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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 SE International Way
Portland, Oregon 97222-4679
- ------------------------------ ----------------------------
(Address of principal executive offices) (Zip Code)
(503) 653-8881
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 par value New York Stock Exchange
- ------------------------------------- -------------------------
Securities registered pursuant to Section 12(g) of the Act: None
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934)
Yes No X
------ -----
Page 1
Indicate the number of shares outstanding of each of the issued classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at March 31, 2004
--------------------- -----------------------------
$ .01 Par Value 30,883,103
Page 2
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
------------
Part I Consolidated Financial Information
Item 1 - Consolidated Financial Statements
Unaudited Consolidated Statements of Income -
first quarter ended March 31, 2004 and 2003 4
Unaudited Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 5
Unaudited Consolidated Statements of Cash Flows -
first quarter ended March 31, 2004 and 2003 6
Unaudited Consolidated Statements of Changes in
Stockholders' Equity (Deficit) - first quarter
Ended March 31, 2004 and 2003 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis 22
Item 4 - Controls and Procedures 27
Part II Other Information
Item 6 - Exhibits and Reports on Form 8-K 27
Signature 28
Page 3
ITEM 1 - FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Blount International, Inc. and Subsidiaries
First Quarter
Ended March 31,
(Dollar amounts in millions, ---------------------
except per share data) 2004 2003
- ---------------------------------- -------- --------
Sales $ 165.6 $ 122.9
Cost of sales 108.6 80.1
- ---------------------------------- -------- ---------
Gross profit 57.0 42.8
Selling, general and
administrative expenses 29.8 24.3
Restructuring expenses 0.2
- ---------------------------------- -------- ---------
Income from operations 27.2 18.3
Interest expense (17.4) (17.6)
Interest income 0.3
Other income (expense) 0.1 (0.1)
- ---------------------------------- -------- ---------
Income before income taxes 9.9 0.9
Provision for income taxes 3.0 0.4
- ---------------------------------- -------- ---------
Net income $ 6.9 $ 0.5
- ---------------------------------- ======== =========
Basic income per share $ 0.22 $ 0.02
- ---------------------------------- ======== =========
Diluted income per share $ 0.21 $ 0.01
- ---------------------------------- ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
UNAUDITED CONSOLIDATED BALANCE SHEETS
Blount International, Inc. and Subsidiaries
March 31, December 31,
---------- ------------
(Dollar amounts in millions, except share and
per share data) 2004 2003
- ----------------------------------------------------- -------- --------
Assets
- ----------------------------------------------------- -------- --------
Current assets:
Cash and cash equivalents $ 18.4 $ 35.2
Accounts receivable, net of allowance for
doubtful accounts of $3.1 and $3.0 81.6 64.4
Inventories 73.9 67.7
Other current assets 26.0 26.1
- ----------------------------------------------------- -------- --------
Total current assets 199.9 193.4
Property, plant and equipment, net of accumulated
depreciation of $194.4 and $191.1 91.7 92.0
Goodwill 76.9 76.9
Other assets 36.9 38.1
- ----------------------------------------------------- -------- --------
Total Assets $ 405.4 $ 400.4
- ----------------------------------------------------- ======== ========
Liabilities and Stockholders' Equity (Deficit)
- ----------------------------------------------------- -------- --------
Current liabilities:
Notes payable and current maturities of
long-term debt $ 7.3 $ 6.6
Accounts payable 36.7 29.7
Accrued expenses 64.1 73.7
- ----------------------------------------------------- -------- --------
Total current liabilities 108.1 110.0
Long-term debt, exclusive of current maturities 602.9 603.9
Deferred income taxes, exclusive of current portion 2.8 2.8
Other liabilities 81.9 81.0
- ----------------------------------------------------- -------- --------
Total Liabilities 795.7 797.7
- ----------------------------------------------------- -------- --------
Stockholders' equity (deficit):
Common stock: par value $0.01 per share,
100,000,000 shares authorized, 30,883,103 and
30,827,738 outstanding 0.3 0.3
Capital in excess of par value of stock 425.0 424.6
Accumulated deficit (813.1) (820.0)
Deferred Stock Compensation (0.1)
Accumulated other comprehensive income (2.4) (2.2)
- ----------------------------------------------------- -------- --------
Total Stockholders' Deficit (390.3) (397.3)
- ----------------------------------------------------- -------- --------
Total Liabilities and Stockholders' Equity (Deficit) $ 405.4 $ 400.4
- ----------------------------------------------------- ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Blount International, Inc. and Subsidiaries
First Quarter Ended March 31,
-----------------------------
(Dollar amounts in millions) 2004 2003
- --------------------------------------------------- ----------- ---------
Cash flows from operating activities:
Net income $ 6.9 $ 0.5
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation, amortization and other non-cash
charges 6.2 5.2
Deferred income taxes (0.2)
Loss on disposals of property, plant & equipment 0.1
Changes in assets and liabilities:
Increase in accounts receivable (17.2) (7.1)
(Increase) decrease in inventories (6.2) 0.6
Decrease in other assets 0.1 5.7
Increase (decrease) in accounts payable 7.0 (1.5)
Decrease in accrued expenses (9.6) (13.8)
Increase in other liabilities 0.7 1.3
- --------------------------------------------------- -------- -------
Net cash used by operating activities (12.1) (9.2)
- --------------------------------------------------- -------- -------
Cash flows from investing activities:
Payments related to sales of property, plant &
equipment (0.5)
Purchases of property, plant & equipment (3.5) (4.0)
- --------------------------------------------------- -------- -------
Net cash used in investing activities (3.5) (4.5)
- --------------------------------------------------- -------- -------
Cash flows from financing activities:
Reduction of debt (1.3) (0.8)
Exercise of stock options 0.2
Other financing activities (0.1)
- --------------------------------------------------- -------- -------
Net cash used in financing activities (1.2) (0.8)
- --------------------------------------------------- -------- -------
Net decrease in cash and cash equivalents (16.8) (14.5)
Cash and cash equivalents at beginning of period 35.2 26.4
- --------------------------------------------------- -------- -------
Cash and cash equivalents at end of period $ 18.4 $ 11.9
- --------------------------------------------------- ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT) Blount International, Inc. and Subsidiaries
Accumu-
lated
Capital in Deferred Compre-
Excess of Accum- Stock hensive
Common Par Value ulated Compen- Other
(Dollar amounts in millions) Stock of Stock Deficit sation Income Total
- -------------------------------------- ------ ---------- -------- -------- ------- --------
FIRST QUARTER ENDED MARCH 31, 2004
Balance December 31, 2003 $ 0.3 $ 424.6 $ (820.0) $ (2.2) $(397.3)
Net income 6.9 6.9
Other comprehensive loss, net:
Foreign currency translation adjustment (0.1) (0.1)
Unrealized losses (0.1) (0.1)
--------
Comprehensive income 6.7
Exercise of stock options 0.2 0.2
Deferred stock compensation 0.2 (0.2)
Amortization of deferred stock compensation 0.1 0.1
- -------------------------------------- ------ ---------- -------- -------- ------- --------
Balance March 31, 2004 $ 0.3 $ 425.0 $ (813.1) (0.1) $ (2.4) $(390.3)
====== ========== ======== ======== ======= ========
FIRST QUARTER ENDED MARCH 31, 2003:
Balance December 31, 2002 $ 0.3 $ 424.3 $ (786.3) $ (7.2) $(368.9)
Net income 0.5 0.5
Other comprehensive income, net:
Foreign currency translation adjustment 0.1 0.1
--------
Comprehensive income 0.6
- -------------------------------------- ------ ---------- -------- -------- ------- --------
Balance March 31, 2003 $ 0.3 $ 424.3 $ (785.9) $ (7.0) $(368.3)
====== ========== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 7
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of Blount International, Inc. and Subsidiaries ("the
Company") contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of the Company
at March 31, 2004 and the results of operations and cash flows for the first
quarter ended March 31, 2004 and 2003. 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, 2003.
The Company's internet home page is http://www.blount.com.
NOTE 2:
STOCK BASED COMPENSATION
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company continues to apply intrinsic value accounting for its stock option
plans. Compensation cost for stock options, if any, is measured as the excess
of the quoted market price of the stock at the date of grant less the amount
an employee must pay to acquire the stock. The Company has adopted the
disclosure-only provisions of SFAS No. 123 and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure-an Amendment of FASB
Statement No. 123". If the Company had elected to recognize compensation
expense based upon the fair value at the grant dates for awards under these
plans, the Company's net earnings and net earnings per share would have been
as follows:
First Quarter
ended March 31,
(Dollars in millions, ------------------
except per share amounts) 2004 2003
- ------------------------------------ -------- --------
Net income, as reported $ 6.9 $ 0.5
Add: stock-based employee compensation cost,
net of tax, included in net income 0.1
Deduct: total stock-based employee
compensation cost, net of tax, that would
have been included in net income
under fair value method (0.3) (0.4)
------- -------
Proforma net income $ 6.7 $ 0.1
======= =======
Basic income per share
As reported $ 0.22 $ 0.02
Pro forma 0.22 0.00
Diluted income per share
As reported 0.21 0.01
Pro forma 0.21 0.00
Page 8
NOTE 3:
RESTRUCTURING EXPENSES
In the first quarter of 2002, the Company incurred a restructuring charge
related to the closure and relocation of the Company's headquarters from
Montgomery, Alabama to Portland, Oregon. An initial charge of $5.6 million was
recorded and was subsequently adjusted to reflect transition expenses and a
revision of estimates. In the fourth quarter of 2002, the Company recorded a
$1.4 million charge related to the closure of a portion of a facility and
relocation of that equipment between its plants within its Oregon Cutting
Systems Group. In the first quarter of 2003, the Company reported an
additional $0.2 million in restructuring expenses associated with this Oregon
Cutting Systems Group relocation project for severance expenses affecting 19
hourly employees and 4 salaried employees. The following table summarizes
expenses, adjustments and charges to the liabilities for each of the
restructuring actions for the comparable periods ended March 31. Previous
actions represent a 2001 plant closure, benefit modification and reduction in
headcount. These expenses are included in accrued expenses.
Restructuring Actions
------------------------------------------------------------------------------
Previous Corporate Office Asset
Actions Relocation Relocation Total
------------- ------------- ------------- -------------
Balance at January 1, 2003 $ 1.1 $ 0.4 $ 1.4 $ 2.9
Expense/Adjustments 0.2 0.2
Charges against liability (0.1) (0.1) (0.2)
------------- ------------- ------------- -------------
Balance at March 31, 2003 $ 1.0 $ 0.3 $ 1.6 $ 2.9
============= ============= ============= =============
Balance at January 1, 2004 $ 0.4 $ 0.1 $ 0.3 $ 0.8
Expense/Adjustments
Charges against liability (0.1) (0.1)
------------- ------------- ------------- -------------
Balance at March 31, 2004 $ 0.3 $ 0.1 $ 0.3 $ 0.7
============= ============= ============= =============
NOTE 4:
INVENTORIES
Inventories consist of the following (in millions):
March 31, December 31,
2004 2003
--------------------------------- ------------ ------------
Finished goods $ 37.6 $ 34.8
Work in process 12.3 10.7
Raw materials and supplies 24.0 22.2
--------------------------------- ------ ------
Total Inventories $ 73.9 $ 67.7
--------------------------------- ====== ======
Page 9
NOTE 5:
SEGMENT INFORMATION
First quarter
ended March 31,
(Dollars in millions) --------------------
2004 2003
- ------------------------------------ --------- --------
Sales:
Outdoor Products $ 102.1 $ 85.2
Industrial and Power Equipment 54.0 29.9
Lawnmower 9.6 7.9
Elimination (0.1) (0.1)
- ------------------------------------ --------- --------
Total Sales $ 165.6 $ 122.9
- ------------------------------------ ========= ========
Operating income (loss):
Outdoor Products $ 26.3 $ 21.8
Industrial and Power Equipment 4.8
Lawnmower (0.2) (0.7)
Corporate expense/elimination (3.7) (2.6)
Restructure expense (0.2)
- ----------------------------------- --------- --------
Income from operations 27.2 18.3
Interest expense (17.4) (17.6)
Interest income 0.3
Other income (expense), net 0.1 (0.1)
- ------------------------------------ --------- --------
Income before income taxes $ 9.9 $ 0.9
- ------------------------------------ ========= ========
NOTE 6:
COMMITMENTS AND CONTINGENT LIABILITIES
In 2003 the Company signed a letter of intent on a parcel of land in The
Peoples Republic of China in the amount of $1.0 million.
The Company provides guarantees and other commercial commitments summarized in
the following table (in millions):
Total at
March 31, 2004
- ------------------------------- -----------------
Product Warranty $ 4.5
Letters of Credit Outstanding 7.9
Third Party Financing Projections(1) 4.0
Accounts Receivable Securitization(2) 0.4
- -------------------------------------------- -----------------
Total $ 16.8
============================================ =================
(1) Applicable to the third party financing agreements for customer equipment
purchases of Dixon lawnmowers and FIED equipment.
(2) Included the guarantees of certain accounts receivable of Dixon's
receivable to a third party financing company.
Page 10
In addition to these amounts, Blount International, Inc. also guarantees
certain debt of its subsidiaries (see Note 9 to the Consolidated Financial
Statements).
Product warranty obligation is recorded as a liability on the balance sheet
and is estimated through historical customer claims, supplier performance and
new product performance. Should a change in trends occur in customer claims,
an increase or decrease in the warranty liability may be necessary. Changes in
the Company's warranty reserve for periods ended March 31, 2004 and 2003 are
as follows (in millions):
Quarter Ended March 31
2004 2003
- ---------------------------------------- --------- ---------
Balance as of December 31, 2003 and 2002 $ 4.1 $ 3.5
Accrued 1.3 1.0
Payments made (in cash or in-kind) (0.9) (1.4)
- ---------------------------------------- --------- ---------
Balance as of March 31, 2004 and 2003 $ 4.5 $ 3.1
======================================== ========= =========
Blount was named a potentially liable person ("PLP") by the Washington State
Department of Ecology ("WDOE") in connection with the Pasco Sanitary Landfill
Site ("Site"). This Site has been monitored by WDOE since 1988. From available
records, the Company believes that it sent 26 drums of chromic hydroxide
sludge in a non-toxic, trivalent state to the Site. It further believes that
the Site contains more than 50,000 drums in total and millions of gallons of
additional wastes, some potentially highly toxic in nature. Accordingly, based
both on volume and on nature of the waste, the Company believes that it is a
de minimis contributor.
The current on-site monitoring program is being conducted and funded by
certain PLPs, excluding the Company and several other PLPs, under the
supervision of WDOE. It is estimated that this study will cost between $7
million and $10 million. Depending upon the results of this study, further
studies or remediation could be required. The Company may or may not be
required to pay a share of the current study, or to contribute to the costs of
subsequent studies or remediation, if any. The Company is unable to estimate
such costs, or the likelihood of being assessed any portion thereof.
The Company has accrued $75,000 at December 31, 2003 and March 31, 2004 for
the potential costs of any clean-up. The Company spent zero and $5,600 in the
years ended December 31, 2003 and 2002 respectively to administer compliance
in regards to the Pasco Site, which are primarily the cost of outside counsel
to provide updates on the Site status.
In July 2001, the Company's former Federal Cartridge Company subsidiary
("Federal") received notice from the Region V 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. The Company retained the
liability for this matter under the terms of the sale of its Sporting
Equipment Group ("SEG") segment (including Federal) to Alliant Techsystems,
Inc., ("ATK") as discussed in Note 5 of the 2003 Annual Report on Form 10-K.
Page 11
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
("Complaint") on Federal. The Complaint proposes civil penalties in the amount
of $258,593. Federal answered the Complaint, denied liability and opposed the
proposed penalties. In August 2002, Federal and the EPA filed cross motions
for Accelerated Decision on both liability and penalties issues with the
assigned Administrative Law Judge. On December 6, 2002 the Administrative Law
Judge issued an Order Granting in Part and Denying in Part the EPA's Motion
for Accelerated Decision and Denying Federal's Motion for Accelerated Decision
("Order"). The Order established that Federal is liable for $6,270 in civil
penalties and stated the remaining issues of liability and proposed penalties
totaling $252,323 would be ruled on after an administrative hearing. On
January 28, 2003, EPA and Federal attended an administrative hearing on both
liability and penalties issues not resolved by the Order. It is anticipated
that the Administrative Law Judge will rule on both liability and penalty
issues in the near future. 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, operating results, or
cash flows.
On September 12, 2003, the Company received a General Notice Letter as a
Potentially Responsible De Minimis Party from Region IX of the EPA regarding
the Operating Industries, Inc. Superfund Site in Monterey Park, California.
The notice stated that the EPA would submit an offer to settle and an
explanation as to why it believes the Company or a predecessor unit is a de
minimis participant at the site. As of April 28, 2004 the Company had not
received the offer or explanation. The site was operated as a landfill from
1948 to 1984, and received wastes from over 4,000 generators during this time.
At the present time, the Company has no knowledge of which of its units, if
any, was involved at the site, or the amounts, if any, sent there. However,
based upon its current knowledge, and its alleged status as a Potentially
Responsible De Minimis Party, the Company does not believe that any settlement
or participation in any remediation will have a material adverse effect on its
consolidated financial condition, operating results, or cash flows.
On December 3, 2003, the Company's Oregon Cutting Systems facility in
Milwaukie, Oregon underwent a Resource Conservation and Recover Act ("RCRA")
hazardous waste management inspection by the Oregon Department of
Environmental Quality ("DEQ").
On February 10, 2004, the Company received a Notice of Non-Compliance
("Notice") from DEQ listing several alleged violations of state and federal
hazardous waste management regulations at the facility. None of the alleged
violations concern a release or discharge of hazardous wastes or substances
into the environment.
In response to the Notice, the Company has completed the corrective actions
suggested by DEQ, has requested further clarification of some of the alleged
violations and has denied most of the remaining alleged violations. Under
applicable administrative procedures, the Company and DEQ will confer on these
issues; however, after considering the Company's response, the DEQ may issue a
Notice of Violation and, if so, the possibility for civil penalties exists.
The Company does not believe payment of any such civil penalties that might
potentially be incurred will have a materially adverse effect on its
consolidated financial condition, operating results, or cash flows.
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. One such suit resulted in the Company paying its
self-insured retention of $1.0 million during the second quarter of 2003. In
addition, the Company is a party to a number of other suits arising out of the
normal course of its business.
Page 12
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.
The Company accrues, by a charge to income, an amount related to a matter
deemed by management and its counsel as a probable loss contingency in light
of all of the then known circumstances. The Company does not accrue a charge
to income for a matter deemed by management and its counsel to be a reasonably
possible loss contingency in light of all of the current circumstances.
NOTE 7:
OTHER INFORMATION
During the quarter ended March 31, 2004 net tax payments of $1.5 million were
made compared to a net tax refund of $4.1 million last year. The Company has
settled its issues with the Internal Revenue Service through the 1998 fiscal
year with no material adverse effect. The periods from fiscal 1999 through
2003 are still open for review. Interest paid during the quarter ended March
31, 2004 and 2003 was $22.8 million and $23.5 million, respectively.
NOTE 8:
EARNINGS PER SHARE DATA
For the first quarter ended March 31, 2004 and 2003, net income and shares
used in the earnings per share ("EPS") computations were as follows:
First quarter
ended March 31,
(Dollars in millions, ------------------------
except per share amounts) 2004 2003
- ------------------------------------ ---------- ----------
Net income, as reported $ 6.9 $ 0.5
- ------------------------------------ ========== ==========
Shares:
Basic EPS - weighted average 30,859,826 30,795,882
common shares outstanding
Dilutive effect of stock options 1,942,988 1,220,232
- ------------------------------------ ---------- ----------
Diluted EPS - weighted average
common shares outstanding 32,802,814 32,016,114
- ------------------------------------ ========== ==========
NOTE 9:
CONSOLIDATING FINANCIAL INFORMATION
Blount, Inc., a wholly-owned subsidiary of the Company, has two registered
debt securities that have different guarantees: 1) 7% Senior Notes due June
15, 2005, and 2) 13% Senior Subordinated Notes due August 1, 2009. The 7%
Senior Notes are fully and unconditionally, jointly and severally, guaranteed
by the Company. Holders have first priority interest in all the shares or
other equity interest of all domestic subsidiaries and other entities, first
priority mortgage on all principal domestic properties, and the pledge of 65%
of outstanding shares of first tier foreign subsidiaries and other entities.
These interests are held in parri passu, ratably, with the Company's secured
lenders. The 13% Senior Subordinated Notes are unconditionally guaranteed by
the Company and all of the Company's domestic subsidiaries ("guarantor
subsidiaries"). All guarantor subsidiaries of the 13% Senior Subordinated
Notes are 100% owned, directly or indirectly, by the Company. While the
Company and all of the Company's domestic subsidiaries
Page 13
guarantee the 13% Senior Subordinated Notes, none of Blount's existing foreign
subsidiaries ("non-guarantor subsidiaries") guarantee the 13% Senior
Subordinated Notes. The following consolidating financial information sets
forth condensed consolidating financial information, 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
UNAUDITED CONDENSED CONSOLIDATING FINANCIAL INFORMATION
For the First Quarter
Ended March 31, 2004
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 113.4 $ 36.9 $ 57.9 $ (42.6) $ 165.6
Cost of sales 81.6 29.0 42.3 (44.3) 108.6
-------- --------- --------- -------- --------
Gross profit 31.8 7.9 15.6 1.7 57.0
Selling, general and administrative expenses 17.9 4.8 7.1 29.8
-------- --------- --------- -------- --------
Income from operations 13.9 3.1 8.5 1.7 27.2
Interest expense $ (5.1) (12.1) (0.1) (0.1) (17.4)
Interest income
Other income (expense), net 0.3 (0.2) 0.1
--------- -------- --------- --------- -------- --------
Income (loss) from continuing operations
before income taxes (5.1) 2.1 3.0 8.2 1.7 9.9
Provision (benefit) for income taxes 0.1 2.9 3.0
--------- -------- --------- --------- -------- --------
Income (loss) from continuing operations (5.1) 2.1 2.9 5.3 1.7 6.9
Equity in earnings (losses) of
affiliated companies, net 12.0 9.8 (21.8)
--------- -------- --------- --------- -------- --------
Net income (loss) $ 6.9 $ 11.9 $ 2.9 $ 5.3 $ (20.1) $ 6.9
========= ======== ========= ========= ======== ========
Page 14
For the First Quarter
Ended March 31, 2003
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
Sales $ 80.8 $ 28.8 $ 47.8 $ (34.5) $ 122.9
Cost of sales 56.0 22.8 35.5 (34.2) 80.1
-------- --------- --------- -------- --------
Gross profit 24.8 6.0 12.3 (0.3) 42.8
Selling, general and administrative expenses 13.9 4.5 5.9 24.3
Restructuring expenses 0.2 0.2
-------- --------- --------- -------- --------
Income from operations 10.7 1.5 6.4 (0.3) 18.3
Interest expense $ (5.0) (12.5) (0.1) (17.6)
Interest income 0.2 0.1 0.3
Other income (expense), net 0.1 (0.2) (0.1)
--------- -------- --------- --------- -------- --------
Income (loss) before income taxes (5.0) (1.5) 1.4 6.3 (0.3) 0.9
Provision (benefit) for income taxes (2.3) 0.2 0.6 1.9 0.4
--------- -------- --------- --------- -------- --------
Income (loss) before earnings (losses)
of affiliated companies (2.7) (1.7) 0.8 4.4 (0.3) 0.5
Equity in earnings (losses) of
affiliated companies, net 3.2 4.9 0.2 (8.3)
--------- -------- --------- --------- -------- --------
Net income (loss) $ 0.5 $ 3.2 $ 1.0 $ 4.4 $ (8.6) $ 0.5
========= ======== ========= ========= ======== ========
Page 15
Ended March 31, 2003
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1.0 $ (0.4) $ 17.8 $ 18.4
Accounts receivable, net 41.1 18.7 21.8 81.6
Intercompany receivables 289.1 44.1 11.8 $ (345.0)
Inventories 31.2 22.2 20.5 73.9
Other current assets 24.0 0.5 1.7 (0.2) 26.0
-------- --------- --------- --------- ---------
Total current assets 386.4 85.1 73.6 (345.2) 199.9
Investments in affiliated companies $ (19.8) 220.9 (2.1) (199.0)
Property, plant and equipment, net 26.7 33.2 31.8 91.7
Cost in excess of net assets of acquired
businesses, net 39.7 30.6 6.6 76.9
Other assets 29.2 0.1 7.6 36.9
--------- -------- --------- --------- --------- ---------
Total Assets $ (19.8) $ 702.9 $ 149.0 $ 117.5 $ (544.2) $ 405.4
========= ======== ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 6.3 $ 1.0 $ 7.3
Accounts payable 22.0 $ 7.0 7.7 36.7
Intercompany payables $ 345.0 $ (345.0)
Accrued expenses 43.3 9.8 11.2 (0.2) 64.1
--------- -------- --------- --------- -------- --------
Total current liabilities 345.0 71.6 16.8 19.9 (345.2) 108.1
Long-term debt, exclusive of current maturities 23.1 575.4 4.4 602.9
Deferred income taxes, exclusive of
current portion 0.4 2.4 2.8
Other liabilities 2.4 75.4 3.1 1.0 81.9
--------- -------- --------- --------- -------- --------
Total Liabilities 370.5 722.8 19.9 27.7 (345.2) 795.7
--------- -------- --------- --------- -------- --------
Stockholders Equity (Deficit) (390.3) (19.9) 129.1 89.8 (199.0) (390.3)
--------- -------- --------- --------- -------- --------
Total Liabilities and
Stockholders' Equity (Deficit) $ (19.8) $ 702.9 $ 149.0 $ 117.5 $ (544.2) $ 405.4
========= ======== ========= ========= ======== ========
Page 16
December 31, 2003
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 13.7 $ (0.6) $ 22.1 $ 35.2
Accounts receivable, net 36.4 10.0 18.0 64.4
Intercompany receivables 289.7 37.6 10.6 $ (337.9)
Inventories 28.4 21.1 18.2 67.7
Other current assets 24.5 0.6 1.2 (0.2) 26.1
-------- --------- --------- -------- --------
Total current assets 392.7 68.7 70.1 (338.1) 193.4
Investments in affiliated companies $ (34.7) 201.0 0.2 (166.5)
Property, plant and equipment, net 27.6 33.5 30.9 92.0
Cost in excess of net assets of acquired
businesses, net 39.7 30.7 6.5 76.9
Other assets 33.0 5.1 38.1
--------- -------- --------- --------- -------- --------
Total Assets $ (34.7) $ 694.0 $ 132.9 $ 112.8 $ (504.6) $ 400.4
========= ======== ========= ========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 5.6 $ 1.0 $ 6.6
Accounts payable 17.0 $ 5.8 6.9 29.7
Intercompany payables $ 337.9 $ (337.9)
Accrued expenses 54.0 8.1 11.8 (0.2) 73.7
--------- -------- --------- --------- -------- --------
Total current liabilities 337.9 76.6 13.9 19.7 (338.1) 110.0
Long-term debt, exclusive of current maturities 22.2 581.7 603.9
Deferred income taxes, exclusive of
current portion 0.4 2.4 2.8
Other liabilities 2.6 70.0 2.9 5.5 81.0
--------- -------- --------- --------- -------- --------
Total Liabilities 362.7 728.7 16.8 27.6 (338.1) 797.7
--------- -------- --------- --------- -------- --------
Stockholders Equity (Deficit) (397.4) (34.7) 116.1 85.2 (166.5) (397.3)
--------- -------- --------- --------- -------- --------
Total Liabilities and
Stockholders' Equity (Deficit) $ (34.7) $ 694.0 $ 132.9 $ 112.8 $ (504.6) $ 400.4
========= ======== ========= ========= ======== ========
Page 17
For the First Quarter
Ended March 31, 2004
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
Net cash provided by (used in) operating
activities $ (0.2) $ (10.7) $ 0.6 $ (1.8) $ (12.1)
--------- -------- --------- --------- --------- --------
Purchases of property, plant and equipment (0.8) (0.4) (2.3) (3.5)
--------- -------- --------- --------- --------- --------
Net cash (used in) investing activities (0.8) (0.4) (2.3) (3.5)
--------- -------- --------- --------- --------- --------
Cash flows from financing activities:
Reduction of debt (1.1) (0.2) (1.3)
Exercise of stock options 0.2 0.2
Other financing activities (0.1) (0.1)
--------- -------- --------- --------- --------- --------
Net cash provided by (used in) financing
activities 0.2 (1.2) (0.2) (1.2)
--------- -------- --------- --------- --------- --------
Net increase (decrease) in cash and cash
equivalents (12.7) 0.2 (4.3) (16.8)
Cash and cash equivalents at beginning of period 13.7 (0.6) 22.1 35.2
--------- -------- --------- --------- --------- --------
Cash and cash equivalents at end of period $ 0.0 $ 1.0 $ (0.4) $ 17.8 $ 18.4
--------- -------- --------- --------- --------- --------
Page 18
For the First Quarter
Ended March 31, 2003
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
Net cash provided by (used in) operating
activities $ (1.9) $ (7.0) $ 0.3 $ (0.6) $ (9.2)
--------- --------- --------- --------- --------- --------
Cash flows from investing activities:
(Payments for) proceeds from sales of property,
plant and equipment (0.5) (0.5)
Purchases of property, plant and equipment (3.2) (0.1) (0.7) (4.0)
--------- -------- --------- --------- --------- --------
Net cash (used in) investing activities (3.7) (0.1) (0.7) (4.5)
--------- -------- --------- --------- --------- --------
Cash flows from financing activities:
Reduction of debt (0.8) (0.8)
Advances from (to) affiliated companies 1.9 (1.5) (0.4)
--------- -------- --------- --------- --------- --------
Net cash provided by (used in) financing
activities 1.9 (2.3) (0.4) 0.0 (0.8)
--------- -------- --------- --------- --------- --------
Net increase (decrease) in cash and cash
equivalents (13.0) (0.2) (1.3) (14.5)
Cash and cash equivalents at beginning of period 16.3 (0.1) 10.2 26.4
--------- -------- --------- --------- --------- --------
Cash and cash equivalents at end of period $ 0.0 $ 3.3 $ (0.3) $ 8.9 $ 11.9
--------- -------- --------- --------- --------- --------
Page 19
NOTE 10:
DEBT AND FINANCING AGREEMENTS
On January 31, 2001, the Company amended the terms of its credit facilities
related to $400 million in term loans and $100 million in revolving credit
facility. 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 were 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 stockholder,
invested $20 million in the Company in exchange for a convertible preferred
equivalent security, together with warrants for 1,000,000 shares of the
Company's 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 convertible preferred equivalent 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 a class, or classes, 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.
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 the
Sporting Equipment Group, 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 years ended December 31, 2002 and 2003 and the first quarter ended
March 31, 2004.
On May 15, 2003 the Company entered into a new senior credit facility
replacing the previous credit facility. The new credit facility consists of a
$67.0 million revolving credit facility, a Term A loan of up to $38.0 million
and a Term B loan of up to $85.0 million. These loans are collateralized by
certain Company assets, some of which are held in trust in parri passu,
ratably, with the Company's 7% Senior Notes. The new credit facility is
subject to certain reporting and financial covenant compliance requirements.
Specifically, the Company must meet minimum EBITDA thresholds and maintain a
certain fixed coverage ratio, which is defined as EBITDA divided by the sum of
cash interest paid, capital spending, cash income taxes paid and scheduled
debt repayments. The Company was in compliance with these covenants as of
March 31, 2004.
Long-term debt at March 31, 2004 and December 31, 2003 consisted of the
following:
March 31, December 31,
(Dollars in millions) 2004 2003
- --------------------------------- ---------------- ------------------
13% Senior subordinated notes $ 323.2 $ 323.2
7% Senior notes 149.7 149.7
Term loans 114.2 115.5
Revolving credit facility
12% preferred equivalent security 23.1 22.1
- --------------------------------- ---------------- ------------------
Total Debt 610.2 610.5
Less current maturities (7.3) (6.6)
- --------------------------------- ---------------- ------------------
Total long-term debt $ 602.9 $ 603.9
- --------------------------------- ================ ==================
Page 20
NOTE 11:
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets." Under the provisions of SFAS No. 142,
amortization of goodwill and indefinite-lived intangible assets is prohibited.
Also, SFAS No. 142 established two broad categories of intangible assets:
definite-lived intangible assets which are subject to amortization and
indefinite-lived intangible assets which are not subject to amortization. For
additional information on the impact to the Company of the adoption of SFAS
No. 142, see Note 4 to the 2003 Annual Report on Form 10-K .
NOTE 12:
PENSION AND POST-RETIREMENT BENEFIT PLANS
A summary of the components of net periodic pension cost, a noncash item, for
the quarter ended March 31 is as follows:
Other
Pension Post-retirement
Benefits Benefits
----------------- ----------------
(Dollar amounts in millions) 2004 2003 2004 2003
- ------------------------------------------ -------- -------- -------- ------
Components of net periodic benefit cost:
Service cost $ 1.2 $ 1.2 $ 0.1 $ 0.1
Interest cost 2.1 2.1 0.5 0.5
Expected return on plan assets (1.8) (1.6)
Amortization of prior service cost 0.1 0.1
Amortization of net (gain) loss 0.5 0.6 0.2 0.2
- ------------------------------------------ -------- -------- -------- ------
Total net periodic benefit cost $ 2.1 $ 2.4 $ 0.8 $ 0.8
- ------------------------------------------ -------- -------- -------- ------
The Company previously disclosed in its financial statements for the year
ended December 31, 2003 that it expected to contribute approximately $14
million to its domestic pension plan in 2004. The Company does not expect to
make any contributions to its other post retirement benefit plans during 2004.
As of March 31, 2004, $0.6 million in contributions have been made and an
additional $13.4 million is expected to be made by December 31, 2004.
NOTE 13:
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities." FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest entities
("VIEs")created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date. It applies to public enterprises in the
first fiscal year or interim period ending after December 15, 2003, to VIEs in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The adoption of this interpretation on January 1, 2004 did not have a
material impact on the Company's financial statements.
Page 21
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, could be classified as equity or "mezzanine" equity, by requiring
those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. SFAS No. 150 requires
disclosure regarding the terms of those instruments and settlement
alternatives. This statement was effective for all financial instruments
entered into or modified after May 31, 2003, and was otherwise effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company has evaluated the effect of the adoption of SFAS No. 150 and believes
that it has not had a material impact on its financial statements.
In 2003, the FASB revised Statement No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". The FASB's revision of Statement
No. 132 requires new annual disclosures about the types of plan assets,
investment strategy, measurement date, plan obligations and cash flows, as
well as the components of the net periodic benefit cost recognized in interim
periods. In addition, SEC registrants are now required to disclose estimates
of contributions to the plan during the next fiscal year and the components of
the fair value of total plan assets by type (i.e. equity securities, debt
securities, real estate and other assets). We adopted the provisions of
Statement No. 132 (revised) except for expected future benefit payments, which
must be disclosed for fiscal years ending after June 15, 2004.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
Results for the first quarter ended March 31, 2004 showed year-over-year
increases of $42.7 million, or 35%, in sales, and $6.4 million ($0.20 per
share) in net income.
Sales for the first quarter of 2004 were $165.6 million, compared to $122.9
million for the same period last year. The increase included improvement of
20% or more in all segments and was highlighted by the Industrial and Power
Equipment segment which had a year over year increase of $24.1 million, or
81%. Overall, these increases were due primarily to higher volume caused by
improvements in economic conditions and the weaker US Dollar. This weaker US
Dollar trend makes the Company's products more competitive in foreign markets,
and the year over year estimated effect of translating foreign currency sales
was estimated to have yielded $2.8 million in additional sales revenue from
last year's first quarter.
Income from operations for the first quarter of 2004 was $27.2 million
compared to $18.3 million for the same period last year. This $8.9 million, or
49% increase, reflected a $14.2 million increase in gross profit, driven by
higher sales volume, partially offset by higher selling, general and
administration expense ("SG&A"). Total SG&A expense in the first quarter of
2004 was $29.8 million compared to $24.3 million reported in 2003. This
increase of $5.5 million, or 23%, is largely attributable to business growth
and included $1.0 million due to the weaker US Dollar. Restructuring expense
of $0.2 million was incurred in the first quarter of 2003 for severance
associated with the relocation of a production process within the Outdoor
Products segment.
Net income for the first quarter of 2004 was $6.9 million, or $0.21 per
diluted share, compared to net income of $0.5 million, or $0.01 per diluted
share, for the same period in 2003. The change in net income was primarily due
to higher income from operations of $8.9 million, offset by higher income tax
expense of $2.6 million. The higher tax expense was due primarily to the
higher pretax income, but offset partially by a lower effective tax rate, 30%
compared to 44% last year.
Page 22
SEGMENT RESULTS
The Company identifies operating segments based on management responsibility.
The Company has three reportable segments: Outdoor Products, Industrial and
Power Equipment and Lawnmower. Outdoor Products manufactures and markets
chain, bars, sprockets, and accessories for chainsaw use, concrete cutting
equipment, and lawnmower blades and accessories for outdoor care. Industrial
and Power Equipment manufactures and markets timber harvesting equipment,
industrial tractors and loaders, rotation bearings and mechanical power
transmission units. The Lawnmower segment manufactures and markets riding
lawnmowers and related accessories.
Sales for the Outdoor Products segment in the first quarter of 2004 were
$102.1 million compared to $85.2 million in 2002, a 20% increase. This
increase was driven by stronger demand across all product lines and major
geographical markets and in both original equipment manufacturer ("OEM") and
replacement channels. A weaker US Dollar contributed to this increase and the
effect of translating foreign currency sales has been estimated to be $2.8
million.
Operating profit increased to $26.3 million from $21.8 million in the first
quarter of 2003. The increase was the result of an increase in gross profit,
offset, in part, by higher SG&A costs. Gross profit increased to $43.6 million
from $35.8 million due to higher sales volume and the net favorable effect in
currency rates of $1.0 million. SG&A increased to $17.3 million from $13.9
million in 2003, largely attributable to business growth, but including $1.0
million due to the unfavorable effect of the weaker US Dollar on expenses in
foreign locations.
Sales of the Company's Industrial and Power Equipment segment in the first
quarter of 2004 were $54.0 million compared to $29.9 million in 2003. The
$24.1 million, or 81%, increase reflected improved product demand across all
brands and products, including $11.0 million under the Timberking brand that
was introduced in the second half of 2003, in conjunction with the Company's
alliance with Caterpillar, and some improvement in unit prices.
The segment's operating income in the first quarter of 2004 was $4.8 million
compared to breakeven last year. This increase was driven by growth in sales,
offset partially by higher SG&A due primarily to the 30% increase in selling
expense.
Sales for the Lawnmower segment in the first quarter of 2004 were $9.6 million
compared to $7.9 million last year, a 22% increase. The increase in sales is
due primarily to a 21% increase in unit volume supported by the new RAM
product line of mowers, Dixon's first all-steel bodied residential mower
introduced late last year, which accounted for 53% of the sales in the first
quarter of 2004. Year-over-year unit prices are up 8% as well, due primarily
to stronger mix.
The segment's operating loss for the first quarter was $0.2 million compared
to an operating loss of $0.7 million for the same period in 2003. The increase
in profitability is due primarily to the increase in sales volume.
Corporate office expense was $3.7 million for the first quarter compared to
$2.6 million in 2003. The $1.1 million increase includes $0.3 million for
severance expense and $0.6 million for professional services.
The Company's total backlog increased to $124.4 million at March 31, 2004 from
$119.3 million at December 31, 2003 and from $61.1 million at March 31, 2003
as follows (in millions):
Page 23
Backlog
----------------------------------------
March 31, December 31, March 31,
2004 2003 2003
- ------------------------------------ ------------ ------------ ------------
Outdoor Products $ 73.0 $ 66.7 $ 51.2
Industrial and Power Equipment 49.5 47.7 9.4
Lawnmower 1.9 4.9 0.5
- ------------------------------------ ------- ------- ------
Total segment backlog $ 124.4 $ 119.3 $ 61.1
- ------------------------------------ ======= ======= ======
Backlog for the Outdoor Products segment has shown continued increases over
the past two years due to improved customer inventory positions and product
demand. It should be noted, however, that during significant increases in
demand for chain saw product, the backlog may be somewhat overstated as some
customers place duplicate orders to ensure order fulfillment. The Lawnmower
segment's backlog is typically lower at this time of the year, but the
increase over last year reflects improvement in product demand from a year
ago. The Industrial and Power Equipment segment backlog has increased over $40
million, as compared to March 31, 2003, largely due to a new program
encouraging dealers to order with greater lead time, the initiation of
Timberking orders associated with the Caterpillar joint marketing arrangement,
that commenced in 2003, and an overall improvement in product demand.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, as a result of the 1999 merger and recapitalization
transactions, the Company had significant amounts of debt, with interest
payments on the notes and interest and principal payments under the credit
facilities representing significant obligations for the Company. Total debt at
March 31, 2004 was $610.2 million compared with total debt at December 31,
2003 of $610.5 million. (See Note 10 of Notes to the Consolidated Financial
Statements.)
The Company continues to be substantially leveraged, which may adversely
affect its operations. This could have important consequences, including the
following:
1. a substantial portion of cash flows available from operations are required
to be dedicated to the payment of interest expense and principal, which will
reduce the funds that would otherwise be available for operations and future
business opportunities;
2. 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;
3. substantial leverage may make the Company more vulnerable to economic
downturns and competitive pressure; and
4. the ability to obtain additional financing to fund the Company's
operational needs may be impaired or may not be available on favorable terms.
Interest on certain loan and credit facilities are payable in arrears
according to varying interest rates and periods. The Company's remaining
liquidity needs relate to working capital and capital expenditures.
The Company intends to fund working capital, capital expenditures and debt
service requirements for the next twelve months through expected cash flows
generated from operations and from the revolving credit facility. Furthermore,
the Company expects these resources will be sufficient to cover any additional
increases in working capital and capital expenditures.
Page 24
The revolving credit facility has availability of up to $67.0 million. Total
availability is adjusted for borrowing base calculations, outstanding letters
of credit issued under the facility, and minimum fixed charge coverage ratio.
The adjusted availability at March 31, 2004 was $48.0 million compared to
$43.8 million at December 31, 2003. There were no amounts drawn on the
revolving credit facility as of March 31, 2004 or December 31, 2003.
Cash balances at March 31, 2004 were $18.4 million compared to $35.2 million
at December 31, 2003. The decline in cash balance in the first quarter of 2004
of $16.8 million was due primarily to working capital requirements compared to
a decline of $14.5 million for the same period in 2003.
Cash used for operating activities in the first quarter of 2004 was $12.1
million compared to $9.2 million for the same period in 2003. The $2.9 million
increase in cash usage reflects the net increase in working capital due to the
growth in business activity and reduction in tax refunds, partially offset by
higher net income and non-cash charges.
Accounts receivable at March 31, 2004 and December 31, 2003 and sales by
segment for the first quarter of 2004 compared to the fourth quarter of 2003
were as follows:
March 31, December 31, Increase
(Dollars in millions) 2004 2003 (Decrease)
- ------------------------------------ ------------ ------------ ------------
Accounts Receivable:
Outdoor Products $ 57.7 $ 42.6 $ 15.1
Industrial and Power Equipment 20.0 19.1 0.9
Lawnmower 3.9 2.9 1.0
- ------------------------------------ ------- ------- -------
Total segment receivables $ 81.6 $ 64.6 $ 17.0
- ------------------------------------ ======= ======= =======
Quarter Ended
March 31, December 31, Increase
2004 2003 (Decrease)
- ------------------------------------ ------------- ------------ ------------
Sales:
Outdoor Products $ 102.1 $ 93.2 $ 8.9
Industrial and Power Equipment 54.0 56.8 (2.8)
Lawnmower 9.6 9.3 0.3
Elimination (0.1) (0.1)
- ------------------------------------ ------- ------- -------
Total segment sales $ 165.6 $ 159.2 $ 6.4
- ------------------------------------ ======= ======= =======
The $17.0 million increase in segment accounts receivable from December 31,
2003 is somewhat disproportionate with the growth in sales. This is partially
due to the timing of first quarter sales activity which was particularly
strong in the later half of the quarter resulting in ending balances that are
higher than normal.
Net cash used for investing activities for the first quarter of 2004 was $3.5
million compared to $4.5 million for the same period of 2003. Purchases for
property, plant and equipment during this period of 2004 were $3.5 million
compared to $4.0 million for the same period last year. Last year's results
also included $0.5 million for payments associated with the 2002 sale of an
office building in Montgomery, Alabama.
Cash used in financing activities for the first quarter of 2004 was $1.2
million compared to usage of $0.8 million for the same period last year. The
current year results include $1.3 million reduction in scheduled payments on
long term debt, partially offset by $0.2 million capital contribution from the
exercise of stock
Page 25
options. The results for the first quarter of 2003 are due
entirely to the scheduled payments on long term debt.
The Company previously disclosed in its financial statements for the year
ended December 31, 2003 that it expected to contribute approximately $14
million to its domestic pension plan in 2004. The Company does not expect to
make any contributions to its other post retirement benefit plans during 2004.
As of March 31, 2004, $0.6 million in contributions have been made and an
additional $13.4 million is expected to be made by December 31, 2004.
On April 26, 2004, the Company filed a Form S-1 regarding a potential offering
of debt or equity securities, or a combination of both.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities." FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest entities
("VIEs")created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date. It applies to public enterprises in the
first fiscal year or interim period ending after December 15, 2003, to VIEs in
which an enterprise holds a variable interest that it acquired before February
1, 2003. The adoption of this interpretation on January 1, 2004 did not have a
material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, could be classified as equity or "mezzanine" equity, by requiring
those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. SFAS No. 150 requires
disclosure regarding the terms of those instruments and settlement
alternatives. This statement was effective for all financial instruments
entered into or modified after May 31, 2003, and was otherwise effective at
the beginning of the first interim period beginning after June 15, 2003. The
Company has evaluated the effect of the adoption of SFAS No. 150 and believes
that it has not had a material impact on its financial statements.
In 2003, the FASB revised Statement No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". The FASB's revision of Statement
No. 132 requires new annual disclosures about the types of plan assets,
investment strategy, measurement date, plan obligations and cash flows, as
well as the components of the net periodic benefit cost recognized in interim
periods. In addition, SEC registrants are now required to disclose estimates
of contributions to the plan during the next fiscal year and the components of
the fair value of total plan assets by type (i.e. equity securities, debt
securities, real estate and other assets). We adopted the provisions of
Statement No. 132 (revised), except for expected future benefit payments,
which must be disclosed for fiscal years ending after June 15, 2004.
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,
Page 26
involve certain risks and actual results subsequent to the date of this
quarterly report may differ materially.
ITEM 4 - CONTROLS AND PROCEDURES
The Registrant carried out an evaluation, under the supervision and with the
participation of the Registrant's management, including the Registrant's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Registrant's disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Registrant's disclosure controls and procedures as of March
31, 2004 were effective to ensure that information required to be disclosed by
the Registrant 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's rules and
forms.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The design of any
control procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be detected.
There were no changes in the Registrant's internal control over financial
reporting that occurred during the quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
PART II Other Information
Item 6(a) Exhibits
** 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002 by James S. Osterman, Chief Executive Officer for the quarter
ended March 31, 2004.
** 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of
2002 by Calvin E. Jenness, Chief Financial Officer for the quarter
ended March 31, 2004.
** 32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by James S. Osterman, Chief Executive Officer for the quarter
ended March 31, 2004.
** 32.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by Calvin E. Jenness, Chief Financial Officer for the quarter
ended March 31, 2004.
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Item 6(b) Reports on Form 8-K
On March 22, 2004, the Company filed a Form 8-K regarding the
availability of certain data presented by one of its executive
officers at the Lehman Brothers 2004 High Yield Bond and Syndicated
Loan Conference in Orlando, Florida on March 22, 2004.
On May 6, 2004, the Company filed its financial results and public
release for the first quarter 2004 as a report pursuant to Form 8-K.
** 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: May 12, 2004 /s/ Calvin E. Jenness
---------------------------------------
Calvin E. Jenness
Senior Vice President, Chief Financial
Officer and Treasurer
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