FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-11549
BLOUNT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0780521
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4520 Executive Park Drive 36116-1602
Montgomery, Alabama (Zip Code)
(Address of principal executive offices)
(334) 244-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock June 30, 2002
--------------------- -----------------
$.01 Par Value 30,795,882 shares
1
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
------------
Part I. Financial Information
Condensed Consolidated Statements of Operations -
three months and six months ended
June 30, 2002 and 2001 3
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows -
six months ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Changes in
Stockholders' Deficit - three months and six months
ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis 22
Part II. Other Information 28
2
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2002 2001 2002 2001
- ---------------------------------- -------- -------- -------- --------
(Unaudited) (Unaudited)
Sales $123.3 $117.1 $229.9 $236.1
Cost of sales 81.2 79.1 150.9 158.0
- ---------------------------------- ------ ------ ------ ------
Gross profit 42.1 38.0 79.0 78.1
Selling, general and
administrative expenses 23.0 23.5 45.4 47.4
Restructuring expenses (0.1) 5.5 16.2
- ---------------------------------- ------ ------ ------ ------
Income from operations 19.2 14.5 28.1 14.5
Interest expense (18.1) (24.7) (36.3) (50.4)
Interest income 0.2 0.2 0.5 0.5
Other income (expense) (0.5) (0.5) (0.9) (0.5)
- ---------------------------------- ------ ------ ------ ------
Income (loss) from continuing
operations before income taxes 0.8 (10.5) (8.6) (35.9)
Provision (benefit) for income taxes 0.3 (4.5) (2.8) (15.6)
- ---------------------------------- ------ ------ ------ ------
Income (loss) from continuing
operations before extraordinary 0.5 (6.0) (5.8) (20.3)
loss)
Discontinued operations:
Net income from operations, net
of taxes of $0.7 and $1.0 1.2 1.7
- ---------------------------------- ------ ------ ------ ------
Income (loss) before extraordinary
loss 0.5 (4.8) (5.8) (18.6)
Extraordinary loss, net of taxes
of $0.1 (0.2)
- ---------------------------------- ------ ------ ------ ------
Net income (loss) $ 0.5 $ (4.8) $ (6.0) $(18.6)
- ---------------------------------- ====== ====== ====== ======
Basic earnings (loss) per share:
Continuing operations $ 0.02 $(0.19) $(0.18) $(0.65)
Discontinued operations 0.04 0.05
Extraordinary loss (0.01)
- ---------------------------------- ------ ------ ------ ------
Net income (loss) $ 0.02 $(0.15) $(0.19) $(0.60)
- ---------------------------------- ====== ====== ====== ======
Diluted earnings (loss) per share:
Continuing operations $ 0.02 $(0.19) $(0.18) $(0.65)
Discontinued operations 0.04 0.05
Extraordinary loss (0.01)
- ---------------------------------- ------ ------ ------ ------
Net income (loss) $ 0.02 $(0.15) $(0.19) $(0.60)
- ---------------------------------- ====== ====== ====== ======
The accompanying notes are an integral part of these statements.
3
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
June 30, December 31,
2002 2001
---------- ------------
(Unaudited)
ASSETS
- --------------------------------------------------- ---------- ------------
Current assets:
Cash and cash equivalents $ 30.6 $ 47.6
Accounts receivable, net of allowance for
doubtful accounts of $4.1 and $3.5 59.5 57.3
Inventories 68.6 68.1
Deferred income taxes 31.8 22.9
Other current assets 6.9 8.2
- --------------------------------------------------- -------- --------
Total current assets 197.4 204.1
Property, plant and equipment, net of accumulated
depreciation of $180.8 and $185.2 95.7 96.2
Cost in excess of net assets of acquired businesses, net 76.9 76.9
Other assets 63.1 67.6
- --------------------------------------------------- -------- --------
Total Assets $ 433.1 $ 444.8
- --------------------------------------------------- ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------- -------- --------
Current liabilities:
Notes payable and current maturities of long-term debt $ 8.4 $ 8.5
Accounts payable 23.2 19.7
Accrued expenses 77.4 93.2
- --------------------------------------------------- -------- --------
Total current liabilities 109.0 121.4
Long-term debt, exclusive of current maturities 630.0 632.5
Deferred income taxes, exclusive of current portion 2.5 2.8
Other liabilities 47.1 38.0
- --------------------------------------------------- -------- --------
Total liabilities 788.6 794.7
- --------------------------------------------------- -------- --------
Commitments and Contingent Liabilities
- --------------------------------------------------- -------- --------
Stockholders' equity (deficit):
Common stock: par value $.01 per share, 100,000,000
shares authorized, 30,795,882 outstanding 0.3 0.3
Capital in excess of par value of stock 424.3 424.3
Accumulated deficit (786.6) (780.6)
Accumulated other comprehensive income 6.5 6.1
- --------------------------------------------------- -------- --------
Total stockholders' deficit (355.5) (349.9)
- --------------------------------------------------- -------- --------
Total Liabilities and Stockholders' Equity (Deficit) $ 433.1 $ 444.8
- --------------------------------------------------- ======== ========
The accompanying notes are an integral part of these statements.
4
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months
Ended June 30,
----------------------
2002 2001
- --------------------------------------------------------------------------------- ---------- ----------
(Unaudited)
Cash flows from operating activities:
Net loss $ (6.0) $ (18.6)
Adjustments to reconcile net loss to net cash provided by operating activities:
Income from discontinued operations (1.7)
Extraordinary loss 0.2
Depreciation, amortization and other non-cash charges 11.0 12.6
Deferred income taxes (9.1) (8.3)
Loss on disposals of property, plant and equipment 0.9 0.3
Changes in assets and liabilities, net of effects of businesses acquired and sold:
(Increase) decrease in accounts receivable (2.2) 9.8
(Increase) decrease in inventories (0.5) 7.6
(Increase) decrease in other assets 2.5 (8.8)
Increase (decrease) in accounts payable 3.5 (1.3)
Increase (decrease) in accrued expenses (1.6) 13.5
Increase (decrease) in other liabilities 10.0 (4.2)
- --------------------------------------------------------------------------------- ------- -------
Net cash provided by continuing operations 8.7 0.9
Net cash used in discontinued operations (21.5)
- --------------------------------------------------------------------------------- ------- -------
Net cash provided by (used in) operating activities 8.7 (20.6)
- --------------------------------------------------------------------------------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 2.4 2.5
Expenditures from sale of discontinued operations (14.3)
Purchases of property, plant and equipment (9.4) (5.1)
Acquisitions of businesses (1.3)
- --------------------------------------------------------------------------------- ------- -------
Net cash used in continuing operations (21.3) (3.9)
Net cash used in discontinued operations (2.1)
- --------------------------------------------------------------------------------- ------- -------
Net cash used in investing activities (21.3) (6.0)
- --------------------------------------------------------------------------------- ------- -------
Cash flows from financing activities:
Net increase in short-term borrowings 1.0
Issuance of long-term debt 24.1
Reduction of long-term debt (4.2) (3.4)
Capital contribution 7.0
Other (0.2) (2.0)
- --------------------------------------------------------------------------------- ------- -------
Net cash provided by (used in) financing activities (4.4) 26.7
- --------------------------------------------------------------------------------- ------- -------
Net (decrease) increase in cash and cash equivalents (17.0) 0.1
- --------------------------------------------------------------------------------- ------- -------
Cash and cash equivalents at beginning of period 47.6 4.8
- --------------------------------------------------------------------------------- ------- -------
Cash and cash equivalents at end of period $ 30.6 $ 4.9
- --------------------------------------------------------------------------------- ======== =======
The accompanying notes are an integral part of the audited financial
statements.
5
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIT (Unaudited)
(In millions)
Accumulated
Capital Retained Other
Common In Excess Earnings Comprehensive
Stock of Par (Deficit) Income Total
-------- --------- --------- ------------- ---------
THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2002:
Balance, March 31, 2002 $ 0.3 $ 424.3 $ (787.1) $ 6.0 $ (356.5)
Net income (loss) 0.5 0.5
Other comprehensive income (loss), net 0.5 0.5
------
Comprehensive income 1.0
------ ------ ------ ------ ------
Balance, June 30, 2002 $ 0.3 $ 424.3 $ (786.6) $ 6.5 $ (355.5)
====== ====== ====== ====== ======
Balance December 31, 2001 $ 0.3 $ 424.3 $ (780.6) $ 6.1 $ (349.9)
Net income (loss) (6.0) (6.0)
Other comprehensive income (loss), net 0.4 0.4
------
Comprehensive income (loss) (5.6)
Capital contribution
------ ------ ------ ------ ------
Balance June 30, 2002 $ 0.3 $ 424.3 $ (786.6) $ 6.5 $ (355.5)
====== ====== ====== ====== ======
THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2001:
Balance, March 31, 2001 $ 0.3 $ 424.3 $ (750.9) $ 6.2 $(320.1)
Net income (loss) (4.8) (4.8)
Other comprehensive income (loss), net 0.1 0.1
------
Comprehensive income (loss) (4.7)
------ ------ ------ ------ ------
Balance, June 30, 2001 $ 0.3 $ 424.3 $ (755.7) $ 6.3 $(324.8)
====== ====== ====== ====== ======
Balance December 31, 2000 $ 0.3 $ 417.3 $ (737.1) $ 7.3 $(312.2)
Net income (loss) (18.6) (18.6)
Other comprehensive income (loss), net (1.0) (1.0)
------
Comprehensive income (loss) (19.6)
Capital contribution 7.0 7.0
------ ------ ------ ------ ------
Balance June 30, 2001 $ 0.3 $ 424.3 $ (755.7) $ 6.3 $(324.8)
====== ====== ====== ====== ======
The accompanying notes are an integral part of these statements.
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Blount International, Inc. and
Subsidiaries ("the Company") contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position
at June 30, 2002 and the results of operations and cash flows for the periods
ended June 30, 2002 and 2001. These financial statements should be read in
conjunction with the notes to the financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation, including the
effects of the sale of the Sporting Equipment Group ("SEG") on December 7,
2001. The results of operations for SEG have been reclassified to discontinued
operations for 2001 as presented in the condensed consolidated statement of
operations.
The Company's Internet home page is http://www.blount.com.
NOTE 2 During the first quarter of 2001, the Company incurred a restructuring
expense of $16.2 million. The expense includes $0.6 million related to the
closure of a manufacturing facility in Zebulon, North Carolina. The remaining
$15.6 million in restructuring expense relates to the modification of certain
employee benefit plans and a reduction in headcount and expenses principally
at the corporate headquarters. During the first quarter of 2002, the Company
incurred a restructuring expense of $5.6 million and recognized a loss of $0.4
million anticipated on the sale of corporate assets associated with the
Company's announced closure of the corporate headquarters in Montgomery,
Alabama. The restructuring expense is primarily severance costs related to the
corporate staff. In the second quarter the company recorded a ($0.1) million
credit to restructuring expense which was the result of a $0.7 million
reduction in estimated severance costs offset by $0.6 million in transition
expenses that occurred during the second quarter. The closure and transition
of activities are expected to be completed by the end of the third quarter of
2002, with an additional $0.4 million in transition expenditures expected by
that time. An additional loss of $0.6 million was recorded in the second
quarter of 2002 for the sale of a fractional interest in an aircraft.
NOTE 3 Inventories consist of the following (in millions):
June 30, December 31,
2002 2001
--------------------------------- ------------ ------------
Finished goods $ 33.9 $ 32.1
Work in process 10.2 9.8
Raw materials and supplies 24.5 26.2
--------------------------------- ------ ------
$ 68.6 $ 68.1
--------------------------------- ====== ======
7
NOTE 4 Segment information is as follows (in millions):
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2002 2001 2002 2001
- ---------------------------------- -------- -------- -------- --------
Sales:
Outdoor Products $ 90.5 $ 89.3 $170.6 $180.4
Industrial and Power Equipment 32.8 27.8 59.3 55.7
- ---------------------------------- ------ ------ ------ ------
$123.3 $117.1 $229.9 $236.1
- ---------------------------------- ====== ====== ====== ======
Operating income (loss):
Outdoor Products $ 18.9 $ 17.4 $ 35.1 $ 37.0
Industrial and Power Equipment 1.5 (1.0) 1.7 (2.7)
- ---------------------------------- ------ ------ ------ ------
Operating income from segments 20.4 16.4 36.8 34.3
Corporate office expenses (1.3) (1.9) (3.2) (3.6)
Restructuring expenses 0.1 (5.5) (16.2)
- ---------------------------------- ------ ------ ------ ------
Income from operations 19.2 14.5 28.1 14.5
Interest expense (18.1) (24.7) (36.3) (50.4)
Interest income 0.2 0.2 0.5 0.5
Other income (expense), net (0.5) (0.5) (0.9) (0.5)
- ---------------------------------- ------ ------ ------ ------
Income (loss) from continuing
operations before income taxes $ 0.8 $(10.5) $ (8.6) $(35.9)
- ---------------------------------- ====== ====== ====== ======
NOTE 5 Under the provisions of Washington State environmental laws, the
Washington State Department of Ecology ("WDOE") has notified the Company that
it is one of many companies named as a Potentially Liable Party ("PLP") for
the Pasco Sanitary Landfill site, Pasco, Washington ("the Site"). Although the
clean-up costs are believed to be substantial, accurate estimates will not be
available until the environmental studies have been completed at the Site.
However, based upon the total documented volume of waste sent to the Site, the
Company's waste volume compared to that total waste volume should result in
the Company being classified as a "de minimis" PLP. In July 1992, the Company
and thirty-eight other PLPs entered into an Administrative Agreed Order with
WDOE to perform a Phase I Remedial Investigation at the Site. In October 1994,
WDOE issued an administrative Unilateral Enforcement Order to all PLPs to
complete a Phase II Remedial Investigation and Feasibility Study ("RI/FS")
under the Scope of Work established by WDOE. Based on results of the RI/FS,
WDOE has issued a new administrative Unilateral Enforcement Order to all PLPs
to perform several years of cleanup action at the Site. The Company is unable
to determine, at this time, the level of cleanup demands that may be
ultimately placed on it. Management believes that, given the number of PLPs
named with respect to the Site and their financial condition, the Company's
potential response costs associated with the Site will not have a material
adverse effect on consolidated financial condition or operating results.
8
In July 2001, the Company's former Federal Cartridge Company subsidiary
("Federal") received notice from the Region 5 Office of the United States
Environmental Protection Agency ("EPA") that it intended to file an
administrative proceeding for civil penalties in connection with alleged
violations of applicable statutes, rules, and regulations or permit conditions
at Federal's Anoka, Minnesota ammunition manufacturing plant. The alleged
violations include (i) unpermitted treatment of hazardous wastes, (ii)
improper management of hazardous wastes, (iii) permit violations, and (iv)
improper training of certain responsible personnel. Blount retained the
liability for this notice under the terms of the sale of SEG (including
Federal) to Alliant Techsystems, Inc. ("ATK") as discussed in note 9.
To the knowledge of the Company, Federal has corrected the alleged violations.
The Company has tendered this matter for partial indemnification to a prior
owner of Federal. In March 2002, EPA served an administrative complaint and
compliance order on Federal. The complaint proposes civil penalties in the
amount of $258,593. Federal has answered the complaint. By the end of August
2002, Federal and the EPA will file cross motions for a decision on both
liability and penalty issues with the assigned Administrative Law Judge.
Nonetheless, at the current time the Company does not believe payment of the
civil penalties sought by the EPA will have a materially adverse effect on its
consolidated financial condition or operating results.
The Company is a defendant in a number of product liability lawsuits, some of
which seek significant or unspecified damages, involving serious personal
injuries for which there are retentions or deductible amounts under the
Company's insurance policies. In addition, the Company is a party to a number
of other suits arising out of the conduct of its business. While there can be
no assurance as to their ultimate outcome, management does not believe these
lawsuits will have a material adverse effect on consolidated financial
condition or operating results.
NOTE 6 During the six months ended June 30, 2002, net tax payments of $4.9
million were made, while in the six months ended June 30, 2001, net tax
payments of $3.5 million were made. The Company has settled its issues with
the Internal Revenue Service through the 1997 fiscal year with no material
adverse effect. The periods from fiscal 1998 through 2001 are still open for
review. Interest paid during the six months ended June 30, 2002 and 2001 was
$32.4 million and $48.5 million, respectively.
The Company's "Other Income (Expense)" includes the gains and losses on
disposed assets and realized gains and losses on securities held in two rabbi
trusts (see Note 6 of Notes to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001
for information regarding these two trusts). In the first six months of this
year, realized gains on securities in these trusts were $0.1 million in
comparison to $0.2 million in realized losses in the first six months last
year. In the first quarter of 2002, the Company sold a storage warehouse in
Montgomery, Alabama that resulted in a pre-tax gain of $0.2 million and
recorded an anticipated loss on sale of corporate assets of $0.4 million in
conjunction with the closure of the corporate headquarters. In the second
quarter of 2002 the Company sold a fractional interest in an aircraft and
realized a loss of $0.6 million.
9
NOTE 7 For the three months and six months ended June 30, 2002 and 2001, net
income (loss) and shares used in the earnings per share ("EPS") computations
were the following amounts:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2002 2001 2002 2001
- ------------------------------ ---------- ---------- ---------- ----------
Net income (loss)(in millions) $ 0.5 $ (4.8) $ (6.0) $ (18.6)
- ------------------------------ ========== ========== ========== ==========
Shares:
Basic EPS - weighted average
common shares outstanding 30,795,882 30,795,882 30,795,882 30,795,882
Dilutive effect of stock
Options 1,049,871
- ------------------------------ ---------- ---------- ---------- ----------
Diluted EPS 31,845,753 30,795,882 30,795,882 30,795,882
- ------------------------------ ========== ========== ========== ==========
10
NOTE 8 The following consolidating financial information sets forth condensed
consolidating statements of operations, and the balance sheets and cash flows
of Blount International, Inc., Blount, Inc., the Guarantor Subsidiaries and
the Non-Guarantor Subsidiaries (in millions).
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
For The Six Months
Ended June 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 144.2 $ 61.5 $ 80.0 $ (55.8) $ 229.9
Cost of sales 97.8 46.6 61.7 (55.2) 150.9
------- ------- ------- ------- -------
Gross profit 46.4 14.9 18.3 (0.6) 79.0
Selling, general and administrative expenses $ 0.3 26.1 8.8 10.2 45.4
Restructuring expenses 5.5 5.5
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.3) 14.8 6.1 8.1 (0.6) 28.1
Interest expense (10.6) (34.6) (0.3) (0.2) 9.4 (36.3)
Interest income 9.7 0.2 (9.4) 0.5
Other income (expense), net (0.5) (0.4) (0.9)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes (10.9) (10.6) 5.8 7.7 (0.6) (8.6)
Provision (benefit) for income taxes (3.5) (4.1) 2.2 2.6 (2.8)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before extraordinary loss (7.4) (6.5) 3.6 5.1 (0.6) (5.8)
Extraordinary loss (0.2) (0.2)
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (7.4) (6.7) 3.6 5.1 (0.6) (6.0)
Equity in earnings (losses) of
affiliated companies, net 1.4 8.1 (9.5)
------- ------- ------- ------- ------- -------
Net income (loss) $ (6.0) $ 1.4 $ 3.6 $ 5.1 $ (10.1) $ (6.0)
======= ======= ======= ======= ======= =======
11
For The Three Months
Ended June 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 62.7 $ 34.3 $ 38.5 $ (12.2) $ 123.3
Cost of sales 37.6 26.2 29.3 (11.9) 81.2
------- ------- ------- ------- -------
Gross profit 25.1 8.1 9.2 (0.3) 42.1
Selling, general and administrative expenses $ 0.1 13.3 4.5 5.1 23.0
Restructuring expenses (0.1) (0.1)
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.1) 11.9 3.6 4.1 (0.3) 19.2
Interest expense (5.4) (17.2) (0.1) (0.1) 4.7 (18.1)
Interest income 4.8 0.1 (4.7) 0.2
Other income (expense), net (0.3) (0.2) (0.5)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes (5.5) (0.8) 3.5 3.9 (0.3) 0.8
Provision (benefit) for income taxes (1.8) (0.1) 1.3 0.9 0.3
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before extraordinary loss (3.7) (0.7) 2.2 3.0 (0.3) 0.5
Extraordinary loss
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (3.7) (0.7) 2.2 3.0 (0.3) 0.5
Equity in earnings (losses) of
affiliated companies, net 4.2 4.9 (9.1)
------- ------- ------- ------- ------- -------
Net income (loss) $ 0.5 $ 4.2 $ 2.2 $ 3.0 $ (9.4) $ 0.5
======= ======= ======= ======= ======= =======
12
For The Six Months
Ended June 30, 2001
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 149.7 $ 66.4 $ 80.8 $ (60.8) $ 236.1
Cost of sales 105.7 51.3 63.0 (62.0) 158.0
------- ------- ------- ------- -------
Gross profit 44.0 15.1 17.8 1.2 78.1
Selling, general and administrative expenses $ 0.4 26.1 10.6 10.3 47.4
Restructuring expenses 16.2 16.2
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.4) 1.7 4.5 7.5 1.2 14.5
Interest expense (17.5) (49.0) (1.0) (0.2) 17.3 (50.4)
Interest income 0.1 17.3 0.2 0.3 (17.4) 0.5
Other income (expense), net (0.2) (0.3) (0.5)
------- ------- ------- ------- ------- -------
Income (loss) before income taxes (17.8) (30.2) 3.7 7.3 1.1 (35.9)
Provision (benefit) for income taxes (7.8) (12.4) 1.4 3.2 (15.6)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations (10.0) (17.8) 2.3 4.1 1.1 (20.3)
Discontinued operations:
Net income from operations 1.9 (0.2) 1.7
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (10.0) (15.9) 2.1 4.1 1.1 (18.6)
Equity in earnings (losses) of
affiliated companies, net (8.6) 7.3 1.3
------- ------- ------- ------- ------- -------
Net income (loss) $ (18.6) $ (8.6) $ 2.1 $ 4.1 $ 2.4 $ (18.6)
======= ======= ======= ======= ======= =======
13
For The Three Months
Ended June 30, 2001
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 73.5 $ 33.3 $ 38.5 $ (28.2) $ 117.1
Cost of sales 52.1 27.2 29.9 (30.1) 79.1
------- ------- ------- ------- -------
Gross profit 21.4 6.1 8.6 1.9 38.0
Selling, general and administrative expenses $ 0.2 14.2 4.0 5.1 23.5
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.2) 7.2 2.1 3.5 1.9 14.5
Interest expense (8.5) (23.8) (0.4) (0.1) 8.1 (24.7)
Interest income 8.0 0.1 0.2 (8.1) 0.2
Other income (expense), net (0.2) (0.3) (0.5)
------- ------- ------- ------- ------- -------
Income (loss) before income taxes (8.7) (8.8) 1.8 3.3 1.9 (10.5)
Provision (benefit) for income taxes (3.8) (2.9) 0.7 1.5 (4.5)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations (4.9) (5.9) 1.1 1.8 1.9 (6.0)
Discontinued operations:
Net income from operations 1.4 (0.2) 1.2
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (4.9) (4.5) 0.9 1.8 1.9 (4.8)
Equity in earnings (losses) of
affiliated companies, net 0.1 4.6 (4.7)
------- ------- ------- ------- ------- -------
Net income (loss) $ (4.8) $ 0.1 $ 0.9 $ 1.8 $ (2.8) $ (4.8)
======= ======= ======= ======= ======= =======
14
June 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 21.5 $ (1.0) $ 10.1 $ 30.6
Accounts receivable, net 31.4 13.7 14.4 59.5
Intercompany receivables 277.0 37.8 4.7 $(319.5)
Inventories 30.0 21.4 17.2 68.6
Deferred income taxes 31.8 31.8
Other current assets 5.1 0.4 1.4 6.9
------- ------- ------- ------- -------
Total current assets 396.8 72.3 47.8 (319.5) 197.4
Investments in affiliated companies $ (15.8) 199.4 0.3 (183.9)
Property, plant and equipment, net 39.4 27.3 29.0 95.7
Cost in excess of net assets of acquired
businesses, net 30.2 40.2 6.5 76.9
Intercompany notes receivable 5.0 (5.0)
Other assets 59.9 0.1 3.1 63.1
------- ------- ------- ------- ------- -------
Total Assets $ (15.8) $ 725.7 $ 139.9 $ 91.7 $(508.4) $ 433.1
======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 3.4 $ 5.0 $ 8.4
Accounts payable $ 0.1 13.5 $ 4.8 4.8 23.2
Intercompany payables 319.5 $(319.5)
Accrued expenses 64.2 6.1 7.1 77.4
------- ------- ------- ------- ------- -------
Total current liabilities 319.6 81.1 10.9 16.9 (319.5) 109.0
Long-term debt, exclusive of current maturities 17.0 613.0 630.0
Intercompany notes payable 5.0 (5.0)
Deferred income taxes, exclusive of
current portion 0.5 2.0 2.5
Other liabilities 3.1 41.9 1.3 0.8 47.1
------- ------- ------- ------- ------- -------
Total liabilities 339.7 741.5 12.2 19.7 (324.5) 788.6
Stockholders' equity (deficit) (355.5) (15.8) 127.7 72.0 (183.9) (355.5)
------- ------- ------- ------- ------- -------
Total Liabilities and
Stockholders' Equity (Deficit) $ (15.8) $ 725.7 $ 139.9 $ 91.7 $(508.4) $ 433.1
======= ======= ======= ======= ======= =======
15
December 31, 2001
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 43.9 $ (1.1) $ 4.8 $ 47.6
Accounts receivable, net 26.3 14.7 16.3 57.3
Intercompany receivables 282.2 28.6 6.0 $(316.8)
Inventories 29.1 22.7 16.3 68.1
Deferred income taxes 22.9 22.9
Other current assets 6.5 0.4 1.3 8.2
------- ------- ------- ------- -------
Total current assets 410.9 65.3 44.7 (316.8) 204.1
Investments in affiliated companies $ (17.5) 186.9 0.2 (169.6)
Property, plant and equipment, net 42.0 27.4 26.8 96.2
Cost in excess of net assets of acquired
businesses, net 30.2 40.2 6.5 76.9
Intercompany notes receivable 5.0 (5.0)
Other assets 64.0 0.5 3.1 67.6
------- ------- ------- ------- ------- -------
Total Assets $ (17.5) $ 734.0 $ 133.4 $ 86.3 $(491.4) $ 444.8
======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 3.4 $ 5.1 $ 8.5
Accounts payable $ 0.1 10.3 $ 4.9 4.4 19.7
Intercompany payables 316.8 $(316.8)
Accrued expenses 78.5 5.9 8.8 93.2
------- ------- ------- ------- ------- -------
Total current liabilities 316.9 92.2 10.8 18.3 (316.8) 121.4
Long-term debt, exclusive of current maturities 15.5 617.0 632.5
Intercompany notes payable 5.0 (5.0)
Deferred income taxes, exclusive of
current portion 0.9 1.9 2.8
Other liabilities 36.4 0.9 0.7 38.0
------- ------- ------- ------- ------- -------
Total liabilities 332.4 751.5 11.7 20.9 (321.8) 794.7
Stockholders' equity (deficit) (349.9) (17.5) 121.7 65.4 (169.6) (349.9)
------- ------- ------- ------- ------- -------
Total Liabilities and
Stockholders' Equity (Deficit) $ (17.5) $ 734.0 $ 133.4 $ 86.3 $(491.4) $ 444.8
======= ======= ======= ======= ======= =======
16
For The Six Months
Ended June 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
Net cash provided by (used in) continuing
operations $ (2.7) $ (2.8) $ 3.1 $ 11.1 $ 0.0 $ 8.7
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 2.4 2.4
Proceeds (expenses) from sale of discontinued
operations (14.3) (14.3)
Purchases of property, plant and equipment (3.4) (1.5) (4.5) (9.4)
------- ------- ------- ------- ------- -------
Net cash (used in) investing activities (15.3) (1.5) (4.5) (21.3)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Reduction of long-term debt (4.2) (4.2)
Dividends paid
Advances from (to) affiliated companies 2.7 (2.2) (0.5)
Other (0.2) (0.2)
------- ------- ------- -------- ------- -------
Net cash provided by (used in) financing
activities 2.7 (6.6) (0.5) (0.0) 0.0 (4.4)
------- ------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents (24.7) 1.1 6.6 (17.0)
Cash and cash equivalents at beginning of period 44.0 (1.1) 4.7 47.6
------- ------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 0.0 $ 19.3 $ (0.0) $ 11.3 $ 0.0 $ 30.6
======= ======= ======= ======= ======= =======
17
For The Six Months
Ended June 30, 2001
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
Net cash provided by (used in) continuing
operations $ (8.9) $ (16.4) $ 25.0 $ 3.7 $ (2.5) $ 0.9
Net cash provided by (used in) discontinued
operations (0.3) (21.2) (21.5)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities (8.9) (16.7) 3.8 3.7 (2.5) (20.6)
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 2.4 0.1 2.5
Purchases of property, plant and equipment (1.0) (1.8) (2.3) (5.1)
Acquisitions of businesses (1.3) (1.3)
------- ------- ------- ------- ------- -------
Net cash used in continuing operations (0.1) (1.8) (2.2) (3.9)
Net cash used in discontinued operations (1.0) (1.1) (2.1)
------- ------- ------- ------- ------- -------
Net cash used in investing activities (0.9) (2.9) (2.2) (6.0)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Net increase (reduction) in short-term
borrowings 0.1 0.9 1.0
Issuance of long-term debt 13.0 11.1 24.1
Reduction of long-term debt (3.4) (3.4)
Dividends paid (2.5) 2.5
Capital contributions 7.0 20.0 (20.0) 7.0
Advances from (to) affiliated companies (11.1) (8.4) (0.5) 20.0
Other (2.0) (2.0)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities 8.9 17.4 (0.5) (1.6) 2.5 26.7
------- ------- ------- ------- ------- -------
Net decrease in cash and cash equivalents (0.2) 0.4 (0.1) 0.1
Cash and cash equivalents at beginning of period 2.0 (0.8) 3.6 4.8
------- ------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 0.0 $ 1.8 $ (0.4) $ 3.5 $ 0.0 $ 4.9
======= ======= ======= ======= ======= =======
18
NOTE 9 In September 2000, the Company purchased the assets of Fabtek, Inc., a
manufacturer of timber harvesting equipment. In October 2000, the Company
purchased the assets of Windsor Forestry Tools Inc., a manufacturer of cutting
chain and guide bars for chain saws and timber harvesting equipment from
Snap-on Incorporated. In October 2000, the Company purchased all the
outstanding stock of Estate Cartridge, Inc., a manufacturer of sporting
shotshell ammunition that was later sold as part of the Company's sale of its
Sporting Equipment Group to Alliant Techsystems, Inc. The aggregate purchase
price of these acquisitions was $41.3 million and the combined sales and
operating loss for the last twelve months prior to acquisition were $47.1
million and $0.6 million, respectively. Assuming these transactions were made
at January 1, 2000, the consolidated pro forma results for 2000 would not be
materially different from reported results.
On December 7, 2001, the Company sold its Sporting Equipment Group ("SEG") to
Alliant Techsystems, Inc. ("ATK"). SEG was comprised of the then wholly owned
subsidiaries of Federal Cartridge Company, Estate Cartridge, Inc., Simmons
Outdoor Corporation, and Ammunition Accessories, Inc. The latter was formed on
December 4, 2001 to facilitate the sale of SEG. The Company contributed
certain assets and liabilities of its then Sporting Equipment Division to
Ammunition Accessories, Inc. in exchange for all the authorized stock of
Ammunition Accessories, Inc. In exchange for the shares of these four
subsidiaries, the Company received approximately 3 million shares of ATK stock
and $10,000 in cash for the sale of SEG. The Company subsequently sold the ATK
stock and received gross proceeds of $236.7 million. Net proceeds of
approximately $170.5 million are anticipated after the payment of $10.1
million in underwriting fees to Lehman Brothers, Inc. and CS First Boston, of
which ATK reimbursed $5.0 million, $36.1 million in other transaction related
costs and income taxes and the establishment of $25.0 million escrow amount,
which is included in Other Assets, as required by the Stock Purchase Agreement
between the Company and ATK. As of June 30, 2002, the outstanding and unpaid
transaction fees included a purchase price adjustment owed to ATK based upon
the net book value of assets of SEG as of December 7, 2001, as required by the
Stock Purchase Agreement. The final purchase price adjustment will be
determined by the review of an independent accounting firm during the third
quarter of this year under the binding arbitration procedure established in
the stock purchase agreement. The outcome of this arbitration if ruled
unfavorable to the Company could be material to the Company's financial
statements. The results of operations for SEG have been reclassified to
discontinued operations for 2001 as presented in the condensed consolidated
statement of operations. The condensed consolidated balance sheet for the
quarter ended June 30, 2002 reflects the sale of SEG on December 7, 2001.
NOTE 10 On January 31, 2001, the Company amended the terms of its credit
facilities related to $400 million in term loans. The amendment was entered
into, in part, to avoid a possible default under the covenants for the
leverage and interest coverage ratios of the credit facilities. The amendment
eased the financial covenants through March 31, 2002, increased the interest
rate on outstanding amounts under the credit facilities until more favorable
financial ratios are achieved, and required an amendment fee. The amendment
also required an infusion of $20 million in the form of equity capital or
mezzanine financing. On March 2, 2001, an affiliate of Lehman Brothers, Inc.,
the Company's principal shareholder, invested $20 million in the Company in
the form of a convertible preferred equivalent security, together with
warrants for 1,000,000 shares of Blount common stock (or approximately 3% of
the outstanding shares of common stock of the Company) that are exercisable
immediately at a price of $0.01 a share. The security can be converted into
convertible preferred stock at the option of the holder as a result of the
Company's stockholders passing an
19
amendment to the Certificate of Incorporation authorizing the issuance of
preferred stock at the Annual Meeting of Stockholders held on April 19, 2001.
The Company has recorded the fair value of the warrants at $7 million as a
credit to additional paid-in capital and a debt discount to the $20 million
security.
On December 7, 2001, the Company amended the terms of its credit agreement to
incorporate the sale of SEG to ATK. The amendment addressed, among other
things, the SEG sale, revisions to the consolidated leverage and interest
coverage ratios, a reduction in the revolving credit facility to $75.0
million, and certain prepayment and amendment fees. The agreement also cured
any event of default under the credit agreement that had been communicated to
the lenders on October 31, 2001.
During 2001, the Company would not have been in compliance with certain of its
debt covenants except for the fact that, in connection with the sale of SEG,
the Company and its lenders amended the covenants; as a result, the Company
was in compliance with all debt covenants as of and for the year ended
December 31, 2001 and the second quarter ended June 30, 2002. While there can
be no assurance, management believes the Company will comply with all debt
covenants during 2002. Should the Company not comply with the covenants during
2002, additional significant actions will be required. These actions may
include, among others, attempting to renegotiate its debt facilities, sales of
assets, additional restructurings and reductions in capital expenditures.
NOTE 11 The Company adopted the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets," effective January 1, 2002. The provisions of SFAS
No. 142 prohibit the amortization of goodwill and indefinite-lived intangible
assets, require that goodwill and indefinite-lived intangible assets be tested
at least annually for impairment, require reporting units be identified for
the purpose of assessing potential future impairments of goodwill, and remove
the forty-year limitation on the amortization period of intangible assets that
have finite lives.
The Company completed the transitional impairment test for goodwill during the
second quarter. The Company tested four reporting entities for impairment and
compared the carrying value of each unit to their respective fair values as
determined by using discounted cash flow projections. The fair market value
exceeded the carrying value in all four cases and thus the Company determined
that no impairment of goodwill existed as of January 1, 2002. The Company will
begin its annual testing of goodwill for impairment in the fourth quarter of
2002, and plans to continue its annual testing in the fourth quarter each
year.
As a result of the non-amortization provisions of SFAS No. 142, the Company
will no longer record approximately $3.1 million of annual amortization
relating to goodwill. The gross carrying value of goodwill at adoption was
$111.6 million and accumulated amortization was $34.7 million. The $76.9
million of unamortized goodwill consists of $28.0 million within the
Industrial and Power Equipment segment and $48.9 million in the Outdoor
Products segment. The following table presents prior year earnings and
earnings per share as if the non-amortization provisions of SFAS No. 142 had
been applied in the prior year:
20
Three Months Six Months
Ended Ended
(Amounts in millions, except per share data) June 30, 2001 June 30, 2001
- --------------------------------------------------------- ------------- -------------
Net income (loss):
Reported net income (loss) from continuing operations $ (6.0) $ (20.3)
Goodwill amortization (0.7) (1.5)
- --------------------------------------------------------- ------- -------
Adjusted net income (loss) from continuing operations $ (5.3) $ (18.8)
- --------------------------------------------------------- ------- =======
Basic earnings (loss) per share from continuing operations:
Reported basic earnings (loss) per share $ (.19) $ (0.65)
Goodwill amortization (.02) (0.05)
- --------------------------------------------------------- ------- -------
Adjusted basic earnings (loss) per share from continuing
operations $ (.17) $ (0.60)
- --------------------------------------------------------- ======= =======
Diluted earnings (loss) per share from continuing operations:
Reported diluted earnings (loss) per share $ (.19) $ (0.65)
Goodwill amortization (.02) (0.05)
- ---------------------------------------------------------- ------- -------
Adjusted diluted earnings (loss) per share from continuing
operations $ (.17) $ (0.60)
- ---------------------------------------------------------- ======= =======
Upon adoption of SFAS 142, the gross carrying value of indefinite-lived
intangible assets excluding goodwill was $0.9 million and was fully amortized.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development, and/or normal use of the
asset.
The Company is required and plans to adopt the provisions of SFAS No. 143
January 1, 2003. Upon initial application of the provisions of SFAS No. 143,
entities are required to recognize a liability for any existing asset
retirement obligations adjusted for cumulative accretion to the date of
adoption of this Statement, an asset retirement cost capitalized as an
increase to the carrying amount of the associated long-lived asset, and
accumulated deprecation on that capitalized cost. The cumulative effect, if
any, of initially applying this Statement will be recognized as a change in
accounting principle. The Company has not yet assessed the impact of this
statement on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for assets to be
disposed of and broadens the presentation of discontinued operations to
include more disposal transactions. The provisions of this Statement, which
were adopted by the Company January 1, 2002, have not had a material impact on
its financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement, which updates, clarifies and simplifies existing accounting
21
pronouncements, addresses the reporting of debt extinguishments and accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Company is required and plans to adopt the
provisions of SFAS No. 145 by January 1, 2003. The Company has not yet
assessed the impact of this Statement on its financial statements.
In July 2002 the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring.)." This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, and concludes
that an entity's commitment to an exit plan does not by itself create a
present obligation that meets the definition of a liability. This Statement
also establishes that fair provisions of this Statement are effective for exit
or disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Company has not yet assessed the impact of the
Statement on its financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Results
Sales for the three months and six months ended June 30, 2002 were $123.3
million and $229.9 million compared to $117.1 million and $236.1 million for
the comparable period last year. The increase in revenue from last year for
the second quarter was due primarily to an increase in sales within our
Forestry and Industrial Equipment Division. The decrease in sales for the
first half of the year is due to reduced Outdoor Products segment sales in the
first quarter resulting from a lower demand for chain products and lawn
mowers.
Net income in the second quarter of 2002 was $0.5 million ($.02 per share)
compared to a net loss of $4.8 million ($.15 per share) in the second quarter
of 2001. The net loss in last year's second quarter includes $1.2 million
($.04 per share) net income from the Sporting Equipment Group, which was sold
in December 2001. The increase in second quarter net income from last year is
primarily due to the improved operating results in both segments and lower
interest expense. This year's second quarter results include a net loss of
$0.4 million ($.01 per share) related to the disposal of corporate assets.
Last year, second quarter results include $0.7 million ($.02 per share)
goodwill amortization that was not incurred in 2002 due to the company's
adoption of SFAS 142 "Goodwill and other Intangible Assets" as of January 1,
2002.
For the six months ended June 30, 2002, net loss was $6.0 million ($.19 per
share) compared to a net loss of $18.6 million ($.60 per share) last year. Net
loss from continuing operations before extraordinary loss in the first half of
the year was $5.8 million ($.18 per share) compared to $20.3 million ($.65 per
share) last year. The improvement in net loss is due to lower restructuring
costs, lower interest expense and improved results within the Industrial and
Power Equipment segment. The 2001 results include goodwill amortization of
$1.5 million ($.05 per share). The 2002 restructuring expense is related to
the relocation of the corporate offices to Portland, Oregon. The restructuring
expense in 2001 relates to headcount reductions and the closure of a facility
within the Industrial Power & Equipment segment. In the first quarter of 2002
an extraordinary loss of $0.2 million ($.01 per share) was recorded for the
early retirement of debt. Net income from the Sporting Equipment Group was
$1.7 million ($.05 per share) in the first half of 2001. The company's year to
date effective tax rate in 2002 is 32.5% compared to 43.6% last year. The
22
decrease in tax rate is the result of a higher ratio of non-deductible
expenses to pre-tax loss in 2002 compared to such ratio last year. The
principal reasons for these results and the status of the company's financial
conditions are set forth below and should be read in conjunction with the
company's financial Annual Report on form 10-K for the year ended December 31,
2001.
Sales for the Outdoor Products segment for the second quarter and first six
months of 2002 were $90.5 million and $170.6 million compared to $89.3 million
and $180.4 million for the same periods in 2001. Operating income increased to
$18.9 million in the second quarter of 2002 compared to $17.4 million in 2001.
For the six months ended June 30, 2002, segment operating income declined to
$35.1 million from $37.0 million last year.
Sales by the segment's principal product groups are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- --------------------------
% Increase % Increase
(Decrease) (Decrease)
2002 2001 in 2002 2002 2001 in 2002
- --------------------------- ------ ------ ---------- ------ ------ ----------
Chain saw components $ 55.5 $ 57.0 (2.6) % $106.0 $118.3 (10.4) %
Lawn mowers and accessories 23.3 21.9 6.4 41.4 40.9 1.2
Other 11.7 10.4 12.5 23.2 21.2 9.4
- --------------------------- ------ ------ ------ ------
Total segment sales $ 90.5 $ 89.3 1.3 % $170.6 $180.4 (5.4) %
- --------------------------- ====== ====== ====== ======
The decrease in chain saw components in the second quarter and first half of
the year is in part due to weaker demand from original equipment manufacturers
(OEMs) resulting from a reduction in inventories from year-ago levels and
selective competitive price discounting in response to the strength of the
United States dollar. Lawn mower unit sales increased modestly in the second
quarter as did replacement parts. Other sales have increased primarily through
the successful introduction of a new gas saw for our Industrial Cutting
Systems ("ICS") business.
The increased segment sales level, combined with a favorable sales mix,
contributed to the improved segment profitability in the second quarter. The
impact of $0.4 million from the adoption of SFAS 142 also had a favorable
impact on second quarter profit.
The Company's Industrial and Power Equipment segment is a cyclical, capital
goods business whose results are closely linked to the strength of the
forestry industry in general, particularly in the Company's most important
market (the Southeastern United States). Throughout 2001 and into 2002, the
forestry industry continued to operate in a cyclical downturn environment that
resulted in weak demand for new equipment. Although still below historic
levels, sales of the company's timber harvesting and loading equipment
increased in the second quarter of 2002 by 25.7% from a year ago. The increase
in part was due to the introduction of a new product line during the quarter
as well as increased unit shipments on existing products. Sales of timber
harvesting and loading equipment for the first six months of the year have
increased 11.6% from last year. Sales of gear components and rotation bearings
continue to be impacted by a weakness in demand, particularly in the utilities
and construction markets that the segment serves. Sales by the segment's
principal product groups were as follows (in millions):
23
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
% Increase % Increase
(Decrease) (Decrease)
2002 2001 in 2002 2002 2001 in 2002
- --------------------------- ------ ------ ---------- ------ ------ ----------
Timber harvesting and loading
equipment $ 28.4 $ 22.6 25.7 % $ 50.9 $ 45.6 11.6 %
Gear components and rotation
bearings 4.4 5.2 (15.4) 8.4 10.1 (16.8)
- --------------------------- ------ ------ ------ ------
Total segment sales $ 32.8 $ 27.8 17.9 % $ 59.3 $ 55.7 6.5 %
- --------------------------- ====== ====== ====== ======
The segment's operating income in the second quarter and first six months of
2002 was $1.5 million and $1.7 million compared to losses of $1.0 million and
$2.7 million in the comparable periods of 2001. The improvement in
year-over-year profitability reflects the impact of increased sales as well as
the actions implemented in 2001 to reduce costs. These actions included the
permanent closure of a production facility and a significant reduction in
segment headcount. The 2001 second quarter segment's operating income included
$0.3 million of goodwill amortization.
The Company's total backlog decreased to $48.4 million at June 30, 2002 from
$48.9 million at December 31, 2001 and from $55.6 million at June 30, 2001 as
follows (in millions):
Backlog
----------------------------------------
June 30, December 31, June 30,
2002 2001 2001
- ------------------------------------ ------------ ------------ ------------
Outdoor Products $ 33.1 $ 36.0 $ 40.2
Industrial and Power Equipment 15.3 12.9 15.4
- ------------------------------------ ------ ------ ------
$ 48.4 $ 48.9 $ 55.6
- ------------------------------------ ====== ====== ======
The backlog at Outdoor Products is lower than June 2001 which included the
carryover effect of storm activity in Europe. A more normal comparison of
backlog in this segment would be June 1999 and 1998 when backlog stood at
$29.9 million and $26.9 million.
Net income from discontinued operations in the second quarter of 2001 was $1.2
million and the first six months of 2001 was $1.7 million. These were the
results of the Company's Sporting Equipment segment that was sold in December
2001. Corresponding sales for this segment were $55.2 million and $110.7
million.
Financial Condition, Liquidity and Capital Resources
On August 19, 1999, Blount International, Inc. merged with Red Dog
Acquisition, Corp., a wholly-owned subsidiary of Lehman Brothers Partners II,
L.P. The merger was completed pursuant to an Agreement and Plan of Merger and
Recapitalization dated as of April 19, 1999. At June 30, 2002, as a result of
the merger and recapitalization transactions, the Company had significant
amounts of debt, with interest payments on outstanding notes and interest and
principal payments under a secured credit agreement representing significant
24
obligations for the Company. The notes require semi-annual interest payments
and the term loan facilities under the new credit facilities require payments
of principal of $3.4 million annually through 2004 and $136.0 million in 2005.
Interest on the term loan facilities and amounts outstanding under the
revolving credit facility are payable in arrears according to varying interest
periods.
The Company's remaining liquidity needs relate to working capital needs,
capital expenditures, and potential acquisitions.
The Company intends to fund working capital, capital expenditures, debt
service requirements, and the payment of transaction expenses related to the
sale of the Sporting Equipment Group through cash flows generated from
operations, the revolving credit facility and cash on hand. At June 30, 2002,
the Company had no outstanding borrowings under its revolving credit facility,
which has $75.0 million in availability. The Company also had $30.6 million in
cash on hand at the end of the second quarter, which will be utilized
primarily for the payment of SEG transaction expenses and interest payments in
the third quarter. Payment of certain of these expenses will be made after the
expected completion of a review of the SEG balance sheet by an independent
accounting firm pursuant to the binding arbitration procedure applicable to
the sale of SEG. Letters of credit issued under the revolving credit facility
that reduce the amount available under the facility totaled $10.4 million at
June 30, 2002. The revolving credit facility matures August 19, 2004.
Certain customers of the Company's Outdoor Products and Industrial and Power
Equipment segments finance their purchases through third party finance
companies. Under the terms of these financing arrangements, the Company may be
required to repurchase certain equipment from the finance companies. The
aggregate repurchase amount included in the agreements outstanding as of June
30, 2002 is $3.2 million. These arrangements have not had a material adverse
effect on the Company's operating results in the past. The Company does not
expect to incur any material charges related to these agreements in future
periods, since any repurchase of equipment will likely be resold.
The impact on earnings of the continued downturn in the forestry equipment
markets raised questions as to whether the Company would meet the covenants
for leverage and interest coverage ratios of the Credit Agreement for December
31, 2000 and for subsequent quarters. As a result, the Company sought and
received (see Note 12 of Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2000) from its lenders an amendment to its credit agreement. In connection
with the amendment, the Company's principal shareholder, through an affiliate
of Lehman Brothers Merchant Banking Partners II, L.P., invested $20 million in
the form of a preferred equivalent security on March 2, 2001 (see Note 10 of
Notes to Consolidated Financial Statements).
On October 30, 2001, the Company notified the administrative agent for the
Company's $500 million senior credit facility that it failed to meet certain
financial covenants for the third quarter. Failure to meet these covenants is
considered an event of default under the terms of the credit agreement. The
Company entered into an agreement with its creditors through January 31, 2002
that allowed the Company to complete the sale of its Sporting Equipment Group
and during the agreement term the lenders agreed to forbear from exercising
their rights and remedies arising from the event of default. The Company
completed the sale of SEG on December 7, 2001. In conjunction with this sale,
the Company and its lenders amended the terms of the senior credit facility.
Among other things, the amendment adjusted the financial coverage ratio
covenants to reflect the sale of SEG and cured any event of default under the
credit agreement that had been communicated to the lenders on October 30,
2001. As of June 30, 2002, the Company is in compliance with all covenants or
25
other requirements set forth in its credit agreement or indentures. Further,
the Company does not have any rating triggers that would accelerate repayment
of outstanding debt.
Management believes that cash generated from operations, together with amounts
available under the revolving credit facility and amounts available following
the sale of the Sporting Equipment Group, will be sufficient to meet the
Company's working capital, capital expenditure and other cash needs in the
foreseeable future. There can be no assurance, however, that this will be the
case. The Company may also consider other options available to it in
connection with future liquidity needs.
The Company has senior notes outstanding in the principal amount of $150
million, which mature in 2005. The Company also has senior subordinated notes
outstanding in the principal amount of $325 million, which mature in 2009, and
senior term loans outstanding in the principal amount of $142.0 million, which
mature at various dates through 2005. See Note 3 of Notes to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001 for the terms and conditions of the senior
notes, senior subordinated notes, and senior term loans.
Cash balances at June 30, 2002 were $30.6 million compared to $47.6 million on
December 31, 2001. Cash generated from operating activities for the first six
months of 2002 was $8.7 million in comparison to a use of cash of $20.6
million for the same period last year. The increase in cash flow in the first
half of the year is due in part to the sale of the SEG in December 2001 which
used $21.5 million of cash in the first half of 2001. Additionally, the lower
debt levels in the first half of 2002, due to the reduction in debt from the
proceeds of the sale of SEG, resulted in $16.0 million in lower cash interest
payments from the prior year first half. Working capital excluding cash and
equivalents increased to $57.8 million in the first half from $35.1 million at
December 31, 2001. The increase in working capital is due to an increase in
deferred taxes of $8.9 million and a $15.8 million decrease in accrued
expenses which is primarily the result of the payment of SEG transaction
expenses.
Accounts receivable at June 30, 2002 and December 31, 2001 and sales by
segment for the second quarter of 2002 compared to the fourth quarter of 2001
were as follows (in millions):
June 30, December 31, Increase
2002 2001 (Decrease)
- ------------------------------------ ------------ ------------ ------------
Accounts Receivable:
Outdoor Products $ 41.1 $ 39.2 $ 1.9
Industrial and Power Equipment 17.0 16.6 0.4
- ------------------------------------ ------ ------ ------
Total segment receivables $ 58.1 $ 55.8 $ 2.3
- ------------------------------------ ====== ====== ======
Three Months Ended
June 30, December 31, Increase
2002 2001 (Decrease)
- ------------------------------------ ------------- ------------ ------------
Sales:
Outdoor Products $ 90.5 $ 85.7 $ 4.8
Industrial and Power Equipment 32.8 33.3 (0.5)
- ------------------------------------ ------ ------ ------
Total segment sales $123.3 $119.0 $ 4.3
- ------------------------------------ ====== ====== ======
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Net cash used for investing activities for the first six months of 2002 was
$21.3 million. Included in this amount is $14.3 million related to the payment
of SEG transaction expenses. Purchases for property, plant and equipment in
the current year are $9.4 million. Included in this amount was the purchase of
certain equipment from a company that was exiting one of its businesses. In
the first half of this year, the Company generated $2.4 million from the sale
of assets, including the sale of a storage warehouse and a fractional interest
in an aircraft.
Cash used in financing activities for the first six months of 2002 was $4.4
million, which was primarily due to a scheduled debt repayment as well as
applying the net proceeds of certain asset sales to a reduction in the term
loan. The Company expects the cash flows from operations and amounts available
under its revolving credit agreements will be sufficient to cover any
additional increases in working capital, including the final SEG transaction
payments and purchase price adjustments.
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The Company is substantially leveraged which may adversely affect its
operations. This substantial leverage could have important consequences for
the Company, including the following:
1. the ability to obtain additional financing for working capital, capital
expenditures or other purposes may be impaired or any such financing may not
be available on favorable terms;
2. a substantial portion of cash flows available from operations are required
to be dedicated to the payment of principal and interest expense, which will
reduce the funds that would otherwise be available for operations and future
business opportunities;
3. a substantial decrease in net income and cash flows or an increase in
expenses may make it difficult to meet debt service requirements or force the
Company to modify operations; and
4. substantial leverage may make the Company more vulnerable to economic
downturns and competitive pressure.
Forward Looking Statements
Forward-looking statements in this release, including without limitation the
Company's "expectations," "beliefs," "indications," "estimates," and their
variants, as defined by the Private Securities Litigation Reform Law of 1995,
involve certain risks and actual results subsequent to the date of this
announcement may differ materially.
PART II Other Information
Item 6(a) Exhibits
** 10(v) Amendment to employment agreement between Blount International, Inc.
and Harold E. Layman dated July 2, 2002.
** 10(w) Amendment to employment agreement between Blount International, Inc.
and James S. Osterman dated March 15, 2002 and executed on
July 3, 2002.
** 99(.1) Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by Harold E. Layman, Chief Executive Officer.
** 99(.2) Certification pursuant to section 906 of the Sarbanes-Oxley Act by
Calvin E. Jenness, Corporate Controller and Treasurer.
** Filed electronically herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLOUNT INTERNATIONAL, INC.
- ----------------------------------
Registrant
Date: August 14, 2002 /s/ Calvin E. Jenness
---------------------------------------
Calvin E. Jenness
Vice President, Corporate
Controller and Treasurer
Chief Accounting Officer
29