 2.4 million square feet of manufacturing space, enabling us to deliver our products in the U.S. and globally to over 60 countries. Approximately 60% of our revenue in 2013 was derived from two key firearms facilities in Ilion, New York and Mayfield, Kentucky and our primary ammunition plant in Lonoke, Arkansas. We are continuously evaluating options to expand our domestic manufacturing capacity while simultaneously implementing production best 2

7 practices to drive margin improvement within our existing facilities. We are currently expanding operations at our ammunition facility in Lonoke, Arkansas. In February 2014, we agreed to acquire a facility in Huntsville, Alabama, in order to increase capacity and expand research and development capabilities. Our History and Corporate Structure We have nearly 200 years of operational history in firearms, ammunition and related products. Remington Outdoor Company (formerly named American Heritage, Inc. through October 2008 and subsequently Freedom Group, Inc.) is a holding company currently controlled by Cerberus Capital Management ( CCM ). Our predecessor company, Bushmaster Firearms International, LLC, was created on February 17, 2006 by CCM for the purpose of acquiring the business of Bushmaster Firearms, Inc. CCM completed the acquisition of certain assets and assumed certain liabilities of Bushmaster Firearms, Inc. on April 1, Remington Outdoor Company was formed by CCM for the purpose of acquiring Remington Arms Company, Inc., which occurred on May 31, Bushmaster Firearms International, LLC and Remington Outdoor Company were merged on December 12, 2007, creating Freedom Group, Inc., which was subsequently renamed Remington Outdoor Company on October 19, Our Market Opportunity We compete in multiple marketplaces for firearms, ammunition and related accessories. End-user markets include U.S. and international consumers, such as sportsmen, hunters and recreational shooters, police departments, the U.S. Military and allied foreign governments. The total size of the domestic commercial market for firearms was approximately $4.1 billion in 2012 according to Federal Excise Tax data. Through our broad portfolio of brands, we are active in many growth segments of the firearms industry, which helped us achieve the #1 market position in many of the categories in which we compete in We are also a leading provider of ammunition, which had a total domestic commercial market of approximately $1.9 billion in 2012, holding the #1 market share for hunting caliber ammunition and the #3 position overall in According to the National Shooting Sports Foundation (NSSF), domestic consumer long gun sales (based on Federal Excise Tax data) have grown at a 16.4% CAGR from 2009 through We believe we are the largest producer of commercial MSRs, a market that has grown at a 22.5% CAGR from 2009 through Further, the NSSF estimates that domestic consumer ammunition sales grew at a 12.6% CAGR from 2009 to We are a leading competitor in the following: Long Guns: Since 2008, we have been the #1 provider of firearms in the long gun market, which was estimated to be $2.1 billion in 2012 based on Federal Excise Tax data. According to Southwick Associates, our brands represented 21.7% of all domestic rifle market and 15.3% of domestic shotgun market share in Handguns: We re-entered the handgun market in 2010 with our R pistol, and in 2012, the R1 gained the #2 market position in the 1911 category. Within the $2 billion handgun market, the 1911 category represented approximately $250 million of sales in 2012, providing a significant amount of uncaptured market share. We plan to introduce additional handgun product platforms in 2014, which will enable us to actively grow within the handgun market. MSRs: Through our Remington, Bushmaster and DPMS brands, we were the #1 provider of MSRs in the domestic market in Ammunition: We estimate, based on Federal Excise Tax data, that the domestic commercial ammunition market was $1.9 billion in Overall, our brands held the #3 position in the ammunition market in However, for the higher margin products that we produce, including many hunting calibers, we believe we have the highest market share. For instance, Remington is the top rifle ammunition brand, representing 19.0% of market share in 2012 according to Southwick Associates. Accessories / Other: Through our Mountain Khakis, 1816 and Dublin Dog brands, we offer outdoor and consumer apparel. We also provide on- and off-gun accessories and firearm cleaning supplies through our AAC, TAPCO, Storm Lake and Ultimate Firearms brands. 3

8 Our consumers include people of all ages, genders, educational backgrounds and income levels. The National Rifle Association (the NRA ) estimates that million civilians in the U.S. owned nearly 300 million firearms in This figure does not include firearms sold for international or police and military users. These products are used for hunting, target shooting, competition and self-defense. According to an ongoing National Sporting Goods Association study, there were approximately 36.6 million active shooters in the United States in 2012, an increase of 21.8% from 2008, representing a 5.0% CAGR. These 36.6 million shooters include approximately 14.6 million handgun shooters, 13.3 million rifle target shooters and 10.9 million shotgun target shooters, representing a significant installed customer base that generates a recurring revenue stream for ammunition, parts and accessory sales. In addition, a number of developments in the industry are broadening and expanding consumer interest in hunting and shooting sports, including a renewed interest in the outdoors and product offerings designed to introduce new shooters to hunting and shooting activities. According to the NSSF, for the period between 2008 and 2012, 66% of new shooters were between the ages of 18 and 34 and 37% of new target shooters were female, demonstrating the industry s favorable and sustainable demographic growth trends. We believe that these factors also lead to consumers purchasing multiple firearm and ammunition products as their participation in shooting sports broadens. The number of firearm background checks initiated through the National Instant Criminal Background Check System ( NICS ) has increased strongly, with more than 21.0 million checks in 2013, compared to more than 19.5 million checks in 2012 and approximately 12.7 million in We believe that a portion of the increase in NICS checks is driven by concern over the potential for more restrictive government regulation on the federal, state and local levels; however, the industry is continuing to experience other, sustainable industry-wide growth trends, including favorable demographics among new shooters, an increasing number of female shooters and a greater focus on home and self-defense. We view the increase in demand as having significant long-term benefits, including expanding the popularity of shooting sport categories and providing an opportunity to cultivate new, and renew existing, long-term customer relationships across our portfolio of products and brands. As the popularity of hunting, shooting and outdoor sports increases, retailers serving this market continue to expand their locations and product offerings to capitalize on these trends. For example, retailers such as Cabela s, Gander Mountain, Academy Sports + Outdoors, Wal-Mart, Bass Pro Shops and Dick s Sporting Goods continue to expand the number of their locations that stock our products. Moreover, the growing popularity of outdoor sports is also demonstrated by new retail concepts, such as Field & Stream, which was recently introduced by Dick s Sporting Goods. We maintain direct sales relationships with these retailers, with each stocking a variety of our firearm and ammunition brands. Our Competitive Strengths Our competitive strengths include: Category Defining Brands Our brand names are some of the most widely recognized in the hunting, shooting sports, law enforcement and military firearm and ammunition end-markets. As a result, we have achieved significant commercial market shares in all of our major firearm and ammunition products in the markets in which we participate, as noted in the table below. Categories (1) U.S. Market Position Selected Brands Firearms Long Guns... #1 Remington, Marlin, Parker, H&R, Dakota Arms Modern Sporting Rifles... #1 Bushmaster, DPMS, Remington Ammunition... #3 Remington, Remington Core-Lokt, UMC, Barnes (1) Based on 2012 Firearms and Ammunition Market Data from Southwick Associates. Established in 1816 and built on a legacy of quality and innovation, we believe the Remington brand represents an enduring symbol of American values that is trusted and respected by generations of sportsmen, lawmen and members of the military. The Remington brand has been deployed across virtually every category of our firearms and ammunition. Remington s category-defining firearms are some of the best-known and longest 4

9 selling products in the hunting and shooting sports market. For example, we celebrated the 50 th anniversary of the Remington Model 700 bolt-action rifle in With over 5.8 million Model 700s sold, we believe it is currently the most widely distributed rifle in its class. Furthermore, the Remington Model 870 shotgun is the best-selling shotgun of all time, with over 11 million units sold. In 2014, we will celebrate the 75 th anniversary of our best selling centerfire rifle ammunition, the Remington Core-Lokt. We believe the strong brand equity associated with the Remington name provides us with significant benefits, including customer loyalty, which leads to repeat purchases and incremental sales opportunities across our product portfolio. It further serves to help create market acceptance for new product introductions in our core business, in addition to enabling the expansion of our portfolio into other outdoor product categories. In addition to Remington, our portfolio of brands also includes Marlin, Harrington & Richardson, Parker and Dakota in long guns; Bushmaster and DPMS in the MSR market and Para in handguns. Our ammunition brands, including Remington, UMC and Barnes, also enjoy leading market positions, strong brand recognition and multi-generational customer loyalty. We believe that Remington Core-Lokt centerfire ammunition is the most widely used ammunition in its class. Our Premier STS and Nitro 27 target loads have won more trophies at the Grand American Trap and World Skeet championship than any other brand. The Grand American is believed to be the largest shooting tournament in the world and offers competitors the opportunity to explore the most advanced products and services in the shooting industry. Broad Product Portfolio We have the broadest firearms, ammunition, components, parts and accessory portfolio in our industry. This broad product portfolio provides a wide assortment of choices and options for end-users, enables us to be a key supplier to our commercial, law enforcement and military customers and creates significant cross-selling and bundling opportunities. The breadth and scale of our product portfolio also provides us with leverage in the distribution channel, enabling us to optimize the mix of our products sold to our retailer and distributor customer base. Our product portfolio consists of: Long Guns: We provide a full product line of both shotguns and rifles. Our long gun products range in price from entry level, sold under the Harrington & Richardson brand, to the aspirational, handcrafted firearms sold under the Parker Gun and Dakota brands, in addition to our core brands of Remington and Marlin. Our pricing strategy enables us to build lifetime relationships and brand loyalty with our customers. We believe that we offer the widest variety of products of any long gun manufacturer. Handguns: In 2010, we re-entered the handgun market after 91 years with the introduction of the Model 1911 R1 pistol. Since re-entering this market, we have continued to expand on the popularity of the 1911 R1 with products including the 1911 R1 Stainless, the 1911 R1 Threaded Barrel, and most recently, the 1911 R1 Carry and R1 Carry Commander. In 2012, we further expanded our handgun business with the acquisition of Para USA, Inc., a producer of 1911 style handguns. MSRs: Through our Bushmaster and DPMS brands, we held the #1 market share position in the core MSR category in Within the MSR market, we have also recently made acquisitions that enable us to provide components and parts to customize MSRs, allowing us to generate additional sales to existing customers, with component systems and parts often yielding higher margins than complete rifles. Ammunition: We believe our prominence in the ammunition market and ability to leverage brand loyalty creates a recurring and growing revenue stream in ammunition to complement our firearms business. We currently produce over 1,100 SKUs of ammunition (loaded rounds and components) in 60 calibers and gauges for use across the entire spectrum of firearms, including centerfire rifles, rimfire rifles, shotguns, and handguns, at a variety of price points and for a broad range of applications. Accessories / Other: We sell a wide variety of accessories that leverage our core brands, including gun care and cleaning products and folding and collectible knives. We also license our trademarks to a carefully selected number of third parties that manufacture sporting and outdoor products in order to expand our brand recognition, enhance our ability to market our core products and generate attractive, high margins. 5

10 Multiple Distribution Channels, Reaching Diverse End-Markets We believe the combination of our strong brands, broad product assortment, leading market share and ability to offer both firearms and ammunition has made us a key partner with commercial retailers and distributors. Unlike many of our competitors that sell their products exclusively to distributors, approximately 45% of our commercial net sales in 2013 were directly to major retail and sporting goods chains, such as Cabela s, Gander Mountain, Academy Sports + Outdoors, Wal-Mart, Bass Pro Shops and Dick s Sporting Goods. Our relationships with these retailers enable us to develop favorable product mix and stocking strategies, ensuring that our full suite of products is widely available to consumers while also serving to optimize our profitability. In addition, we maintain strong relationships with major sporting goods distributors such as Sport South, AcuSport, Jerry s Sport Center and Ellett Brothers, which collectively accounted for approximately 30% of our commercial net sales in We also have strong relationships with dealers and shooting ranges, and actively work to grow net sales within these channels. In addition to our significant commercial business, we sell products to law enforcement, government and military end-markets in the U.S. and internationally. These markets represented approximately 5% of net sales in Our current customers include, among others, the Texas Department of Public Safety, Los Angeles County Sheriff s Department, Los Angeles Police Department, the California Highway Patrol, the Federal Law Enforcement Training Center ( FLETC ), SOCOM, the U.S. Secret Service, and important U.S. foreign allies. Although these end-markets comprise a smaller portion of our total net sales than our commercial business, we believe that the research and development investments in our military and law enforcement business generates significant benefits to our overall product portfolio and creates an aspirational aspect to similar products that we sell to consumers. Differentiated, Customer-Focused Sales and Marketing Approach We have shifted our business from a manufacturing-based push system, in which product volumes and mix are determined based on available capacity, to a customer-focused pull system, in which customer preference and consumer demand determine manufacturing decisions. We are able to determine what products customers demand by mining our extensive and proprietary database of consumer data and we believe we are an industry leader in capturing and analyzing point-of-sale statistics from key customers and distributors. We continue to grow our sales force and have transitioned to a two-tiered structure whereby dedicated key account managers sell our full product offering to our top five retail and top 11 wholesale accounts, while our internal field sales force calls on a network of approximately 750 distributors and dealers. We believe this sales structure has led to better mix management and has provided the ability to leverage our flexible manufacturing capacity to quickly respond to changes in consumer preferences and demands. Our transition from a manufacturingbased push system to a customer-focused pull system has also significantly reduced our use of third-party, nonexclusive sales representatives. Significant Capital Investment to Increase Earnings In order to enhance our mix management through flexible manufacturing and to meet the demand for our products, a sizable portion of which has gone unsatisfied in recent years, we have embarked on a significant capital investment program that will add capacity to our manufacturing operations at attractive margins. During 2012 and 2013, we invested approximately $28.1 million and $59.2 million in capital expenditures, respectively. The majority of this investment is above our annual historical capital expenditure rate of approximately $25 million per year, and is focused on product categories that are experiencing historically high demand such as ammunition, hunting rifles, shotguns and our new pistol product lines. This investment will also spur the introduction of new products in each of our key categories. The largest individual capital investment initiative we are undertaking is an approximately $30 million capacity expansion at our Lonoke ammunition factory. This production facility, expected to come on-line in the second half of 2014, will significantly expand our centerfire pistol and revolver ( P&R ) ammunition capacity, enabling us to meet the robust industry-wide demand for these rounds. In addition to capacity expansion to meet demand, our capital investment program is also a key to our margin improvement initiative, as new and more efficient machines enable us to realize lower manufacturing costs. Proven and Experienced Management Team and Board of Directors We are led by a senior management team with substantial industry and related operational, sales and marketing and financial experience. Our Chairman and Chief Executive Officer, George Kollitides II, has over 22 years of experience in acquiring, financing, operating and growing businesses. Mr. Kollitides was employed at 6

11 Cerberus Capital Management, L.P. ( CCM ) from 2003 until 2012, where he was the architect of the strategy that formed our company. Our Chief Financial Officer and board member, Ronald E. Kolka, has over 25 years of experience in finance and is the former Chief Financial Officer of Chrysler Motors LLC. In April 2012, we hired Kevin Miniard as our Chief Operating Officer. Mr. Miniard brings 20 years of operations experience in leadership roles with globally recognized companies such as Toyota and Smith & Nephew Medical. Our Growth Strategy We intend to grow our revenue and earnings pursuant to the following strategies: Strategically Invest Capital to Increase Capacity and Efficiency We have undertaken a capital investment program under which we have spent more than $80 million in 2012 and 2013 in equipment and new product innovation to increase capacity and improve overall production efficiency through enhanced mix management and flexible manufacturing. Our capital investment strategy targets increasing production capacity in product lines and categories with attractive margins and persistent unsatisfied demand. This strategy is demonstrated by the initiative we are undertaking at our Lonoke ammunition factory. The Lonoke facility expansion, expected to come on-line in the second half of 2014, will considerably increase our centerfire P&R ammunition capacity, enabling us to meet the significant industry-wide demand for P&R rounds while expanding margins. Continued Focus on Innovation and New Product Development We believe that continuously developing innovative new products and improving existing offerings is paramount to the success of businesses in our industry. We introduced several new products in 2012 and 2013, and we plan to introduce more new products in 2014 than in any other year of our almost 200-year history. We will introduce new products in each of our major categories. Long Guns: New long gun products for 2013 included the Remington Model 783 bolt-action centerfire rifle, which is positioned to capture market share in the mid-level price point hunting rifle category. We have also continued to grow and expand in the autoloading shotgun category with the introduction of the Versa Max Sportsman series, bringing the patented Versa Port gas system into reach for a larger segment of the overall marketplace. In 2014, we plan to introduce a new shotgun platform that is specifically designed for female and youth shooters. Handguns: After re-entering the handgun market in 2010, we have continued to expand on the popularity of the 1911 R1 with products including the 1911 R1 Stainless, the 1911 R1 Threaded Barrel, and most recently, the 1911 R1 Carry and R1 Carry Commander. In 2014, we expect to introduce new handgun platforms, which will significantly expand our handgun offering beyond our current 1911 range and broaden our participation into new handgun market segments. Our first new handgun platform in 2014 will be the introduction of the Remington R51 Subcompact Pistol, which will compete in the fast-growing concealed carry handgun market. MRSs: In 2014, within our DPMS MSR portfolio, we introduced the 308 GEN II firearm, which, while approximately two pounds lighter than competing products, will still enhance performance over those products, and a line of DPMS MSRs in hunting calibers, which will capitalize on the weight reduction technology developed in conjunction with the 308 GEN II. Ammunition: We have developed a variety of new ammunition products including our Hypersonic Steel Shotshell, HyperSonic Bonded Rifle ammunition, Hog Hammer Rifle ammunition and Ultimate Defense P&R ammunition combination packs, as well as High Terminal Performance ( HTP ) P&R and target products focusing on our consumers demands. In 2013, we successfully introduced a new TAC-XPD Defense ammunition line under the Barnes brand that has been engineered to provide a customized solution for personal carry or home defense. In 2014, we plan to introduce Remington SubSonic Suppressor Loads and a portfolio of advanced slug offerings, marketed under the Barnes brand. In 2014, we have introduced a Remington portfolio of advanced slug offerings, marketed under the Remington and Barnes name, as well as the new Remington Ultimate Defense Compact Handgun and Golden Saber Black Belt Handgun ammunition, and the new Remington Hypersonic Slug. 7

12 Accessories / Other: We have numerous new accessory products and existing product extensions in development, with planned introductions in 2014 and beyond. These initiatives support our strategy to leverage the strength of the Remington brand by selling a variety of outdoor products in order to provide an increasing share of the equipment, apparel and accessories upon which the outdoorsman relies. We continue to strategically expand our licensing portfolio. We have over 20 licensing partners, which provide brand relevant products and services to the outdoorsman. Examples include truck accessories, logo wear, sporting dog products and guided hunting trips. Continue to Optimize Manufacturing Operations In addition to increasing capacity to meet demand that has historically exceeded production, our management team is focused on optimizing operations through the adoption of lean manufacturing, six sigma, and other continuous improvement projects focused on inventory and supply chain management, cost reductions and productivity. Our manufacturing optimization plan also includes the potential to expand our production capacity while shifting to higher margin products. We expect these efforts will collectively help our drive toward manufacturing to orders as opposed to manufacturing to safety stock, which will also carry working capital benefits. Our continuous cost and production volume improvements continue to be our organization s focus as we build and optimize our world class manufacturing platform. In February 2014, we agreed to acquire a facility in Huntsville, Alabama, in order to increase capacity and expand research and development capabilities. Increase Commercial Market Share Our industry is currently experiencing strong demand due in part to what we believe to be the changing dynamics and demographics of the hunting/shooting consumer, as well as the growing popularity of outdoor sports and lifestyle. Due to the combination of our strong brands, leading market positions and ability to offer a suite of firearms and ammunition at various price points, we have experienced greater demand for our products than we have been able to satisfy over the last several years. Between 2009 and 2012, we estimate that we had average annual unsatisfied demand of approximately $110 million and $100 million for our firearms and ammunition, respectively. We expect to grow our commercial market share by leveraging our strong brand and product portfolio with our dedicated sales force to increase shelf space. Twenty-four hour availability and control of e-commerce platforms offers a new channel to grow our commercial market share. Support for all business channels will come from our increased focus on social media by leveraging our brand ambassadors and engaging consumers to shape purchase decisions. Further Penetrate the Domestic and International Defense and Law Enforcement Channels We focus our research efforts on developing products in advance of key emerging firearms solicitation windows for the U.S. government and allied foreign militaries. We have supplied products to the military and law enforcement channels for over 195 years, leading the military sniper rifle market since the Vietnam era. We were recently awarded the SOCOM precision sniper rifle contract under which we will provide a complete system including the rifle, suppressor and ammunition to the U.S. government. We use key relationships to identify defense and law enforcement needs in anticipation of formal bids, so that research and development investments are focused on providing products that meet those needs. We are developing several products specific to the anticipated requirements of U.S. foreign allies, including a 7.62mm semi-automatic sniper system and several personal defense weapons that we believe will help us improve our international sales efforts. We believe we are a well-positioned player in this growing global market, as we are able to offer full firearms and ammunition solutions to existing and new foreign military customers and have been awarded several contracts from allied militaries. We believe that the research and development investments in our military business have a positive impact on our commercial markets as consumers ascribe significant brand recognition to, and aspire to own, products used by some of the most discerning end-users in the world. Pursue Acquisitions and Strategic Investments We are committed to enhancing our core businesses and positioning our company to take advantage of opportunities to strategically grow and improve by identifying and pursuing strategic acquisitions or investments that expand and enhance our brand, product, supply chain and intellectual property portfolio. We seek to acquire highly complementary products, brands or external capabilities to expand our product portfolio or extend our brands and channel relationships. In particular, we will pursue acquisitions that extend our product offerings in handguns, enhance our ability to better service military and law enforcement markets and extend our reach into accessories markets that strengthen our brand portfolio. 8

13 We have a proven track record of successfully identifying and integrating acquisitions, as demonstrated by the integration of our brands and significant ongoing operational improvements. We have built and strengthened our family of brands and products primarily through the successful integration of our acquisitions. We have continued to strategically pursue and successfully integrate acquisitions and arrangements that complement our existing product base. As demonstrated in the table below, we have completed and successfully integrated 18 acquisitions across all of our platforms since These acquisitions have allowed us to better compete in each of our key categories: long guns (Remington, Marlin, Parker, H&R, Dakota), handguns (Remington, Para), MSRs (Remington, Bushmaster, DPMS, AAC), ammunition (Remington, Barnes, UMC) and Accessories / Other (AAC, TAPCO, Mountain Khakis, Dublin Dog, Storm Lake). Company Date Bushmaster April 2006 Remington May 2007 The Parker Gun May 2007 DPMS Firearms, LLC December 2007 The Marlin Firearms Company and its subsidiary H&R 1871, LLC January 2008 Dakota June 2009 S&K September 2009 AAC October 2009 Barnes December 2009 Mountain Khakis May 2010 Para USA, Inc. January 2012 TAPCO November 2012 LAR November 2012 Ultimate Firearms November 2012 Dublin Dog December 2012 TMRI December 2012 SMK March 2013 Storm Lake August 2013 Financial Information about Segments and Geographic Areas We operate our business under two reporting segments: (1) our Firearms segment, which designs, manufactures and markets primarily sporting shotguns, rifles, handguns, modular firearms and airguns; and (2) our Ammunition segment which designs, manufactures and markets primarily sporting ammunition and ammunition reloading components. Our All Other category combines our other operating segments, including accessories, silencers, other gun-related products, licensed products and lifestyle products, including apparel and pet accessories. The following table sets forth our sales for our reportable operating segments for the periods shown: Year Ended December 31, Firearms $ $ $ Ammunition All Other Totals $ 1,268.2 $ $ Our Products Firearms We design, manufacture and market our firearms primarily under the Remington, Marlin, Bushmaster, DPMS, H&R, Parker, Dakota and Para brand names. Through our diversified portfolio of brands, we offer a wide variety of firearms and components, which enable gun enthusiasts to build and continually upgrade and customize our products. Our brand strategy allows us to address a variety of end-user preferences across price points, ranging from hunting and shooting sports to government, military and law enforcement applications that in each case are equally attractive to both beginner and accomplished shooters. This strategy also allows us to build strong brand awareness and generate attractive cross-selling opportunities. As the largest firearms manufacturer in the United 9

14 States, we sold approximately 1.8 and 1.4 million firearms during the years ended December 31, 2013 and 2012, respectively. Key Products Long Guns: Our most popular Remington long guns are the Model 870 pump-action shotgun, the Model 1100 and Model auto-loading shotguns, the Model 700 and the Model 770 centerfire rifles and the Model 597 rimfire rifle. Remington long guns are offered in versions that are marketed to both novices and experienced gun owners. Marlin is synonymous with lever and rimfire rifles. The Model 336, Model 1895 and Model 1894 lever-rifles are designed for high performance and durability across multiple medium and large centerfire calibers. Marlin also produces the Model 39A lever action rimfire rifle, which is the longest continuously manufactured rifle in the world, having commenced production in 1891 and been used by Annie Oakley. Under our Dakota, Nesika and Parker brands, we offer premium, aspirational shotguns and rifles. Handguns: Our Remington 1911 R1 semi-automatic pistol was introduced in The R1 product range continued to expand in 2012 and 2013 and has become one of the leading brands of 1911 pistols. Para USA, Inc., acquired in January 2012, manufactures semi-automatic 1911 style handguns for discriminating 1911 enthusiasts, using single stack and innovative double stack magazines to deliver higher capacity for competition shooting and personal protection. In addition, the Para line includes models with the light double action (LDA ) trigger systems as part of its innovative design. During 2013, the Para line was expanded beyond the.45 Auto caliber, to now include 9mm and.40s&w calibers in the popular 1911 format. MSRs: Our Bushmaster brand is well-known for its superior quality and highly advanced MSRs, used worldwide in the commercial, law enforcement, international and military markets. Bushmaster includes a wide range of products with a primary focus on the.223 and 5.56mm caliber and innovative products such as the Bushmaster ACR and caliber offerings such as the.50 BMG and.450 Bushmaster with several new platforms currently under development. Our DPMS brand is an innovator of MSRs with a broad range of caliber offerings such as.308,.338 and.243. In addition, DPMS produces a range of upper and lower assemblies, stocks and other gun components to a diverse customer base including dealers and end-users. We also offer the R-15 and R-25 MRSs for hunting use through our Remington brand. Firearm Product Introductions In 2013, we introduced the Remington Model 783 bolt-action centerfire rifle, which we believe will capture market share in the mid-level price point category. We continue to grow and expand in the autoloading shotgun category with the introduction of the Versa Max Sportsman series, bringing the reliability of the patented Versa Port gas system into reach for a larger segment of the overall market place. Additionally, 2013 marked the 50 th anniversary of the legendary Remington Model 1100, one of the most popular shotguns of all time. To memorialize this historic milestone, we have introduced a Limited Edition 50 th anniversary model. In 2012 and 2013, we continued expansion of the Remington 1911 R1 handgun line with the R1 Carry and R1 Carry Commander, both targeted at the fast-growing concealed carry pistol segment. During 2013, we expanded the Para line to include higher-end models, such as our Executive Agent, Black Ops Recon, LDA Officer and LDA Agent and expanded calibers to include 9mm and.40s&w models. We will continue to innovate and introduce new products. We plan to introduce a greater number of new products in 2014 than any year in the history of our company. These new product introductions will span the major categories within our portfolio, including long guns, handguns, MSRs and ammunition. Ammunition We sold approximately 3.1 billion and 2.1 billion rounds of ammunition during the years ended December 31, 2013 and 2012, respectively, making us one of the largest manufacturers of commercial ammunition in the United States. The National Rifle Association estimates that approximately million people in the United States owned approximately 300 million firearms in 2010, creating a large installed base for our ammunition products. As one of only two major manufacturers of both firearms and ammunition in the United States, we believe 10

15 our ability to manufacture and sell ammunition creates a unique competitive advantage within the industry, allowing us to solidify and extend our existing long-term relationship with our loyal customer base. Key Products Our most popular ammunition products include Remington Core-Lokt centerfire rifle ammunition, Premier STS and Nitro 27 shotgun target loads, which have won more trophies at the Grand American Trap and World Skeet championship than any other brand. In addition to copper lead-free bullets, Barnes is a supplier of loaded ammunition with their Barnes Vor-TX ammunition, including copper-tin composite core bullets. Ammunition Product Introductions We focus our product development efforts on introducing new products that satisfy the need for specialized, high-performance ammunition. Recent ammunition product introductions have focused on developing exclusive or proprietary technology with applications for the performance oriented hunting segments, personal defense and special application law enforcement and military needs. Multiple recent product launches include our Hypersonic Steel Shotshell and Hypersonic Slug, HyperSonic Bonded Rifle ammunition, Hog Hammer Rifle ammunition, Ultimate Defense P&R ammunition combination packs, Ultimate Defense Compact Handgun ammunition, Golden Saber Black Belt and HTP P&R. In addition, the Barnes VOR-TX Rifle ammunition line continues to grow. This year, Barnes also introduced the new TAC-XPD Defense ammunition line that has been engineered to provide a solution for personal carry or home defense. Accessories / Other We sell a wide variety of branded accessories, including gun care and cleaning products, folding and collectible knives and specialty outdoor apparel. We believe we are one of the top brands in complete firearm care, including cleaning chemicals, tools and kits. In order to better serve our consumers, we also offer them access to these products through our online store. In addition to offering a wide range of Remington branded accessories to the commercial market, we sell a full line of accessory products to military, law enforcement and commercial markets through our AAC brand. We design and market men s and women s clothing for the specialty outdoor apparel segment through 1816 and Mountain Khakis. We are also committed to growing our accessories line through innovation with a pipeline of products ranging from everyday apparel to accessories created to satisfy outdoor lifestyles. That commitment is exemplified by our acquisition of TAPCO, a designer and marketer of American-made aftermarket accessories for firearms, in late In March 2013, we acquired SMK, a leading participant in the UK airgun market, with the strategy of expanding our European footprint by launching a full line of airguns and related accessories through its U.S. distribution network beginning in We also license our trademarks to carefully selected third parties that manufacture and market sporting and outdoor products that complement our product lines. Currently, our trademarks are licensed for use on, among other things, apparel, caps, gun cases, tree stands, wildlife feeders, dog equipment, safety and security products, gun safes, and various other novelty goods. We strive to ensure that the quality, image and appeal of these licensed products are consistent with our brands images and the high-quality nature of our products. We believe that these licenses increase market recognition of our brands, enhance our ability to market our core products and generate attractive, high margin income. Additionally, we believe there are significant additional opportunities for our licensed products as consumer preference is continuing to move toward an outdoor lifestyle. Competition Product image, performance, quality and innovation are the primary competitive factors in the firearms industry, with price and customer service also being important. Our shotgun products compete with products offered by O.F. Mossberg & Sons, Inc., Winchester, Browning Arms Company and Fabbrica d Armi Pietro Beretta S.p.A. Our centerfire and rimfire rifles compete with products offered by Sturm, Ruger & Co., Inc., Savage Arms, Inc. (a subsidiary of Alliant Techsystems), Browning Arms Company. Our MSR products compete with Colt Defense, FN Herstal, Smith & Wesson, Rock River Arms, Stag Arms and Armalite. 11

16 In the ammunition market, we compete with the Winchester division of Olin Corporation and Federal Cartridge Co., a subsidiary of Alliant Techsystems. Additionally, some imported ammunition brands compete in the domestic market. Manufacturing We are one of the largest manufacturers of firearms in the United States. Approximately 60% of our revenue in 2013 was derived from our two key firearms facilities in Ilion, New York and Mayfield, Kentucky and our primary ammunition plant in Lonoke, Arkansas, which has achieved ISO certification. In addition, we manufacture firearms in Sturgis, South Dakota; St. Cloud, Minnesota; Pineville, North Carolina and Kalispell, Montana and ammunition in Sturgis, South Dakota and Mona, Utah. Certain of these facilities also provide factory repair services. We also have a firearm accessory manufacturing facility in Lawrenceville, Georgia and firearm component manufacturing facilities in Lexington, Missouri; West Jordan, Utah and Lenoir City, Tennessee. Seasonality Although the sales of many of our products fall outside the September through December hunting season, a portion of our sales are seasonal and concentrated toward the fall hunting season. As a result of the seasonal nature of our sales and the payment terms under our billing practices, our historical working capital financing needs generally have exceeded cash provided by operations during certain parts of the year. As a result, our working capital financing needs tend to be greatest during the spring and summer months, decreasing during the fall and reaching their lowest points during the winter. Supply of Raw Materials We have augmented and integrated our facilities and supply chain and have focused on improving our operating efficiency. To manufacture our various firearms, ammunition and related products, we utilize numerous raw materials, including steel, wood, lead, brass, powder and plastics, as well as parts purchased from independent manufacturers. We have completed numerous lean manufacturing projects and six sigma efforts focused on supply chain optimization. For a number of our raw materials, we rely on a limited number of suppliers. For example, our brass strip, lead and smokeless powder requirements in the United States and Canada are supplied by a few key vendors. Where machining processes on certain of our firearms components are performed by a limited number of vendors, we are actively pursuing in-house capabilities to mitigate supply chain dependency associated with our products. See 1A. Risk Factors Risks Related to Our Business We are dependent on a number of key suppliers. Loss of or damage to our relationships with these suppliers could have a material adverse effect on our business, financial condition, results of operations or cash flow. We have long-term relationships with most of our vendors and believe that all such relationships are good, and do not currently anticipate any material shortages or disruptions in supply from these vendors. The price and availability of production materials are affected by a wide variety of interrelated economic and other factors, including alternative uses of materials and their components, changes in production capacity, energy prices, commodity prices and governmental regulations. Specifically, some of our manufacturing sites have experienced volatility in acquisition costs related to purchases of metals and other materials related to our business, increased processing charges and increased energy costs. See 7. Management s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources and 7A. Management s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Analysis of Market Risk. Service and Warranty We have support service and repair facilities for our firearms products in order to meet the service needs of our distributors, customers and consumers nationwide. We provide warranties for our new firearms products manufactured in the United States to the original purchaser for defects in material and workmanship for periods of one to five years, which commence on the registered date of purchase by the end consumer. Our imported firearms products are warranted by our vendors for a period of one year commencing with the registered date of purchase by the end consumer. We also provide limited warranties for our ammunition products. Warranty costs associated with these programs were $5.7 million, $6.4 million and $5.2 million for each of the years ended December 31, 2013, 2012 and 2011, respectively. 12

17 Marketing and Distribution We are a leading global manufacturer of firearms, ammunition and related products with a diverse portfolio of category-defining brands including Remington, Marlin, Bushmaster, Barnes Bullets, AAC and DPMS. We sell products to the commercial, law enforcement, international, government and military end-user markets. We have shifted our business from a manufacturing-based push system, in which product volumes and mix are determined based on available capacity, to a customer-focused pull system, in which customer preference and consumer demand determine manufacturing decisions. We are able to determine what products customers demand by mining our extensive and proprietary database of consumer data and we believe we are an industry leader in capturing and analyzing point-of-sale statistics from key customers and distributors. Additionally, key account managers have access to the full suite of our products, further leveraging our retail partners to assist in long range sales planning. We continue to grow our sales force and have transitioned to a two-tiered structure whereby dedicated key account managers sell our full product offering to our top five retail and top 11 wholesale accounts, while our internal field sales force calls on a network of approximately 750 distributors and dealers. We believe this sales structure has led to better mix management and has provided the ability to leverage our flexible manufacturing capacity to quickly respond to changes in consumer preferences and demands. This investment and effort has significantly reduced our use of third-party, non-exclusive sales representatives. We believe the combination of our strong brands, broad product assortment, leading market share and ability to offer both firearms and ammunition has made us a key partner with domestic commercial retailers and distributors. Unlike many of our competitors that sell their products exclusively to distributors, approximately 45% of our commercial net sales in 2013 were made directly to major retail and sporting goods chains, such as Cabela s, Gander Mountain, Academy Sports + Outdoors, Wal-Mart, Bass Pro Shops and Dick s Sporting Goods. We also maintain strong relationships with major sporting goods distributors such as Sport South, Acusport, Jerry s Sport Center and Ellett Brothers, which collectively accounted for approximately 30% of our commercial net sales in In addition, we have strong relationships with dealers and shooting ranges and actively work to grow net sales within these channels. In addition to our significant commercial business, we also sell products to law enforcement, government and military end-markets in the U.S. and internationally. These markets represented approximately 5% of net sales for the year ended December 31, Our current customers include, among others, the Texas Department of Public Safety, Los Angeles County Sheriff s Department, Los Angeles Police Department, the California Highway Patrol, FLETC, SOCOM, the U.S. Secret Service and important U.S. foreign allies. We are increasing our presence in social media as consumers become more comfortable with technology and the ease of access improves across all demographics. While broadcast and digital marketing are important, print publications, press relations and print advertisements are a critical component of our marketing strategy. Geographic Areas Net sales from customers outside of the United States were $82.2 million, $72.4 million and $66.8 million for each of the years ended December 31, 2013, 2012 and 2011, respectively. Net sales from customers in Canada were $31.0 million, $28.5 million and $25.2 million for each of the years ended December 31, 2013, 2012 and 2011, respectively. The carrying amounts of long-lived, tangible assets maintained outside of the United States were $0.6 million, $0.3 million and $0.3 million at December 31, 2013, 2012 and 2011, respectively. Sales outside of the United States accounted for approximately 6%, 8% and 9% of our total net sales for the years ended December 31, 2013, 2012 and 2011, respectively. Our sales personnel and manufacturers sales representatives market to foreign distributors generally on a nonexclusive basis and for a one-year term. Customer Concentration Approximately 11%, 16% and 15% of our total net sales from all reportable business segments for the years ended December 31, 2013, 2012 and 2011, respectively, consisted of sales made to one customer, Wal-Mart. The loss of this customer or a substantial reduction in sales to this customer could adversely affect our financial condition, results of operations or cash flows. No other single customer comprises more than 10% of total sales. No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of a government or any other type of purchaser. See 1A. Risk Factors Risks Relating to Our Business A 13

18 substantial amount of our business comes from one national account customer. Loss of business from this customer could adversely affect our financial condition, results of operations or cash flows. Research and Development Our research and development team is focused on new product development and improving existing products based on consumer needs and demands and in response to competition in the market. Research and development expenditures for our continuing operations were approximately $16.6 million, $13.2 million and $11.7 million in the years ended December 31, 2013, 2012 and 2011, respectively. Patents, Trademarks and Copyrights Our operations are dependent upon the Remington and Bushmaster trademarks and the Remington, Bushmaster and DPMS logos. In addition, we also own, among others, the Marlin, H&R and Dakota trade names and trademarks. Some of the other trademarks that we use, however, are nonetheless identified with and important to the sale of our products. Our business is not dependent to a material degree on patents, copyrights or trade secrets. We do not believe that the expiration of any of our patents will have a material adverse effect on our financial condition or our results of operations. We likewise do not believe that any of our licenses of intellectual property to third parties are material to our business, taken as a whole. In June 2000, Remington formed RA Brands L.L.C. ( RA Brands ), a Delaware limited liability company and wholly-owned subsidiary of Remington, to which Remington transferred ownership of all of its patents, trademarks and copyrights. RA Brands licenses such trademarks to Remington at an arm s length royalty rate. In July 2011, Remington contributed its interest in RA Brands to FGI Opco. In 2012, we acquired intellectual property related to muzzle loading adapters for approximately $0.8 million. We believe that we have adequate policies and procedures in place to protect our intellectual property. Regulation The manufacture, sale, purchase, possession, import, export, and use of firearms are subject to extensive federal, state and local governmental regulations. The primary federal laws are the National Firearms Act of 1934 ( NFA ), the Gun Control Act of 1968 ( GCA ), the Arms Export Control Act of 1976 ( AECA ) and the Internal Revenue Code provisions applicable to the Firearms and Ammunition Excise Tax ( FAET ), which have been amended from time to time. The manufacture and import of firearms under NFA, GCA and the AECA are administered and enforced by the Bureau of Alcohol, Tobacco, Firearms and Explosives through the Department of Justice; permanent and temporary exports under the AECA are administered and enforced by the Directorate of Defense Trade Controls through the Department of State and by the Bureau of Industry and Security through the Department of Commerce; and the FAET is administered and enforced by the Alcohol and Tobacco Tax and Trade Bureau through the Department of Treasury. We maintain valid federal licenses and registrations at our locations as required by these agencies for the Company to import, export, manufacture and sell firearms and ammunition. The NFA places various additional restrictions on certain firearms defined in that law and its regulations including fully automatic firearms, short barreled rifles, short barreled shotguns, silencers and destructive devices. We do manufacture or import limited products regulated under the NFA primarily for official government and law enforcement end users. The GCA places certain restrictions on the interstate sale of firearms, among other things. The AECA requires approved licenses or other authorizations to be in place prior to the import or export of certain defense articles, firearms, ammunition and explosives. The FAET imposes a federal tax on the sale of or use by the manufacturer, producer or importer of firearms and ammunition. There is no assurance that the administrative branches responsible for approving import and export licenses, authorizations or transfers of NFA firearms or other firearms to our customers will do so in all cases, and failure to obtain such approvals could adversely affect our business. In addition, changes in the tax laws or rates could adversely affect our business. In September 2004, the United States Congress declined to renew the Assault Weapons Ban ( AWB ) which generally prohibited the manufacture of certain firearms defined under that statute as assault weapons as well as the sale or possession of assault weapons except for those that were manufactured prior to the law s enactment. Various states and local jurisdictions have adopted their own version of the AWB and some of those apply to Bushmaster, DPMS and certain Remington sporting firearms products. We cannot guarantee that an assault weapons ban similar to the AWB, or another version thereof, will not be re-enacted. Legislation of this type, if enacted, could have a material adverse effect on our business. 14

19 On January 16, 2013, as a result of some high-profile crimes by individuals involving firearms, President Obama announced 23 proposed executive actions intended to reduce violent acts by individuals. These proposed actions include requiring background checks for all gun sales, ensuring information on dangerous individuals is available to the background check system, helping to ensure that individuals get mental health treatment, giving law enforcement additional tools to prevent and prosecute crime, encouraging gun owners to store guns safely, and making schools safer with more school resource officers. On April 17, 2013, the U.S. Senate voted down an amended version of the gun background check proposed by President Obama. No assurance can be given as to whether some or all of these actions will be adopted, and if they are adopted, the effect they may have on our business, results of operations and financial condition. At the federal level, bills have been introduced in Congress to establish, and to consider the feasibility of establishing, a nationwide database recording so-called ballistic images of ammunition fired from new firearms. Should such a mandatory database be established, the cost to the Company and its customers could be significant, depending on the type of firearms and ballistic information included in the database. Other bills have been introduced in Congress in the past several years that would restrict or prohibit the manufacture, transfer, importation or sale of certain calibers of handgun ammunition, impose a tax and import controls on bullets designed to penetrate bullet-proof vests, impose a special occupational tax and registration requirements on manufacturers of handgun ammunition, and increase the tax on handgun ammunition in certain calibers. In addition to federal requirements, state and local laws and regulations may place additional restrictions on firearms and ammunition manufacture, sale, purchase, possession and use. For example, two states have established regulations requiring ballistic imaging registries of ammunition fired from new handguns. Within the past few years, at least four states introduced, or currently have, bills proposing requirements for bullet serialization for ammunition or microstamping capabilities for certain firearms. Some of these bills would apply to ammunition and firearms of the kind we produce. California passed semi-automatic pistol microstamping legislation that went into effect in March Several other states require firearms to be sold with internal or external locking mechanisms. Generally, there are numerous other bills proposed at both the state and local levels that could restrict or otherwise prohibit the manufacture, sale, purchase, possession or use of firearms and ammunition. In summary, there can be no assurance that the regulation of firearms and ammunition will not become more restrictive in the future, and more restrictive legislation could have a material adverse effect on the business of the Company. Several states enacted new gun laws in 2013 intended to reduce violent acts by individuals. No assurance can be given as to the effect such legislation may have on our business, results of operations and financial condition. Although numerous jurisdictions presently have mandatory waiting periods for the sale of handguns (and some for the sale of long guns as well), there are currently few restrictive state or municipal regulations applicable to handgun (or long gun) ammunition. Our firearms are covered under several recently enacted state regulations requiring guns to be sold with internal or external locking mechanisms. Some states are considering mandating certain design features on safety grounds, most of which would be applicable only to handguns. There can be no assurance that the regulation of firearms and ammunition will not become more restrictive in the future, and more restrictive legislation in this area could have a material adverse effect on the business of the Company. Following legislation, we are no longer a defendant in any lawsuits brought by municipalities against participants in the firearms industry. In addition, legislation has been enacted in approximately 34 states precluding such actions. Similar federal legislation, entitled The Protection of Lawful Commerce in Arms Act was signed into law by President Bush on October 26, 2005, after being passed by the U.S. Senate in August 2005 and by the House of Representatives in October However, the applicability of the law to various types of governmental and private lawsuits has been challenged. Any court decision restricting the applicability of the law could adversely impact the business of the Company. We believe that existing federal and state regulation regarding firearms and ammunition has not had a material adverse effect on our sales of these products to date. However, there can be no assurance that federal, state, local or foreign regulation of firearms and/or ammunition will not become more restrictive in the future and that any such development would not have a material adverse effect on our business either directly or by placing additional burdens on those who distribute and sell our products or those consumers who purchase our products. In addition, future incidents of violence by individuals involving firearms could increase pressure to adopt some or all of the proposed regulations described above or spur additional regulatory proposals at the state and federal levels and call for the adoption of such proposals. Any such development might have a material adverse effect on our business, financial condition, results of operations or cash flows. See 1A. Risk Factors Risks Relating to Our Business Our business is subject to extensive governmental legislation and regulation that may restrict our 15

20 operations, increase our costs of operations, or adversely affect the demand for our products by limiting the availability and/or increasing the cost of our products. Environmental Matters Our operations are subject to a variety of federal, state and local environmental laws and regulations which govern, among other things, the discharge of hazardous materials into the air and water, handling, treatment, storage and disposal of such materials and remediation of contaminated soil and groundwater. We have programs in place that monitor compliance with these requirements and we believe our operations are in material compliance with them. In the normal course of our manufacturing operations, we are subject to occasional governmental proceedings and orders pertaining to waste disposal, air emissions and water discharges into the environment. We believe that we are in compliance with applicable environmental regulations in all material respects, and that the outcome of any such proceedings and orders will not have a material adverse effect on our business. Under the terms of a legacy asset purchase agreement from 1993 ( Purchase Agreement ) with E.I. DuPont Nemours & Company ( DuPont ) relating to the Remington business ( Asset Purchase ), DuPont agreed to retain responsibility for certain pre-closing environmental liabilities. Remington also entered into an agreement with DuPont with respect to cooperation and responsibility for specified environmental matters. See 3. Legal Proceedings and Related Matters and 3. Legal Proceedings and Related Matters Certain Indemnities. To date, DuPont has honored its responsibilities under the Purchase Agreement, but no assurance can be given that it will continue to do so in the future. There are various pending proceedings associated with environmental liability for which DuPont and its affiliates have accepted liability. Our obligations in these cases are not expected to be material. Marlin has also conducted remediation activities at its former facilities. Costs for remediation are not expected to be material. Based on information known to us, we do not expect current environmental regulations or environmental proceedings and claims to have a material adverse effect on our results of operations, financial condition or cash flows. However, it is not possible to predict with certainty the impact of future environmental compliance requirements or the cost of resolution of any future environmental proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under some federal environmental laws is under certain circumstances joint and several in nature, and environmental laws and regulations are subject to modification and changes in interpretation. There can be no assurance that environmental regulation will not become more burdensome in the future or that unknown conditions will not be discovered and that any such development would not have a material adverse effect on our business. We do not anticipate incurring any material capital expenditures for environmental control facilities for Employees As of December 31, 2013, we employed approximately 4,200 full-time employees, consisting of 3,800 regular employees and 400 temporary employees. Of the 4,200 employees, approximately 2,400 are engaged in manufacturing and approximately 1,800 are engaged in sales, marketing, general administration and research and development. An additional work force of temporary employees is engaged during peak production schedules at certain of our manufacturing facilities. As of December 31, 2013, approximately 1,200 employees were members of the United Mine Workers of America ( UMWA ) at our Ilion, New York manufacturing facility. The collective bargaining agreement with the UMWA was renegotiated effective October 2012 and expires October of Employees at our other manufacturing facilities are not represented by unions. There have been no significant interruptions or curtailments of operations due to labor disputes since prior to 1968 and we believe that our relations with our employees are satisfactory. 16