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 September 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.)
4909 S.E. International Way 97222-4679
Portland, Oregon (Zip Code)
(Address of principal executive offices)
(503) 653-8881
(Registrant's telephone number, including area code)
Former Address:
4520 Executive Park Drive
Montgomery, Alabama
(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 September 30, 2002
--------------------- -----------------
$.01 Par Value 30,795,882 shares
Page 1
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
------------
Part I Financial Information
Item 1 - Financial Statements
Condensed Consolidated Statements of Operations -
three months and nine months ended
September 30, 2002 and 2001 3
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2002 and 2001 5
Condensed Consolidated Statements of Changes in
Stockholders' Deficit - three months and nine months
ended September 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis 23
Item 4 - Controls and Procedures 29
Part II
Item 6 - Exhibits and Reports on Form 8 K
Signature
Certifications
Page 2
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
- ---------------------------------- -------- -------- -------- --------
(Unaudited) (Unaudited)
Sales $121.5 $113.6 $351.4 $349.7
Cost of sales 80.7 75.3 231.6 233.3
- ---------------------------------- ------ ------ ------ ------
Gross profit 40.8 38.3 119.8 116.4
Selling, general and
administrative expenses 23.1 24.3 68.5 71.7
Restructuring expenses 0.3 5.8 16.2
- ---------------------------------- ------ ------ ------ ------
Income from operations 17.4 14.0 45.5 28.5
Interest expense (18.0) (24.0) (54.3) (74.3)
Interest income 0.2 0.2 0.7 0.8
Other income (expense) (1.3) 0.2 (2.2) (0.4)
- ---------------------------------- ------ ------ ------ ------
Loss from continuing
operations before income taxes (1.7) (9.6) (10.3) (45.4)
Benefit for income taxes (1.3) (2.8) (16.9)
- ---------------------------------- ------ ------ ------ ------
Loss from continuing
operations before extraordinary (1.7) (8.3) (7.5) (28.5)
loss
Discontinued operations:
Net income from operations, net
of taxes of $0.7 and $2.3 2.1 3.8
Loss on disposal, net of benefit
for income taxes of $0.4 (1.7) (1.7)
- ---------------------------------- ------ ------ ------ ------
Loss before extraordinary
loss (3.4) (6.2) (9.2) (24.7)
Extraordinary loss, net of taxes
of $0.1 and $0.1 (0.1) (0.3)
- ---------------------------------- ------ ------ ------ ------
Net loss $ (3.5) $ (6.2) $ (9.5) $(24.7)
- ---------------------------------- ====== ====== ====== ======
Basic earnings (loss) per share:
Continuing operations $(0.05) $(0.27) $(0.24) $(0.92)
Discontinued operations (0.06) 0.07 (0.06) 0.12
Extraordinary loss (0.01)
- ---------------------------------- ------ ------ ------ ------
Net loss $(0.11) $(0.20) $(0.31) $(0.80)
- ---------------------------------- ====== ====== ====== ======
Diluted earnings (loss) per share:
Continuing operations $(0.05) $(0.27) $(0.24) $(0.92)
Discontinued operations (0.06) 0.07 (0.06) 0.12
Extraordinary loss (0.01)
- ---------------------------------- ------ ------ ------ ------
Net loss $(0.11) $(0.20) $(0.31) $(0.80)
- ---------------------------------- ====== ====== ====== ======
The accompanying notes are an integral part of these statements.
Page 3
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
- --------------------------------------------------- ------------- ------------
Current assets:
Cash and cash equivalents $ 20.1 $ 47.6
Accounts receivable, net of allowance for
doubtful accounts of $4.1 and $3.5 58.4 57.3
Inventories 68.0 68.1
Deferred income taxes 34.1 22.9
Other current assets 8.3 8.2
- --------------------------------------------------- -------- --------
Total current assets 188.9 204.1
Property, plant and equipment, net of accumulated
depreciation of $177.4 and $185.2 89.3 96.2
Cost in excess of net assets of acquired businesses, net 76.9 76.9
Other assets 58.4 67.6
- --------------------------------------------------- -------- --------
Total Assets $ 413.5 $ 444.8
- --------------------------------------------------- ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------- -------- --------
Current liabilities:
Notes payable and current maturities of long-term debt $ 8.4 $ 8.5
Accounts payable 22.4 19.7
Accrued expenses 70.3 93.2
- --------------------------------------------------- -------- --------
Total current liabilities 101.1 121.4
Long-term debt, exclusive of current maturities 624.1 632.5
Deferred income taxes, exclusive of current portion 2.4 2.8
Other liabilities 45.0 38.0
- --------------------------------------------------- -------- --------
Total liabilities 772.6 794.7
- --------------------------------------------------- -------- --------
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 (790.2) (780.6)
Accumulated other comprehensive income 6.5 6.1
- --------------------------------------------------- -------- --------
Total stockholders' deficit (359.1) (349.9)
- --------------------------------------------------- -------- --------
Total Liabilities and Stockholders' Equity (Deficit) $ 413.5 $ 444.8
- --------------------------------------------------- ======== ========
The accompanying notes are an integral part of these statements.
Page 4
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months
Ended September 30,
----------------------
2002 2001
- --------------------------------------------------------------------------------- ---------- ----------
(Unaudited)
Cash flows from operating activities:
Net loss $ (9.5) $(24.7)
Adjustments to reconcile net loss to net cash provided by operating activities:
Income from discontinued operations 1.7 (3.8)
Extraordinary loss 0.3
Depreciation, amortization and other non-cash charges 16.3 21.4
Deferred income taxes (10.9) (15.2)
Loss on disposals of property, plant and equipment 1.6 0.2
Changes in assets and liabilities, net of effects of businesses acquired and sold:
(Increase) decrease in accounts receivable (1.1) 10.3
Decrease in inventories 0.1 15.2
(Increase) decrease in other assets 4.5 2.8
Increase (decrease) in accounts payable 2.7 (3.3)
Decrease in accrued expenses (11.9) (3.8)
Increase (decrease) in other liabilities 7.9 (0.8)
- --------------------------------------------------------------------------------- ------- -------
Net cash provided by continuing operations 1.7 (1.7)
Net cash used in discontinued operations (11.3)
- --------------------------------------------------------------------------------- ------- -------
Net cash provided by (used in) operating activities 1.7 (13.0)
- --------------------------------------------------------------------------------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 8.3 2.6
Expenditures from sale of discontinued operations (14.5)
Purchases of property, plant and equipment (11.8) (8.2)
Acquisitions of businesses (1.3)
- --------------------------------------------------------------------------------- ------- -------
Net cash used in continuing operations (18.0) (6.9)
Net cash used in discontinued operations (2.7)
- --------------------------------------------------------------------------------- ------- -------
Net cash used in investing activities (18.0) (9.6)
- --------------------------------------------------------------------------------- ------- -------
Cash flows from financing activities:
Issuance of long-term debt 52.9
Reduction of long-term debt (10.9) (4.3)
Capital contribution 7.0
Other (0.3) (2.8)
- --------------------------------------------------------------------------------- ------- -------
Net cash provided by (used in) financing activities (11.2) 52.8
- --------------------------------------------------------------------------------- ------- -------
Net (decrease) increase in cash and cash equivalents (27.5) 30.2
- --------------------------------------------------------------------------------- ------- -------
Cash and cash equivalents at beginning of period 47.6 4.8
- --------------------------------------------------------------------------------- ------- -------
Cash and cash equivalents at end of period $ 20.1 $ 35.0
- --------------------------------------------------------------------------------- ======== =======
The accompanying notes are an integral part of the audited financial
statements.
Page 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 NINE MONTHS
ENDED SEPTEMBER 30, 2002:
Balance, June 30, 2002 $ 0.3 $ 424.3 $ (786.6) $ 6.5 $(355.5)
Net income (loss) (3.5) (3.5)
Other comprehensive income (loss), net (0.1) (0.1)
-------
Comprehensive income (3.6)
------ ------- ------- ------- -------
Balance, September 30, 2002 $ 0.3 $ 424.3 $(790.1) $ 6.4 $(359.1)
====== ======= ======= ======= =======
Balance December 31, 2001 $ 0.3 $ 424.3 $(780.6) $ 6.1 $(349.9)
Net income (loss) (9.5) (9.5)
Other comprehensive income (loss), net 0.3 0.3
-------
Comprehensive income (loss) (9.2)
------ ------- ------- ------- -------
Balance September 30, 2002 $ 0.3 $ 424.3 $(790.1) $ 6.4 $(359.1)
====== ======= ======= ======= =======
THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 2001:
Balance, June 30, 2001 $ 0.3 $ 424.3 $(755.7) $ 6.3 $(324.8)
Net income (loss) (6.2) (6.2)
Other comprehensive income (loss), net (0.3) (0.3)
-------
Comprehensive income (loss) (6.4)
------ ------- ------- ------- -------
Balance, September 30, 2001 $ 0.3 $ 424.3 $(761.7) $ 5.9 $(331.2)
====== ======= ======= ======= =======
Balance December 31, 2000 $ 0.3 $ 417.3 $(737.1) $ 7.3 $(312.2)
Net income (loss) (24.7) (24.7)
Other comprehensive income (loss), net (1.3) (1.3)
-------
Comprehensive income (loss) (26.0)
Capital contribution 7.0 7.0
------ ------- ------- ------- -------
Balance September 30, 2001 $ 0.3 $ 424.3 $(761.7) $ 5.9 $(331.2)
====== ======= ======= ======= =======
The accompanying notes are an integral part of these statements.
Page 6
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 September 30, 2002 and the results of operations and cash flows for the
periods ended September 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 in Montgomery, Alabama. 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.
The restructuring expense is primarily severance costs related to the
corporate staff. In the second quarter of 2002 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. 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, and a $0.8 million loss was recorded in
the third quarter of 2002 related to the sale of the company's corporate
office building in Montgomery, Alabama. The closure and transition of
corporate activities to Portland, Oregon was completed by the end of the third
quarter of 2002, with $0.3 million in transition expense during the quarter.
NOTE 3 Inventories consist of the following (in millions):
September 30, December 31,
2002 2001
--------------------------------- ------------ ------------
Finished goods $ 32.0 $ 32.1
Work in process 10.4 9.8
Raw materials and supplies 25.6 26.2
--------------------------------- ------ ------
$ 68.0 $ 68.1
--------------------------------- ====== ======
Page 7
NOTE 4 Segment information is as follows (in millions):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
- ---------------------------------- -------- -------- -------- --------
Sales:
Outdoor Products $ 84.9 $ 82.0 $255.5 $262.4
Industrial and Power Equipment 36.6 31.6 95.9 87.3
- ---------------------------------- ------ ------ ------ ------
$121.5 $113.6 $351.4 $349.7
- ---------------------------------- ====== ====== ====== ======
Operating income (loss):
Outdoor Products $ 17.1 $ 15.8 $ 52.2 $ 52.8
Industrial and Power Equipment 2.1 0.1 3.8 (2.6)
- ---------------------------------- ------ ------ ------ ------
Operating income from segments 19.2 15.9 56.0 50.2
Corporate office expenses (1.5) (1.9) (4.7) (5.5)
Restructuring expenses (0.3) (5.8) (16.2)
- ---------------------------------- ------ ------ ------ ------
Income from operations 17.4 14.0 45.5 28.5
Interest expense (18.0) (24.0) (54.3) (74.3)
Interest income 0.2 0.2 0.7 0.8
Other income (expense), net (1.3) 0.2 (2.2) (0.4)
- ---------------------------------- ------ ------ ------ ------
Loss from continuing
operations before income taxes $ (1.7) $ (9.6) $(10.3) $(45.4)
- ---------------------------------- ====== ====== ====== ======
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.
Page 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. In August 2002,
Federal and the EPA filed cross motions for a decision on both liability and
penalty issues with the assigned Administrative Law Judge. Rulings on these
motions are pending. 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 nine months ended September 30, 2002, net tax payments of
$6.2 million were made, while in the nine months ended September 30, 2001, net
tax payments of $4.6 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 nine months ended September 30, 2002
and 2001 was $57.0 million and $78.8 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 nine months of this
year, realized losses on securities in these trusts were $0.4 million in
comparison to less than $0.1 million in gains in the first nine 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. In the third quarter of 2002, the company
sold its former corporate office building in Montgomery, Alabama, and
recognized a loss of $0.8 million.
Page 9
NOTE 7 For the three months and nine months ended September 30, 2002 and 2001,
net income (loss) and shares used in the earnings per share ("EPS")
computations were the following amounts:
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2002 2001 2002 2001
- ------------------------------ ---------- ---------- ---------- ----------
Net income (loss)(in millions) $ (3.5) $ (6.2) $ (9.5) $ (24.7)
- ------------------------------ ========== ========== ========== ==========
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
- ------------------------------ ---------- ---------- ---------- ----------
Diluted EPS 30,795,882 30,795,882 30,795,882 30,795,882
- ------------------------------ ========== ========== ========== ==========
Page 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 Nine Months
Ended September 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 225.5 $ 89.5 $ 121.0 $ (84.6) $ 351.4
Cost of sales 154.5 69.0 92.6 (84.5) 231.6
------- ------- ------- ------- -------
Gross profit 71.0 20.5 28.4 (0.1) 119.8
Selling, general and administrative expenses $ 0.5 39.5 13.2 15.3 68.5
Restructuring expenses 5.8 5.8
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.5) 25.7 7.3 13.1 (0.1) 45.5
Interest expense (16.0) (51.7) (0.4) (0.2) 14.0 (54.3)
Interest income 14.5 0.2 (14.0) 0.7
Other income (expense), net (1.6) (0.6) (2.2)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes (16.5) (13.1) 6.9 12.5 (0.1) (10.3)
Provision (benefit) for income taxes (4.5) (5.3) 2.6 4.4 (2.8)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before extraordinary loss (12.0) (7.8) 4.3 8.1 (0.1) (7.5)
Loss on disposal net of taxes of $.04 (1.7) (1.7)
Extraordinary loss net of taxes of $0.1 (0.3) (0.3)
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (12.0) (9.8) 4.3 8.1 (0.1) (9.5)
Equity in earnings (losses) of
affiliated companies, net 2.5 12.2 0.1 (14.8)
------- ------- ------- ------- -------- --------
Net income (loss) $ (9.5) $ 2.4 $ 4.4 $ 8.1 $ (14.9) $ (9.5)
======= ======= ======= ======= ======== ========
Page 11
For The Three Months
Ended September 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 81.3 $ 28.0 $ 41.0 $ (28.8) $ 121.5
Cost of sales 56.6 22.3 31.0 (29.2) 80.7
------- ------- ------- -------- --------
Gross profit 24.7 5.7 10.0 0.4 40.8
Selling, general and administrative expenses $ 0.1 13.5 4.5 5.0 23.1
Restructuring expenses 0.3 0.3
------- ------- ------- ------- -------- --------
Income (loss) from operations (0.1) 10.9 1.2 5.0 0.4 17.4
Interest expense (5.4) (17.1) (0.1) 4.6 (18.0)
Interest income 4.8 (4.6) 0.2
Other income (expense), net (1.1) (0.2) (1.3)
------- ------- ------- ------- -------- --------
Income (loss) from continuing operations
before income taxes (5.5) (2.5) 1.2 4.7 0.4 (1.7)
Provision (benefit) for income taxes (0.9) (1.2) 0.4 1.7
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before extraordinary loss (4.6) (1.3) 0.8 3.0 0.4 (1.7)
Loss on disposal net of taxes of $0.4 (1.7) (1.7)
Extraordinary loss net of taxes of $0.1 (0.1) (0.1)
------- ------- ------- ------- -------- --------
Income (loss) before earnings (losses)
of affiliated companies (4.6) (3.1) 0.8 3.0 0.4 (3.5)
Equity in earnings (losses) of
affiliated companies, net 1.2 4.1 0.1 (5.4)
------- ------- ------- ------- ------- -------
Net income (loss) $ (3.4) $ 1.0 $ 0.9 $ 3.0 $ (5.0) $ (3.5)
======= ======= ======= ======= ======= =======
Page 12
For The Nine Months
Ended September 30, 2001
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 224.0 $ 94.7 $ 119.4 $ (88.4) $ 349.7
Cost of sales 155.8 74.1 92.8 (89.4) 233.3
------- ------- ------- ------- -------
Gross profit 68.2 20.6 26.6 1.0 116.4
Selling, general and administrative expenses $ 0.5 40.3 15.9 15.0 71.7
Restructuring expenses 16.2 16.2
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.5) 11.7 4.7 11.6 1.0 28.5
Interest expense (25.1) (47.9) (0.9) (0.4) (74.3)
Interest income 0.1 0.2 0.5 0.8
Other income (expense), net 0.1 (0.5) (0.4)
------- ------- ------- ------- ------- -------
Income (loss) before income taxes (25.5) (36.1) 4.0 11.2 1.0 (45.4)
Provision (benefit) for income taxes (9.5) (13.7) 1.5 4.8 (16.9)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations (16.0) (22.4) 2.5 6.4 1.0 (28.5)
Discontinued operations:
Net income from operations 3.8 3.8
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses) (16.0) (18.6) 2.5 6.4 1.0 (24.7)
of affiliated companies
Equity in earnings (losses) of
affiliated companies, net (8.6) 10.0 (1.4)
------- ------- ------- ------- ------- -------
Net income (loss) $ (24.6) $ (8.6) $ 2.5 $ 6.4 $ (0.4) $ (24.7)
======= ======= ======= ======= ======= =======
Page 13
For The Three Months
Ended September 30, 2001
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 74.2 $ 28.2 $ 38.7 $ (27.5) $ 113.6
Cost of sales 50.1 22.7 29.9 (27.4) 75.2
------- ------- ------- ------- -------
Gross profit 24.1 5.5 8.8 (0.1) 38.3
Selling, general and administrative expenses $ 0.1 14.1 5.4 4.7 24.3
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.1) 10.0 0.1 4.1 (0.1) 14.0
Interest expense (7.7) (16.2) (0.1) (24.0)
Interest income 0.2 0.2
Other income (expense), net 0.4 (0.2) 0.2
------- ------- ------- ------- ------- -------
Income (loss) before income taxes (7.8) (5.8) 0.1 4.0 (0.1) (9.6)
Provision (benefit) for income taxes (1.7) (1.3) 1.7 (1.3)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations (6.1) (4.5) 0.1 2.3 (0.1) (8.3)
Discontinued operations:
Net income from operations 2.1 2.1
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses) (6.1) (2.4) 0.1 2.3 (0.1) (6.2)
of affiliated companies
Equity in earnings (losses) of
affiliated companies, net 2.4 (2.4) 0.0
------- ------- ------- ------- ------- -------
Net income (loss) $ (6.1) $ 0.0 $ 0.1 $ 2.3 $ (2.5) $ (6.2)
======= ======= ======= ======= ======= =======
Page 14
September 30, 2002
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 14.2 $ (1.0) $ 6.9 $ 20.1
Accounts receivable, net 30.0 13.1 15.3 58.4
Intercompany receivables 278.8 40.1 4.3 $(323.2)
Inventories 28.3 21.5 18.2 68.0
Deferred income taxes 34.1 34.1
Other current assets 6.4 0.4 1.5 8.3
------- ------- ------- ------- -------
Total current assets 391.8 74.1 46.2 (323.2) 188.9
Investments in affiliated companies (14.8) 198.5 0.2 (183.9)
Property, plant and equipment, net 33.4 26.9 29.0 89.3
Cost in excess of net assets of acquired
businesses, net 30.1 40.2 6.6 76.9
Intercompany notes receivable 5.1 (5.1)
Other assets 55.2 0.1 3.1 58.4
------- ------- ------- ------- ------- -------
Total Assets $ (14.8) $ 709.0 $ 141.3 $ 90.2 $(512.2) $ 413.5
======= ======= ======= ======= ======= =======
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 12.5 4.6 5.2 22.4
Intercompany payables 323.2 $(323.2)
Accrued expenses 56.4 6.3 7.6 70.3
------- ------- ------- ------- ------- -------
Total current liabilities 323.3 72.3 10.9 17.8 (323.2) 101.1
Long-term debt, exclusive of current maturities 17.9 606.2 624.1
Intercompany notes payable 5.1 (5.1)
Deferred income taxes, exclusive of
current portion 0.5 1.9 2.4
Other liabilities 3.1 39.7 1.4 0.8 45.0
------- ------- ------- ------- ------- -------
Total liabilities 344.3 723.8 12.3 20.5 (328.3) 772.6
Stockholders equity (Deficit) (359.1) (14.8) 129.0 69.7 (183.9) (359.1)
Total Liabilities and
Stockholders' Equity (Deficit) $ (14.8) $ 709.0 $ 141.3 $ 90.2 $(512.2) $ 413.5
======= ======= ======= ======= ======= =======
Page 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
======= ======= ======= ======= ======= =======
Page 16
For The Nine Months
Ended September 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 $ (6.4) $ 3.5 $ 2.2 $ 2.4 $ 0.0 $ 1.7
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 8.2 0.1 8.3
Proceeds (expenses) from sale of discontinued
operations (14.5) (14.5)
Purchases of property, plant and equipment (4.5) (1.7) (5.6) (11.8)
------- ------- ------- ------- ------- -------
Net cash (used in) investing activities (10.8) (1.7) (5.5) (18.0)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Reduction of long-term debt (10.9) (10.9)
Dividends paid
Advances from (to) affiliated companies 6.4 (5.9) (0.5)
Other (0.3) (0.3)
------- ------- ------- -------- ------- -------
Net cash provided by (used in) financing
Activities 6.4 (17.1) (0.5) 0.0 0.0 (11.2)
------- ------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents (24.4) 0.0 (3.1) (27.5)
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 $ 19.6 $ (1.1) $ 1.6 $ 0.0 $ 20.1
======= ======= ======= ======= ======= =======
Page 17
For The Nine Months
Ended September 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 $ (14.3) $ (2.5) $ 12.0 $ 5.6 $ (2.5) $ (1.7)
Net cash provided by (used in) discontinued
operations (3.4) (7.9) (11.3)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities (14.3) (5.9) 4.1 5.6 (2.5) (13.0)
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 2.5 0.1 2.6
Purchases of property, plant and equipment (2.4) (2.3) (3.5) (8.2)
Acquisitions of businesses (1.3) (1.3)
------- ------- ------- ------- ------- -------
Net cash used in continuing operations 0.0 (1.2) (2.3) (3.4) 0.0 (6.9)
Net cash used in discontinued operations (1.3) (1.4) (2.7)
------- ------- ------- ------- ------- -------
Net cash used in investing activities 0.0 (2.5) (3.7) (3.4) 0.0 (9.6)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Net increase (reduction) in short-term
borrowings 0.1 (0.1)
Issuance of long-term debt 13.0 39.9 52.9
Reduction of long-term debt (4.3) (4.3)
Dividends paid (2.5) 2.5
Capital contributions 7.0 20.0 (20.0) 7.0
Advances from (to) affiliated companies (5.7) (13.8) (0.5) 20.0
Other (2.8) (2.8)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities 14.3 39.1 (0.5) (2.6) 2.5 52.8
------- ------- ------- ------- ------- -------
Net decrease in cash and cash equivalents 30.7 (0.1) (0.4) 30.2
Cash and cash equivalents at beginning of period 1.9 (0.8) 3.7 4.8
------- ------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 0.0 $ 32.6 $ (0.9) $ 3.3 $ 0.0 $ 35.0
======= ======= ======= ======= ======= =======
Page 18
NOTE 9 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 $168.1 million were 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, $38.5 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 September 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 was
determined by the review of an independent accounting firm on October 16, 2002
under the binding arbitration procedure established in the Stock Purchase
Agreement. The outcome of this arbitration resulted in a final purchase price
adjustment of $9.0 million. As a result of the arbitrator's ruling, the
company recorded an after-tax loss of $1.7 million in discontinued operations.
The purchase price adjustment payment was made to ATK in October 2002. 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
September 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 per 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 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.
Page 19
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 third quarter ended September 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 2002. 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 of each
year thereafter.
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 of SFAS
No. 142 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:
Page 20
Three Months Nine Months
Ended Ended
(Amounts in millions, except per share data) September 30, 2001 September 30, 2001
- --------------------------------------------------------- ------------------ -------------------
Net income (loss):
Reported net income (loss) from continuing operations $ (8.3) $ (28.5)
Goodwill amortization 0.7 2.2
- --------------------------------------------------------- ------- -------
Adjusted net income (loss) from continuing operations $ (7.6) (26.3)
- --------------------------------------------------------- ------- =======
Basic earnings (loss) per share from continuing operations:
Reported basic earnings (loss) per share $ (.27) (.92)
Goodwill amortization .02 .07
- --------------------------------------------------------- ------- -------
Adjusted basic earnings (loss) per share from continuing
operations $ (.25) (.85)
- --------------------------------------------------------- ======= =======
Diluted earnings (loss) per share from continuing operations:
Reported diluted earnings (loss) per share $ (.27) (.92)
Goodwill amortization .02 .07
- ---------------------------------------------------------- ------- -------
Adjusted diluted earnings (loss) per share from continuing
operations $ (.25) (.85)
- ---------------------------------------------------------- ======= =======
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
pronouncements, addresses the reporting of debt extinguishments and accounting
Page 21
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.
Page 22
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
Sales for the three months and nine months ended September 30, 2002 were
$121.5 million and $351.4 million, respectively, compared to $113.6 million
and $349.7 million for the comparable periods last year. The increase in
revenue from last year for the third quarter was due to an increase in sales
within both segments. The increase in sales for the first nine months was due
to higher sales in the Industrial and Power Equipment segment partially offset
by reduced Outdoor Products segment sales resulting from a lower demand for
chain products and lawn mowers in the first quarter.
Net loss in the third quarter of 2002 was $3.5 million ($.11 per share)
compared to a net loss of $6.2 million ($.20 per share) in the third quarter
of 2001. The net loss in the third quarter includes an expense of $1.7 million
($.06 per share) attributed to the final purchase price adjustment related to
the sale of the Sporting Equipment Group in December 2001. Third quarter 2001
includes $2.1 million ($.07 per share)net income from the Sporting Equipment
Group. The decrease in third quarter net loss from last year is primarily due
to the improved operating results in both segments and lower interest expense.
Third quarter 2002 results include a net loss of $0.8 million ($.02 per share)
related to the disposal of corporate assets. Third quarter 2001 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 nine months ended September 30, 2002, net loss was $9.5 million ($.31
per share) compared to a net loss of $24.7 million ($.80 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. In the first nine months of 2002 the Company incurred $4.2
million ($.14 per share)in restructuring costs, net of tax, related to the
relocation of the company's headquarters from Montgomery, Alabama to Portland,
Oregon. In the first nine months of 2001, the Company incurred after tax
restructuring expense of $10.2 million ($.33 per share) related to a plant
closure within the Industrial and Power Equipment segment and a reduction of
headcount within the company. The 2001 results include goodwill amortization
of $2.1 million ($.07 per share). In the first nine months of 2002, an
extraordinary loss of $0.3 million ($.01 per share) was recorded for the early
retirement of debt. The Company recorded $1.7 million in expense during the
first nine months of 2002 related to the final purchase adjustment for SEG.
Net income from the Sporting Equipment Group was $3.8 million ($.12 per share)
in the first nine months of 2001. The company's year to date effective tax
rate in 2002 is 27.5% compared to 37.2% last year. The 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 third quarter and first nine
months of 2002 were $84.9 million and $255.5 million compared to $82.0 million
and $262.4 million for the same periods in 2001. Operating income increased to
$17.1 million in the third quarter of 2002 compared to $15.8 million in 2001.
For the nine months ended September 30, 2002, segment operating income
declined to $52.2 million from $52.8 million last year.
Page 23
Sales by the segment's principal product groups are as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------
% Increase % Increase
(Decrease) (Decrease)
2002 2001 in 2002 2002 2001 in 2002
- --------------------------- ------ ------ ---------- ------ ------ ----------
Chain saw components $ 56.8 $ 56.6 0.4% $162.9 $174.8 (6.8)%
Lawn mowers and accessories 17.7 16.8 5.4 59.1 57.7 2.4
Other 10.4 8.6 20.9 33.5 29.9 12.0
- --------------------------- ------ ------ ------ ------
Total segment sales $ 84.9 $ 82.0 3.5% $255.5 $262.4 (2.6)%
- --------------------------- ====== ====== ====== ======
The increase in chain saw components in the third quarter is due to an
increase in international sales, primarily in Europe. The decline in sales in
the first nine months 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 third quarter as did replacement parts. The increase
in unit sales in the quarter was primarily due to the introduction of a new
product. 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 third quarter. The
impact of $0.5 million from the adoption of SFAS 142 also had a favorable
impact on third 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 2002, the
forestry industry continues 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 third quarter of 2002 by 21.6% from a year ago. The increase
in part was due to the introduction of a new product line during the second
quarter of this year, as well as increased unit shipments of existing
products. Sales of timber harvesting and loading equipment for the first nine
months of the year have increased 15.3% 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):
Page 24
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
% Increase % Increase
(Decrease) (Decrease)
2002 2001 in 2002 2002 2001 in 2002
- --------------------------- ------ ------ ---------- ------ ------ ----------
Timber harvesting and loading
equipment $ 32.6 $ 26.8 21.6% $ 83.5 $ 72.4 15.3%
Gear components and rotation
bearings 4.0 4.8 (16.7) 12.4 14.9 (16.8)
- --------------------------- ------ ------ ------ ------
Total segment sales $ 36.6 $ 31.6 15.8% $ 95.9 $ 87.3 9.9%
- --------------------------- ====== ====== ====== ======
The segment's operating income in the third quarter and first nine months of
2002 was $2.1 million and $3.8 million, respectively, compared to profit of
$0.1 million in the third quarter of 2001 and a loss of $2.6 million in the
first nine months 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
third quarter segment's operating income included $0.2 million of goodwill
amortization.
The Company's total backlog increased to $60.6 million at September 30, 2002
from $48.9 million at December 31, 2001 and from $59.5 million at September
30, 2001 as follows (in millions):
Backlog
----------------------------------------
September 30, December 31, September 30,
2002 2001 2001
- ------------------------------------ ------------ ------------ ------------
Outdoor Products $ 43.4 $ 36.0 $ 39.0
Industrial and Power Equipment 17.2 12.9 20.5
- ------------------------------------ ------ ------ ------
Total segment sales $ 60.6 $ 48.9 $ 59.5
- ------------------------------------ ====== ====== ======
Net loss on disposal from discontinued operations in the third quarter and
first nine months of 2002 was $1.7 million, ($.06 per share)for the sale of
SEG and reflects an adjustment to the final purchase price as determined by
the third party arbitrator. Net income from discontinued operations in the
third quarter of 2001 was $2.1 million and the first nine months of 2001 was
$3.8 million. These were the results of the Company's Sporting Equipment
segment, which was sold in December 2001. Corresponding sales for this segment
were $80.9 million and $191.6 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 September 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
Page 25
principal payments under a secured credit agreement representing significant
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 $4.0 million annually through 2004 and $127.6 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 and debt
service requirements through cash flows generated from operations, the
revolving credit facility and cash on hand. At September 30, 2002, the Company
had no outstanding borrowings under its revolving credit facility, which has
$75.0 million in availability. The Company also had $20.1 million in cash on
hand at the end of the third quarter, of which $9.0 million will be utilized
in October 2002 for the payment of SEG transaction expenses, including the
final purchase price adjustment. Letters of credit issued under the revolving
credit facility that reduce the amount available under the facility totaled
$11.3 million at September 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
September 30, 2002 is $4.0 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 equipment repurchased 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
while 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 September 30, 2002, the
Company is in compliance with all covenants or 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.
Page 26
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 $135.2 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 September 30, 2002 were $20.1 million compared to $47.6
million on December 31, 2001. Cash generated from operating activities for the
first nine months of 2002 was $1.7 million in comparison to a use of cash of
$13.0 million for the same period last year. The increase in cash flow in the
first nine months of this year is due in part to the sale of the SEG in
December 2001 which used $11.3 million of cash in the first nine months of
2001. Additionally, the lower debt levels in the first nine months of 2002,
due to the reduction in debt from the proceeds of the sale of SEG, resulted in
$21.8 million in lower cash interest payments from the prior year's first nine
months. Working capital excluding cash and equivalents increased to $67.7
million in the first nine months from $35.1 million at December 31, 2001. The
increase in working capital is due to an increase in deferred taxes of $11.2
million and a $22.9 million decrease in accrued expenses which, is primarily
the result of the payment of SEG transaction expenses.
Accounts receivable at September 30, 2002 and December 31, 2001 and sales by
segment for the third quarter of 2002 compared to the fourth quarter of 2001
were as follows (in millions):
September 30, December 31, Increase
2002 2001 (Decrease)
- ------------------------------------ ------------ ------------ ------------
Accounts Receivable:
Outdoor Products $ 38.2 $ 39.2 $ (1.1)
Industrial and Power Equipment 18.8 16.6 2.3
- ------------------------------------ ------ ------ ------
Total segment receivables $ 57.0 $ 55.8 $ 1.2
- ------------------------------------ ====== ====== ======
Three Months Ended
September 30, December 31, Increase
2002 2001 (Decrease)
- ------------------------------------ ------------- ------------ ------------
Sales:
Outdoor Products $ 84.9 $ 85.7 $ (0.8)
Industrial and Power Equipment 36.6 33.3 3.3
- ------------------------------------ ------ ------ ------
Total segment sales $121.5 119.0 $ 2.5
- ------------------------------------ ====== ====== ======
Net cash used for investing activities for the first nine months of 2002 was
Page 27
$18.0 million. Included in this amount is $14.5 million related to the payment
of SEG transaction expenses. Purchases for property, plant and equipment in
the current year are $11.8 million. Included in this amount was the purchase
of certain equipment from a company that was exiting one of its businesses. In
the first nine months of this year, the Company generated $8.3 million from
the sale of assets, including the sale of a storage warehouse, a fractional
interest in an aircraft, and an office building in Montgomery, Alabama.
Cash used in financing activities for the first nine months of 2002 was $11.2
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 purchase price
adjustments related to the sale of SEG.
Due to a decline in asset values of the Company's sponsored Defined Benefit
Plan during 2002, the Company's annual cash contributions to the Pension Fund
will increase in 2003 and 2004. The decline in asset value is due to overall
weakness in the stock and bond market. The estimated amount of incremental
cash contributions over 2002 is estimated to be $3.5 million and $7.2 million
respectively for 2003 and 2004. Additionally, the Company will adjust its
balance sheet at the end of 2002 to record a minimum pension liability in
accordance with SFAS 87 "Employers' Accounting for Pensions". This adjustment
will result in a non-cash reduction of shareholder's equity that will not
impact current year's earnings or the financial covenants of the credit
agreement. The estimated after-tax adjustment to equity is approximately $10
million. The company believes that cash flow from operations and amounts
available under its revolving credit agreement will be sufficient to cover the
higher pension contribution levels.
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.
Page 28
Item 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their
evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II Other Information
Item 6(a) Exhibits
**99(.1) Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by James S. Osterman, Chief Executive Officer.
**99(.2) Certification pursuant to section 906 of the Sarbanes-Oxley Act by
Calvin E. Jenness, Chief Financial Officer.
Item 6(b) Reports on Form 8K On September 9, 2002 the Company filed a Form 8K
regarding the issuance of a press release announcing organizational
changes.
** Filed electronically herewith.
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: November 14, 2002 /s/ Calvin E. Jenness
---------------------------------------
Calvin E. Jenness
Senior Vice President,
Chief Financial Officer and Treasurer
Page 29
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, James S. Osterman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blount
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the issuer as of, and for, the periods presented in this quarterly report;
4. The issuer's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the issuer and we have:
i. designed such disclosure controls and procedures to ensure
that material information relating to the issuer, including
its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this quarterly report is being prepared;
ii. evaluated the effectiveness of the issuer's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
iii. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The issuer's other certifying officer and I have disclosed, based
on our most recent evaluation, to the issuer's auditors and the audit committee
of issuer's board of directors (or persons fulfilling the equivalent function):
i. all significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer's auditors any
material weaknesses in internal controls; and
Page 30
ii. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the issuer's internal controls; and
6. The issuer's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ James S. Osterman
- ---------------------------
James S. Osterman
Chief Executive Officer
November 14, 2002
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Calvin E. Jenness, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Blount
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the issuer as of, and for, the periods presented in this quarterly report;
4. The issuer's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the issuer and we have:
i. designed such disclosure controls and procedures to ensure
that material information relating to the issuer, including
its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this quarterly report is being prepared;
ii. evaluated the effectiveness of the issuer's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
Page 31
iii. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The issuer's other certifying officer and I have disclosed, based
on our most recent evaluation, to the issuer's auditors and the audit committee
of issuer's board of directors (or persons fulfilling the equivalent function):
i. all significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer's auditors any
material weaknesses in internal controls; and
ii. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the issuer's internal controls; and
6. The issuer's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Calvin E. Jenness
Calvin E. Jenness
Senior Vice President,
Chief Financial Officer and Treasurer
November 14, 2002
Page 32