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 June 30, 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 97222-4679
Portland, Oregon (Zip Code)
(Address of principal executive offices)
(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]
------- ------
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 June 30, 2004
--------------------- ----------------------------
$ .01 Par Value 30,954,948
Page 1
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Consolidated Financial Information
Item 1 - Consolidated Financial Statements
Unaudited Consolidated Statements of Income
Three and six months ended June 30, 2004 and 2003 3
Unaudited Consolidated Balance Sheets
June 30, 2004 and December 31, 2003 4
Unaudited Consolidated Statements of Cash Flows
Six months ended June 30, 2004 and 2003 5
Unaudited Consolidated Statements of Changes in
Stockholders' Equity (Deficit) - three and six months
ended June 30, 2004 and 2003 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis 22
Item 4 - Controls and Procedures 30
Part II Other Information
Item 6 - Exhibits and Reports on Form 8-K 31
Signature 32
Page 2
ITEM 1 - FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Blount International, Inc. and Subsidiaries
Three months Six months
ended June 30, ended June 30,
----------------------------------- ---------------------------------
(Dollar amounts in millions, except per
share data) 2004 2003 2004 2003
- ------------------------------------------- --------------- -------------- ---------------- -------------
Sales $ 169.2 $ 131.2 $ 334.8 $ 254.1
Cost of sales 110.9 86.5 219.5 166.6
- ------------------------------------------- --------------- -------------- ---------------- -------------
Gross profit 58.3 44.7 115.3 87.5
Selling, general and administrative
expenses 29.8 25.4 59.6 49.7
Restructuring expenses 0.2
- ------------------------------------------- --------------- -------------- ---------------- -------------
Operating income 28.5 19.3 55.7 37.6
Interest expense (17.2) (17.7) (34.6) (35.3)
Interest income 0.2 0.2 0.2 0.5
Other income (expense) (0.1) (3.0) (3.1)
- ------------------------------------------- --------------- -------------- ---------------- -------------
Income (loss) before income taxes 11.4 (1.2) 21.3 (0.3)
Provision (benefit) for income taxes 3.4 (0.5) 6.4 (0.1)
- ------------------------------------------- --------------- -------------- ---------------- -------------
Net income (loss) $ 8.0 $ (0.7) $ 14.9 $ (0.2)
- ------------------------------------------- =============== ============== ================ =============
Basic income (loss) per share $ 0.26 $ (0.02) $ 0.48 $ (0.01)
Diluted income (loss) per share $ 0.24 $ (0.02) $ 0.45 $ (0.01)
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
UNAUDITED CONSOLIDATED BALANCE SHEETS
Blount International, Inc. and Subsidiaries
June 30, December 31,
2004 2003
------------ ------------
Assets
- ---------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 36.7 $ 35.2
Accounts receivable, net of allowance for doubtful accounts of $2.8
and $3.0 respectively 73.9 64.4
Inventories 78.3 67.7
Other current assets 25.3 26.1
- --------------------------------------------------------------------- ------------ ------------
Total current assets 214.2 193.4
Property, plant and equipment, net of accumulated depreciation of
$197.4 and $191.1 respectively 92.9 92.0
Goodwill 76.9 76.9
Other assets 36.4 38.1
- --------------------------------------------------------------------- ------------ ------------
Total Assets $ 420.4 $ 400.4
- --------------------------------------------------------------------- ============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable and current maturities of long-term debt $ 158.0 $ 6.6
Accounts payable 33.2 29.7
Accrued expenses 78.2 73.7
Current deferred income taxes 0.1
- --------------------------------------------------------------------- ------------ ------------
Total current liabilities 269.5 110.0
Long-term debt, exclusive of current maturities 449.6 603.9
Deferred income taxes, exclusive of current portion 2.7 2.8
Other liabilities 81.0 81.0
- --------------------------------------------------------------------- ------------ ------------
Total Liabilities 802.8 797.7
- --------------------------------------------------------------------- ------------ ------------
Stockholders' equity (deficit):
Common stock: par value $0.01 per share, 100,000,000 shares
authorized, 30,954,948 and 30,827,738 outstanding 0.3 0.3
Capital in excess of par value of stock 425.3 424.6
Accumulated deficit (805.1) (820.0)
Deferred stock compensation (0.1)
Accumulated other comprehensive income (2.8) (2.2)
- --------------------------------------------------------------------- ------------ ------------
Total Stockholders' Deficit (382.4) (397.3)
- --------------------------------------------------------------------- ------------ ------------
Total Liabilities and Stockholders' Equity (Deficit) $420.4 $400.4
- --------------------------------------------------------------------- ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Blount International, Inc. and Subsidiaries
Six months ended June 30,
-------------------------
(Dollar amounts in millions) 2004 2003
- ------------------------------------------------------ ------------ -----------
Cash flows from operating activities:
Net income (loss) $ 14.9 $ (0.2)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Early extinguishment of debt 2.8
Depreciation, amortization and other non-cash charges 12.2 10.5
Deferred income taxes (0.1) 0.5
Loss on disposals of property, plant & equipment 0.2
Changes in assets and liabilities:
(Increase) in accounts receivable (9.5) (0.2)
(Increase) decrease in inventories (10.6) 0.5
(Increase) decrease in other assets (0.1) 24.1
Increase (decrease) in accounts payable 4.5 (2.7)
Increase (decrease) in accrued expenses 4.4 (5.5)
Increase (decrease) in other liabilities (0.3) 2.8
- ------------------------------------------------------ ------------ -----------
Net cash provided by operating activities 15.4 32.8
- ------------------------------------------------------ ------------ -----------
Cash flows from investing activities:
Payments related to sales of property, plant &
equipment (0.4)
Purchases of property, plant & equipment (8.4) (6.8)
- ------------------------------------------------------ ------------ -----------
Net cash used in investing activities (8.4) (7.2)
- ------------------------------------------------------ ------------ -----------
Cash flows from financing activities:
Issuance of long-term debt 118.0
Reduction of debt (4.9) (135.8)
Exercise of stock options 0.5 0.2
Other financing activities (1.1) (9.7)
- ------------------------------------------------------ ------------ -----------
Net cash used in financing activities (5.5) (27.3)
- ------------------------------------------------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 1.5 (1.7)
Cash and cash equivalents at beginning of period 35.2 26.4
- ------------------------------------------------------ ------------ -----------
Cash and cash equivalents at end of period $36.7 $24.7
- ------------------------------------------------------ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Blount International, Inc. and Subsidiaries
Accumulated
Capital in Excess Other
of Par Value of Accumulated Deferred Stock Comprehensive
(Dollar amounts in millions) Common Stock Stock Deficit Compensation Income Total
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2004
Balance March 31, 2004 $ 0.3 $ 425.0 ($ 813.1) ($ 0.1) ($ 2.4) ($ 390.3)
Net income 8.0 8.0
Other comprehensive loss, net:
Foreign currency translation (0.2) (0.2)
adjustment
Unrealized losses (0.2) (0.2)
---------
Comprehensive income 7.6
Exercise of Stock Options 0.3 0.3
- -----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004 $ 0.3 $ 425.3 ($ 805.1) ($ 0.1) ($ 2.8) ($ 382.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance on December 31, 2003 $ 0.3 $ 424.6 ($ 820.0) ($ 2.2) ($ 397.3)
Net Income 14.9 14.9
Other comprehensive loss, net:
Foreign currency translation (0.3) (0.3)
adjustment
Unrealized losses (0.3) (0.3)
---------
Comprehensive income 14.3
Exercise of stock options 0.5 0.5
Deferred stock compensation 0.2 (0.2)
Amortization of deferred stock
compensation 0.1 0.1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 2004 $ 0.3 $ 425.3 ($ 805.1) ($ 0.1) ($ 2.8) ($ 382.4)
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2003
Balance March 31, 2003 $ 0.3 $ 424.3 ($ 785.9) $ (7.0) ($ 368.3)
Net loss (0.7) (0.7)
Other comprehensive income, net:
Foreign currency translation adjustment 0.7 0.7
Unrealized gains 0.2 0.2
---------
Comprehensive income 0.2
Exercise of Stock Options 0.2 0.2
- -----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2003 $ 0.3 $ 424.5 ($ 786.6) ($ 6.1) ($ 367.9)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance on December 31, 2002 $ 0.3 $ 424.3 $ (786.3) $ (7.2) {$ 368.9)
Net loss (0.2) ( 0.2)
Other comprehensive income, net:
Foreign currency translation adjustment 0.8 0.8
Unrealized gains 0.2 0.2
---------
Comprehensive income 0.8
Exercise of Stock Options 0.2 0.2
- -----------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 2003 $ 0.3 $ 424.5 ($ 786.6) ($ 6.1) ($ 367.9)
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
Page 6
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 only of normal recurring
adjustments) necessary to present fairly the financial position of the Company
at June 30, 2004 and the results of operations and cash flows for the periods
ended June 30, 2004 and 2003. These financial statements should be read in
conjunction with the notes to the audited 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:
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------
(Dollar amounts in millions,
except per share amounts) 2004 2003 2004 2003
- ----------------------------- ----------- ----------- ----------- -----------
Net Income, as reported $ 8.0 ($ 0.7) $ 14.9 ($ 0.2)
Add: Stock-based employee
compensation cost, net of
tax, included in income 0.1 0.1 0.1
Deduct:Total stock-based
employee compensation
cost, net of tax that would
have been included in net
income under the fair value
method 0.3 0.3 0.6 0.7
- --------------------------------- ----------- ----------- ----------- -----------
Proforma net income $ 7.7 ($ 0.9) $ 14.4 ($ 0.8)
- --------------------------------- =========== =========== =========== ===========
Basic income per share
As reported $ 0.26 $(0.02) $ 0.48 $(0.01)
Pro forma 0.25 (0.03) 0.47 (0.03)
Diluted income per share
As reported $ 0.24 $(0.02) $ 0.45 $(0.01)
Pro forma 0.23 (0.03) 0.44 (0.03)
Page 7
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 recorded 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 June 30. Previous
actions represent a 2001 plant closure, benefit modification and reduction in
headcount. These expenses are included in accrued expenses.
Restructuring Actions
---------------------------------------------
Corporate
Previous Office Asset
(Dollar amounts in millions) Actions Relocation Relocation Total
- -------------------------------- ---------- ------------ ------------ -------
Balance as of January 1, 2003 $ 1.1 $ 0.4 $ 1.4 $ 2.9
Expenses/Adjustments 0.2 0.2
Charges against liability (0.3) (0.2) (0.3) (0.8)
- -------------------------------- ---------- ------------ ------------ -------
Balance at June 30, 2003 $ 0.8 $ 0.2 $ 1.3 $ 2.3
- -------------------------------- ========== ============ ============ =======
Balance as of January 1, 2004 $ 0.4 $ 0.1 $ 0.3 $ 0.8
Expenses/Adjustments
Charges against liability (0.2) 0.1 (0.1)
- -------------------------------- ---------- ------------ ------------ -------
Balance at June 30, 2004 $ 0.2 $ 0.1 $ 0.4 $ 0.7
- -------------------------------- ========== ============ ============ =======
NOTE 4:
INVENTORIES
Inventories consist of the following:
June 30, December 31,
(Dollar amounts in millions) 2004 2003
- --------------------------------- ------------- ---------------
Finished goods $ 39.9 $ 34.8
Work in process 12.3 10.7
Raw materials and supplies 26.1 22.2
- --------------------------------- ------------- ---------------
Total inventories $ 78.3 $ 67.7
- --------------------------------- ============= ===============
Page 8
NOTE 5:
SEGMENT INFORMATION
Three months ended Six months ended
June 30, June 30,
------------------------ ---------------------
(Dollar amounts in millions) 2004 2003 2004 2003
- ----------------------------- ------------------------ ---------------------
Sales
Outdoor Products $102.2 $ 87.9 $204.3 $ 173.1
Industrial and Power Equipment 53.1 33.2 107.1 63.1
Lawnmower 14.2 10.2 23.8 18.1
Elimination (0.3) (0.1) (0.4) (0.2)
- -------------------------------- ---------- ------------ --------- --------
Total sales $169.2 $ 131.2 $334.8 $ 254.1
- -------------------------------- ---------- ------------ --------- --------
Operating income (loss)
Outdoor Products $ 26.1 $ 21.1 $ 52.4 $ 42.9
Industrial and Power Equipment 4.8 0.9 9.6 0.9
Lawnmower 1.5 0.4 1.3 (0.3)
Corporate expenses/elimination (3.9) (3.1) (7.6) (5.7)
Restructure expense (0.2)
- -------------------------------- ---------- ------------ --------- --------
Operating income $ 28.5 $ 19.3 $ 55.7 $ 37.6
- -------------------------------- ---------- ------------ --------- --------
Interest expense (17.2) (17.7) (34.6) (35.3)
Interest income 0.2 0.2 0.2 0.5
Other income (expense), net (0.1) (3.0) (0.0) (3.1)
- -------------------------------- ---------- ------------ --------- --------
Income before income taxes $ 11.4 ($ 1.2) $ 21.3 ($ 0.3)
- -------------------------------- ---------- ------------ --------- --------
NOTE 6:
COMMITMENTS AND CONTINGENT LIABILITIES
In 2004 the Company entered into agreements totaling $2.9 million purchasing the
rights for the use of land for 50 years and the construction of a manufacturing
facility in Fuzhou, Fujian Province in The People's Republic of China.
The Company provides guarantees and other commercial commitments summarized in
the following table (in millions):
(Dollar amounts in millions) Total at June 30, 2004
- ------------------------------------------------- -------------------------
Product warranty (1) $ 4.9
Standby letters of credit (2) 7.9
Third party financing agreement recourse (2) (3) 4.0
Accounts receivable securitization( 2) (4) 0.5
- ------------------------------------------------- -------------------------
Total $ 17.3
- ------------------------------------------------- -------------------------
(1) Product warranties are reported as accrued expenses within total current
liabilities on the balance sheet.
(2) Not recorded as a liability in the financial statements.
(3) Applicable to the third party financing agreements for customer equipment
purchases of Dixon lawnmowers and FIED equipment.
(4) Including the guarantees of certain accounts receivable of Dixon's
customers to a third party financing company.
Page 9
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 June 30, 2004 and 2003 are as
follows (in millions):
Six Months
Ended June 30,
--------------------------
(Dollar amounts in millions) 2004 2003
- ---------------------------------------- ---------- ------------
Balance as of December 31, 2003 and 2002 $ 4.1 $ 3.5
Accrued 3.5 2.2
Payments made (in cash or in-kind) (2.7) (2.3)
- ---------------------------------------- ---------- ------------
Balance as of June 30, 2004 and 2003 $ 4.9 $ 3.4
- ---------------------------------------- ========== ============
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. 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 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. However, during the most
recent negotiations with those PLPs that are funding the work at the Site, the
Company's potential share ranged from approximately $20,000 to $250,000.
The Company has accrued $75,000 at December 31, 2003 and June 30, 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.
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.
Page 10
In March 2002, the 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. On December 6, 2002, in response to several preliminary
cross motions, the assigned Administrative Law Judge held Federal liable for
$6,270 in civil penalties and stated that the remaining issues of liability
and proposed penalties totaling $252,323 would be ruled on after an
administrative hearing. This hearing was held in January 2003 and the parties
await a final ruling. At the current time the Company does not believe payment
of the civil penalties sought by the EPA will have a material 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. However, the Company was subsequently
informed by the EPA that its report would be delayed, and has not received the
offer or explanation as of August 10, 2004. The site was operated as a
landfill from 1948 to 1984, and received wastes from over 4,000 generators. 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 Recovery 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 the DEQ regarding alleged violations
of state and federal hazardous waste management regulations. None of the
alleged violations concern a release or discharge into the environment.
In response to the Notice, the Company has taken certain corrective actions,
has asked for further explanation of some of the alleged violations and may
contest the remaining alleged violations. Under applicable procedures, the
Company and DEQ will confer on these issues; however, after considering the
Company's response, the DEQ could issue a Notice of Violation and, if so, the
possibility for civil penalties exists. Nonetheless, the Company does not
believe payments that might potentially be incurred will have a material
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. 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 any 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 any matter deemed by management and its counsel to be a
reasonably possible loss contingency in light of all of the current
circumstances.
Page 11
NOTE 7:
OTHER INFORMATION
During the six months ended June 30, 2004, net tax payments of $5.8 million
were made compared to $3.6 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 years 1999 through 2003 are
still open for review. Interest paid during the six months ended June 30, 2004
and 2003 was $29.9 million and $32.9 million, respectively.
NOTE 8:
EARNINGS PER SHARE DATA
For the three months and six months ended June 30, 2004 and 2003, net income
and shares used in the earnings per share ("EPS") computations were as follows:
Three months Six months
ended June 30, ended June 30,
----------------------- --------------------------
(Dollar amounts in millions, except
per share data) 2004 2003 2004 2003
- ------------------------------------ ----------------------- --------------------------
Net income as reported $ 8.0 $ (0.7) $ 14.9 $ (0.2)
========== =========== ============ ===========
Shares:
Basic EPS - weighted average
common shares
outstanding 30,936,116 30,808,010 30,897,971 30,801,946
Dilutive effect of stock options 2,037,347 1,990,168
----------- ----------- ------------ -----------
Diluted EPS - weighted
average common shares
outstanding 32,973,463 30,808,010 32,888,139 30,801,946
=========== =========== ============ ===========
NOTE 9:
CONSOLIDATING FINANCIAL INFORMATION
Blount 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 Blount International. 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, 65% of outstanding shares of first tier foreign
subsidiaries, and are held in parri passu, ratably, with our secured credit
facility lenders. The 13% Senior Subordinated Notes are fully and
unconditionally, jointly and severally, guaranteed by Blount International 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 Blount International and all of
the Company's domestic subsidiaries 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).
Page 12
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Blount
International, Guarantor Non-Guarantor
(Dollar amounts in millions) Inc. Blount Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Operations
SIX MONTHS ENDED JUNE 30, 2004
Sales $ 228.8 $ 77.4 $ 112.4 $ (83.8) $ 334.8
Cost of sales 167.8 60.9 79.4 (88.6) 219.5
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 61.0 16.5 33.0 4.8 115.3
Selling, general and administrative
expenses 36.4 9.1 14.1 59.6
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 24.6 7.4 18.9 4.8 55.7
Interest expense $(10.2) (23.5) (0.2) (0.7) (34.6)
Interest income 0.2 0.2
Other income (expense), net 0.6 (0.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (10.2) 1.7 7.2 17.8 4.8 21.3
Provision (benefit) for income taxes 0.4 6.0 6.4
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (10.2) 1.7 6.8 11.8 4.8 14.9
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings (losses) of affiliated
companies, net 25.2 23.5 0.1 (48.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) $15.0 $ 25.2 $ 6.9 $ 11.8 $(44.0) $ 14.9
===================================================================================================================================
THREE MONTHS ENDED JUNE 30, 2004
Sales $ 115.4 $ 40.5 $ 54.5 $ (41.2) $ 169.2
Cost of sales 86.2 31.9 37.1 (44.3) 110.9
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 29.2 8.6 17.4 3.1 58.3
Selling, general and administrative
expenses 18.5 4.3 7.0 29.8
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 10.7 4.3 10.4 3.1 28.5
Interest expense $ (5.1) (11.4) (0.1) (0.6) (17.2)
Interest income 0.2 0.2
Other income (expense), net 0.3 (0.4) ( 0.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (5.1) ( 0.4) 4.2 9.6 3.1 11.4
Provision (benefit) for income taxes 0.3 3.1 3.4
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (5.1) ( 0.4) 3.9 6.5 3.1 8.0
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings (losses) of affiliated
companies, net 13.2 13.7 0.1 (27.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) $ 8.1 $ 13.3 $ 4.0 $ 6.5 $(23.9) $ 8.0
===================================================================================================================================
Page 13
Blount
International, Guarantor Non-Guarantor
(Dollar amounts in millions) Inc. Blount Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Operations
Statement of Operations
SIX MONTHS ENDED JUNE 30, 2003
Sales $ 164.4 $ 60.0 $ 97.3 $ (67.6) $ 254.1
Cost of sales 115.9 47.0 71.8 (68.1) 166.6
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 48.5 13.0 25.5 0.5 87.5
Selling, general and administrative
expenses 29.5 8.2 12.0 49.7
Restructuring expenses 0.2 0.2
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 19.0 4.6 13.5 0.5 37.6
Interest expense $ (9.9) (23.7) (0.3) (1.4) (35.3)
Interest income 0.3 0.2 0.5
Other income (expense), net (2.6) (0.5) (3.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (9.9) (7.0) 4.3 11.8 0.5 (0.3)
Provision (benefit) for income taxes (4.0) (6.8) 1.7 9.0 (0.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (5.9) (0.2) 2.6 2.8 0.5 (0.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings (losses) of affiliated
companies, net 5.7 5.9 0.2 (11.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) $ (0.2) $ 5.7 $ 2.8 $2.8 $(11.3) $ (0.2)
===================================================================================================================================
THREE MONTHS ENDED JUNE 30, 2003
Sales $ 83.6 $ 31.2 $49.5 $(33.1) $ 131.2
Cost of sales 59.9 24.3 36.3 (34.0) 86.5
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 23.7 6.9 13.2 0.9 44.7
Selling, general and administrative
expenses 15.4 3.9 6.1 25.4
Restructuring expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 8.3 3.0 7.1 0.9 19.3
Interest expense $ (5.0) (11.2) (0.1) (1.4) (17.7)
Interest income 0.2 0.2
Other income (expense), net (2.7) (0.3) ( 3.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (5.0) ( 5.4) 2.9 5.4 0.9 (1.2)
Provision (benefit) for income taxes (1.7) ( 7.0) 1.1 7.1 ( 0.5)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (3.3) 1.6 1.8 ( 1.7) 0.9 ( 0.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings (losses) of affiliated
companies, net 2.6 1.0 (3.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) $ 0.7 $ 2.6 $ 1.8 $( 1.7) $ 2.7 $ ( 0.7)
===================================================================================================================================
Page 14
Blount
International, Guarantor Non-Guarantor
(Dollar amounts in millions) Inc. Blount Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
JUNE 30, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 16.8 $ (0.5) $ 20.4 $ 36.7
Accounts receivable, net 41.2 13.4 19.3 73.9
Intercompany receivables 299.7 39.2 10.1 $(349.0)
Inventories 33.9 21.5 22.9 78.3
Other current assets 23.2 0.5 1.7 (0.1) 25.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 414.8 74.1 74.4 (349.1) 214.2
Investments in affiliated companies $ (7.0) 211.9 (2.1) (202.8)
Property, plant and equipment, net 26.5 33.1 33.3 92.9
Cost in excess of net assets of acquired
businesses, net 39.7 30.7 6.5 76.9
Other assets 28.9 7.5 36.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ (7.0) $ 721.8 $ 137.9 $ 119.6 ($551.9) $ 420.4
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities
of long-term debt $ 156.7 $ 1.3 $ 158.0
Accounts payable 19.4 $ 7.0 6.8 33.2
Intercompany payables $ 349.0 ($349.0)
Accrued expenses 56.4 10.2 11.8 (0.1) 78.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 349.0 232.5 17.2 19.9 (349.1) 269.5
Long-term debt, exclusive of current
maturities 24.0 421.7 3.9 449.6
Deferred income taxes, exclusive of
current portion 0.4 2.3 2.7
Other liabilities 2.4 74.2 3.4 1.0 81.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 375.4 728.8 20.6 27.1 (349.1) 802.8
Stockholders equity (deficit) (382.4) (7.0) 117.3 92.5 (202.8) (382.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity
(Deficit) ($ 7.0) $721.8 $137.9 $119.6 $(551.9) $420.4
===================================================================================================================================
Page 15
Blount
International, Guarantor Non-Guarantor
(Dollar amounts in millions) Inc. Blount Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
DECEMBER 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 13.7 $ (0.6) $ 22.1 $ 35.2
Accounts receivables, 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 0.0 603.9
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 16
Blount
International, Guarantor Non-Guarantor
(Dollar amounts in millions) Inc. Blount Inc. Subsidiaries Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004
Net cash provided by (used in) continuing $ (11.6) $ 22.1 $ 1.2 $ 3.7 $ 15.4
operations
Purchases of property, plant and equipment (2.3) (1.1) (5.0) ( 8.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2.3) (1.1) (5.0) ( 8.4)
Cash flow from financing activities:
Reduction in debt (4.5) (0.4) ( 4.9)
Exercise of stock options 0.5 0.5
Advances from (to) affiliated companies 11.1 (11.1)
Other financing activities (1.1) ( 1.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used in) financing
activities 11.6 (16.7) (0.4) ( 5.5)
Net increase (decrease) in cash and cash
equivalents 3.1 0.1 (1.7) 1.5
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 $16.8 ($ 0.5) $ 20.4 $ 36.7
===================================================================================================================================
SIX MONTHS ENDED JUNE 30, 2003
Net cash provided by (used in)
continuing operations $ (4.3) $ 32.0 $ 0.7 $ 4.4 $ 32.8
Proceeds from sales of property,
plant and equipment (0.4) ( 0.4)
Purchases of property, plant
and equipment (4.3) (0.7) (1.8) ( 6.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4.7) (0.7) (1.8) ( 7.2)
Cash flow from financing activities:
Net increase in short-term borrowings (0.8) 0.8
Issuance of long-term debt 118.0 118.0
Reduction of long-term debt (135.8) (135.8)
Exercise of stock options 0.2 0.2
Advances from (to) affiliated companies 4.1 (3.6) (0.5)
Other financing activities (9.7) (9.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used in) financing
activities 4.3 (31.9) (0.5) 0.8 ( 27.3)
Net increase (decrease) in cash and
cash equivalents (4.6) (0.5) 3.4 (1.7)
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 $ 11.7 ($ 0.6) $ 13.6 $ 24.7
===================================================================================================================================
Page 17
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 for the
years ended December 31, 2002 and 2003, and as of June 30, 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 thresholds for adjusted EBITDA as
defined in the credit agreement and maintain a certain fixed coverage ratio,
which is defined as adjusted EBITDA divided by the sum of cash interest paid,
capital spending, cash income taxes paid and scheduled debt repayments.
Long-term debt at June 30, 2004 and December 31, 2003 consisted of the
following:
June 30, December 31,
(Dollar amounts in millions) 2004 2003
- ---------------------------------- ----------- ----------------
13% Senior subordinated notes $ 323.2 $ 323.2
7% Senior notes 149.8 149.7
Term loan 110.6 115.5
12% preferred equivalent security 24.0 22.1
- ---------------------------------- ----------- ----------------
Total debt 607.6 610.5
Less current maturities (158.0) (6.6)
- ---------------------------------- ----------- ----------------
Total long-term debt 449.6 603.9
As of June 30, 2004 the 7% Senior Notes were classified as a current debt due
to the June 15, 2005 maturity date.
On August 9, 2004, the Company completed a series of financing transactions.
The Company is using the net proceeds from this financing to redeem the 7%
Senior Notes, the 12% Convertible Preferred Equivalent Security and,
subsequent to a mandatory 30 day waiting period during which
Page 18
time the remaining proceeds will be held in trust, the 13% Senior Subordinated
Notes. Estimated nonrecurring charges of $47.1 million associated with the
write-off of debt issuance costs, unamortized discounts and redemption
premiums will be incurred.
Upon completion of the refinancing transactions, the Company will have
refinanced its existing long term debt by issuing additional common stock and
new Senior Subordinated Notes, and amending and restating the agreements on
its senior credit facilities. These three transactions are referred to as the
"Refinancing Transactions". The amended and restated credit facilities will
consist of a revolving credit facility of up to $100.0 million, a $4.9 million
Canadian term loan facility, a $265.0 million Term B loan facility and a $50.0
million Second Collateral Institutional Loan ("SCIL") facility.
Subsequent to the amendment and restatement of our senior credit facilities,
the terms of the revolving credit facility will be five years, the terms of
the Canadian term loan facility and Term B loan facility will be six years and
the terms of the SCIL facility will be six and one half years, in each case,
from the date of the completion of the refinancing transactions. Scheduled
quarterly payments under the amended and restated credit facilities will be as
follows: the Canadian term loan facility will require quarterly payments of US
$12,212, with a final payment of $4.6 million due on the maturity date, the
Term B loan facility will require quarterly payments of $662,500, with a final
payment of $249.1 million due on the maturity date, and the SCIL facility will
not require any quarterly payments and will be payable in a single payment on
the maturity date. The amended and restated senior credit facilities may be
prepaid at any time, however, any repayment of the SCIL facility during the
first two years of the term will result in a prepayment fee to the lenders
under most circumstances. The amount available to be drawn on the revolving
credit facility will be restricted by our First Lien Credit Facilities
leverage ratio. On August 9, 2004, after the Refinancing Transactions, the
Company had $50.4 million of additional borrowing capacity available through
the revolving credit facility.
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 for the Company's
pension and other post-retirement benefit plans, a non-cash item, for the six
months ended June 30, is as follows:
Other Post-retirement
Pension Benefits Benefits
---------------------------- ---------------------------
Six months ended June 30, Six months ended June 30,
---------------------------- ---------------------------
(Dollar amounts in millions) 2004 2003 2004 2003
- --------------------------------- ----------- ------------- ------------ -----------
Components of net periodic benefit:
Service cost $ 2.4 $ 2.4 $ 0.2 $0.2
Interest cost 4.2 4.2 1.0 1.0
Expected return on plan assets (3.6) (3.2)
Amortization of prior service costs 0.2 0.2
Amortization of net (gain) loss 1.1 1.2 0.5 0.4
- --------------------------------- ----------- ------------- ------------ -----------
Total net period benefit cost $ 4.3 $ 4.8 $ 1.7 $ 1.6
- --------------------------------- =========== ============= ============ ===========
Page 19
As of June 30, 2004, $4.2 million in contributions to the pension plan have
been made and an additional $10.1 million is expected to be made by December
31, 2004. The Company does not expect to make any contributions to its other
post retirement benefit plans during 2004.
NOTE 13:
OTHER ASSETS
Other assets at June 30, 2004 and December 31, 2003 consist of the following:
June 30, December 31,
(Dollar amounts in millions) 2004 2003
- ------------------------------ -------------- ------------------
Long-term deferred tax asset $ 0.1
Other long-term assets 17.2 $ 16.6
Deferred financing costs 19.1 21.5
- ------------------------------ -------------- ------------------
Total other assets $ 36.4 $ 38.1
- ------------------------------ ============== ==================
As of June 30, 2004 the projected amortization of December 31, 2003 deferred
financing costs by year is as follows:
(Dollar amounts in millions) June 30, 2004
------------------
2004 $ 4.8
2005 4.4
2006 3.9
2007 4.0
2008 and beyond 4.4
- --------------------------------------------- ------------------
Total amortization $ 21.5
- --------------------------------------------- ==================
As a result of the refinancing transactions, which occurred on August 9, 2004
as discussed in Note 14, an amount estimated at $11.4 million is being written
off to other expense, and new costs estimated at $18.2 million are being
capitalized. Future amortization expense will be affected as a result of the
net increase to the asset and changes to the maturity dates for related debt
instruments.
NOTE 14:
SUBSEQUENT EVENT
On August 9, 2004, the Company completed a series of financing transactions.
Referred to as the "Refinancing Transactions", they include:
o The issuance of an additional 13,800,000 shares of the Company's
common stock at $10 per share;
o The issuance of $175.0 million 8.875% Senior Subordinated Notes due
2012;
o The amendment and restatement of the Company's existing senior
credit facilities consisting of the new $100.0 million revolving
credit facility, a $4.9 million Canadian term loan facility, a
$265.0 million Term B loan facility and a $50.0 million Second
Collateral Institutional Loan ("SCIL") facility; and
o The payment of fees and expenses estimated at $26.9 million as of
August, 2004.
As a result of the Refinancing Transactions, the Company will use the net
proceeds from this financing to redeem the 7% Senior Notes, the 12%
Convertible Preferred Equivalent Security, and subsequent to a mandatory 30
day waiting period during which time the remaining proceeds will be held in
trust, the 13% Senior Subordinated Notes. Estimated nonrecurring charges of
$47.1 million
Page 20
associated with the write-off of debt issuance costs, unamortized discounts
and redemption premiums will be incurred in the third quarter of 2004.
Long-term debt as of August 9, 2004, giving effect to the retirement of the
13% notes, is as follows:
(Dollar amounts in millions) August 9, 2004
- ------------------------------------------- -------------------
Revolving credit facility $ 41.8
Canadian term loan 4.9
Term B loan 265.0
Second Collateral Institutional Loan 50.0
8.875% Senior subordinated notes 175.0
- ------------------------------------------- -------------------
Total long-term debt as of August 9, 2004 $ 536.7
- ------------------------------------------- -------------------
Subsequent to the amendment and restatement of our senior credit facilities,
the terms of the revolving credit facility will be five years, the terms of
the Canadian term loan facility and Term B loan facility will be six years and
the terms of the SCIL facility will be six and one half years, in each case,
from the date of the completion of the refinancing transactions. Scheduled
quarterly payments under the amended and restated credit facilities will be as
follows: the Canadian term loan facility will require quarterly payments of US
$12,212, with a final payment of $4.6 million due on the maturity date, the
Term B loan facility will require quarterly payments of $662,500, with a final
payment of $249.1 million due on the maturity date, and the SCIL facility will
not require any quarterly payments and will be payable in a single payment on
the maturity date. The amended and restated senior credit facilities may be
prepaid at any time; however, any repayment of the SCIL facility during the
first two years of the term will result in a prepayment fee to the lenders
under most circumstances. The amount available to be drawn on the revolving
credit facility will be restricted by our First Lien Credit Facilities
leverage ratio. As of August 9, 2004, after the Refinancing Transactions, the
Company had $50.4 million of additional borrowing capacity available through
the revolving credit facility.
NOTE 15:
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
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 evaluated the effect of the adoption of SFAS No. 150 and it did not
have a material impact on its financial statements.
Page 21
In December 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 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATING RESULTS
Three months and six months ended June 30, 2004 (unaudited) compared with
three months and six months ended June 30, 2003 (unaudited).
Results for the second quarter and six months ended June 30, 2004 showed year-
over-year increases for both sales and net income. Sales increased $38.0
million, or 29%, and $80.7, or 32%, respectively for the quarter and six
months year to date. The Company's total backlog increased $5.9 million during
the quarter to $130.3 million at June 30, 2004 and compares to $119.3 million
at December 31, 2003 and $86.5 million at June 30, 2003. For the quarter, net
income was $8.0 million, or $0.24 per share (fully diluted), an increase of
$8.7 million from the same period last year. Year to date, net income of $14.9
million, or $0.45 per share (fully diluted) shows an increase of $15.1 million
compared to last year. The improved net income is due primarily to the strong
growth in sales.
Sales for the second quarter of 2004 were $169.2 million, compared to $131.2
million for the same period in 2003. The 29% increase reflected an improvement
of 16% or more in all operating segments and was highlighted by the Industrial
and Power Equipment segment, which had a year-over-year increase of 60%. The
following factors contributed to the increase in sales:
o Unit volume increases of our timber harvesting equipment yielded
$19.4 million in incremental sales. This increase is due to improved
conditions within the domestic forestry products market as prices of
lumber, pulp and paperboard increased from 2003. Unit volume was
also increased by incremental shipments related to marketing and
sales agreements with Caterpillar Inc. that commenced during 2003.
o Increases in sales volumes of our Outdoor Products segment generated
an additional $13.3 million in sales during the second quarter of
2004 as compared to the same period in 2003. International sales
increased by 17% as the relative weakness of the U.S. dollar in 2004
compared to 2003 allowed our products to be priced more
competitively. Also, sales of the ICS product line, which are used
to cut concrete, increased by 28%.
o The introduction of a new Dixon lawnmower model helped increase
Lawnmower segment sales by $4.0 million, or 39%, in the second
quarter of 2004 compared to the same period in 2003.
o The effect of foreign currency translation resulted in $1.4 million
in higher sales.
Sales for the six months ended June 30, 2004 were $334.8 million, compared to
$254.1 million for the same period in 2003. This 32% increase reflected
improvements of 18% or more in all operating segments and was highlighted by
the Industrial and Power Equipment segment, which had a year-over-year
increase of 70%. The following factors contributed to the increase in sales:
Page 22
o Unit volume increases of our timber harvesting equipment yielded
$39.4 million in incremental sales. This increase is due to improved
conditions within the domestic forestry products market as prices of
lumber, pulp and paperboard increased from 2003. Unit volume was
also increased by incremental shipments related to marketing and
sales agreements with Caterpillar Inc. that commenced during 2003.
o Increases in sales volumes of our Outdoor Products segment generated
an additional $28.3 million in sales during the first six months of
2004 as compared to the same period in 2003. International sales
increased by 19% as the relative weakness of the U.S. dollar in 2004
compared to 2003 allowed our products to be priced more
competitively. ICS sales grew by 22%. Sales of outdoor care products
increased by 20% primarily through the use of the Oregon brand name
to gain new distribution.
o The introduction of a new Dixon lawnmower model helped increase
Lawnmower segment sales by $5.7 million, or 31%, in the second
quarter of 2004 compared to the same period in 2003.
o The effect of foreign currency translation resulted in $4.2 million
in higher sales.
Operating income for the second quarter of 2004 was $28.5 million compared to
$19.3 million for the same period in 2003. This $9.2 million, or 48%, increase
reflected a $13.6 million increase in gross profit, partially offset by a $4.4
million, or 17%, increase in selling, general and administration expense
(``SG&A''). The higher gross profit is primarily the result of $11.6 million
of unit volume increases, $0.4 million in favorable currency translation, and
$1.6 million for the net effect of changes to unit prices, production costs
and product mix. Results for the quarter include higher steel prices estimated
at $3.9 million as compared to the same period in 2003; the Company began
adjusting its selling prices in response to the higher steel costs and
estimated that it generated approximately $0.9 million from this action in the
second quarter.
Operating income for the six months ended June 30, 2004 was $55.7 million
compared to $37.6 million for the same period in 2003. This $18.1 million, or
48%, increase reflected a $27.8 million increase in gross profit, partially
offset by a $9.9 million, or 20%, increase in SG&A. The higher gross profit is
primarily the result of $23.8 million of unit volume increases, $1.4 million
in favorable currency translation, and the net effect of changes to unit
prices, production costs and product mix estimated at $2.6 million. Results
for the six months ended June 30, 2004 include higher steel prices of
approximately $4.6 million as compared to the same period in 2003.
Total SG&A expense in the second quarter of 2004 was $29.8 million compared to
$25.4 million in 2003. For the six months year to date, SG&A expense was $59.6
million compared to $49.7 million last year. These year-over-year increases of
$4.4 million, or 17%, for the quarter and $9.9 million, or 20%, for the six
months year to date are largely attributable to business growth and include
additional overseas operational expenses of $0.3 million and $1.3 million,
respectively, compared to the prior year due to the weaker U.S. dollar.
Increases in professional services, largely to ensure compliance with the
Sarbanes-Oxley Act, were $0.7 million and $1.5 million respectively for the
three months and six months ending June 30, 2004. The Outdoor Products segment
incurred SG&A increases from last year associated with the new enterprise
resource planning system that was activated in the fourth quarter of 2003, of
$1.3 million and $2.3 million for the three months and six months ending June
30, 2004 primarily for depreciation and training. Advertising expense
increased from last year $0.7 million and $1.2 million respectively as the
Company seeks to strengthen brand awareness. Incremental expenses from last
year related to the Caterpillar agreement are $0.3 million for the second
quarter and $0.9 million for the six month periods. 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 second quarter of 2004 was $8.0 million, or $0.24 per share
(fully diluted), compared to a net loss of $0.7 million, or $0.02 per share
(fully diluted), for the same period in 2003. The change in net income is due
primarily to the following:
o Increase of $9.2 million in operating income primarily from growth
in sales volume,
Page 23
o Decrease in other expense of $2.9 million as the 2003 amount
included $2.8 million related to extinguishment of debt,
o $3.9 million increase in provision for income taxes due primarily to
higher pretax income, offset partially by a lower effective tax rate
of 30% compared to 42% in 2003. The lower tax rate in 2004 reflects
an estimate of the 2004 provision for income taxes on a global
basis.
Net income for the six months ended June 30, 2004 was $14.9 million, or $0.45
per share (fully diluted), compared to a net loss of $0.2 million, or $0.01
per share (fully diluted), for the same period in 2003. The change in net
income is due primarily to the following:
o Increase of $18.1 million in operating income primarily from growth
in sales volume,
o Decrease in other expense of $3.1 million as the 2003 amount
included $2.8 million related to extinguishment of debt,
o $6.5 million increase in provision for income taxes due primarily to
higher pretax income, offset partially by a lower effective tax rate
of 30% compared to 33% in 2003.
The following table reflects segment sales and contribution to operating income
for the three months and six months ended June 30, 2004 and 2003:
3 months 6 months
(unaudited) Ended June 30, Ended June 30,
------------------- -------------------
(Dollar amounts in millions) 2004 2003 2004 2003
- ------------------------------- ------- -------- -------- --------
Sales
Outdoor Products $ 102.2 $ 87.9 $ 204.3 $ 173.1
Industrial and Power Equipment 53.1 33.2 107.1 63.1
Lawnmower 14.2 10.2 23.8 18.1
Inter-Segment Elimination (0.3) (0.1) (0.4) (0.2)
- ------------------------------- ------- -------- -------- --------
Total Sales $ 169.2 $ 131.2 $ 334.8 $ 254.1
Segment Contribution
Outdoor Products $ 26.1 $ 21.1 $ 52.4 $ 42.9
Industrial and Power Equipment 4.8 0.9 9.6 0.9
Lawnmower 1.5 0.4 1.3 (0.3)
Inter-Segment Elimination - - - -
- ------------------------------- ------- -------- -------- --------
Contribution from segments 32.4 22.4 63.3 43.5
Corporate Office Expenses (3.9) (3.1) (7.6) (5.7)
Restructure Expenses - - - (0.2)
- ------------------------------- ------- -------- -------- --------
Operating Income $ 28.5 $ 19.3 $ 55.7 $ 37.6
- ------------------------------- ======= ======== ======== ========
The principal reasons for these results are set forth below.
Outdoor Products
Sales for the Outdoor Products segment in the second quarter of 2004 were
$102.2 million compared to $87.9 million in 2003, a 16% increase. For the six
months year to date, sales were $204.3 million compared to $173.1 million last
year. For the quarter, the increase was driven by unit volume increases
totaling $13.3 million and favorable foreign currency translation of $1.4
million. Increased unit selling prices were offset by the combination of
weaker product mix and a higher proportion sold to original equipment
manufacturers with lower relative margins for a net decrease estimated at $0.4
million compared to the same period in 2003. For the six months year to date,
the sales volume impact is estimated at $28.3 million and the favorable
foreign currency translation is $4.2 million, partially offset by a $1.3
million decrease due to the net effect of higher prices offset by a weaker
product mix and an increased proportion sold to original equipment
manufacturers.
Page 24
Demand continues to increase across all of the segment's product lines
compared to 2003 as the weaker U.S. dollar made the selling prices of our
products more competitive internationally and utilization of saw chain
products remained high in all markets. The segment's order backlog increase of
$4.3 million, or almost 6%, to $77.3 million during the second quarter is
reflective of both the substantial demand for saw chain products and some
production capacity limitations. We are addressing this backlog in part by
adding capacity in the second half of 2004 and in 2005.
This segment's contribution to operating income increased to $26.1 million
from $21.1 million in the second quarter of 2003. For the six months ended
June 30, contribution was $52.4 million compared to $42.9 million for the same
period in 2003. The year-over-year increases for the quarter and year to date
were driven by higher sales volume of $6.2 million and $12.8 million
respectively. The net effect of foreign currency translation contributed $0.1
million for both the quarter and year to date. The weak U.S. dollar generally
results in higher sales revenue for products sold in Europe and other foreign
locations, offset by higher production costs for our product manufacturing in
Canada and Brazil and higher SG&A expenses for foreign offices. The net effect
of product mix, unit prices and product costs excluding currency translation
effects contributed to the year-over-year increase as well, and are estimated
at $1.0 million for the quarter and $1.2 million for the six months year to
date. Rising steel prices are estimated to have increased cost of sales by
$1.8 million for the quarter and $2.3 million year to date compared to the
same periods last year. Selling price increases related to the increase in
steel costs were initiated in the first half and are estimated to have
resulted in recovery of $0.3 million so far. SG&A expense, excluding the
estimated effect of currency, was up $16% for both the quarter and year to
date, attributable largely to additional costs required in response to higher
demand, as well as $2.3 million in incremental costs for the first six months
related to the start up of a new enterprise resource planning system that was
activated in the fourth quarter of 2003.
Industrial and Power Equipment
Sales for the Industrial and Power Equipment Group segment ("IPEG") in the
second quarter of 2004 were $53.1 million compared to $33.2 million in the
second quarter of 2003, a 60% increase. For the six months year to date, sales
were $107.1 million compared to $63.1 million for the same period in the prior
year, representing a 70% increase. In general, market conditions within the
United States forestry market improved over the past year as housing
construction remained strong, prices for forest related products increased and
imports of wood products decreased due to a weaker U.S. dollar. These factors
resulted in increased demand for timber harvesting products.
The second quarter increase in sales includes a $19.4 million volume increase
in timber harvesting unit shipments. The sales increase for six months
includes a $39.4 million volume increase for these unit sales. These increases
in sales volume included $9.6 million and $20.5 million respectively for the
quarter and year to date for products sold under the Timberking brand names,
the first shipments of which started in August of 2003 in conjunction with our
joint marketing and supply agreements with Caterpillar, Inc. Additional volume
in the Company's Gear Products unit yielded another $2.1 million for the
quarter and $3.4 million year to date. For the segment overall, the combined
effect of price and mix provided a decrease of $1.3 million for the quarter
compared to last year, but a net increase of $1.7 million for the year to date
with results for both time periods reflecting the effect of increased selling
prices offset by a product mix shift to lower cost models. International sales
are an area of focused effort to expand the business. For the three months and
six months ended June 30, 2004, international sales increased $0.3 million and
$1.8 million respectively, compared to the same periods in 2003. Segment
backlog at the end of the second quarter was $52.8 million, and increased $5.1
million from year end 2003 and $24.3 million from the end of the second
quarter of 2003.
IPEG's segment contribution to operating income in the second quarter of 2004
was $4.8 million compared to $0.9 in the second quarter of 2003. For the six
months year to date, contribution was $9.6 million compared to $0.9 million
last year. The $3.9 million increase for the second quarter was driven by the
sales volume impact of $4.5 million. In addition, the net effect of selling
price increases
Page 25
partially offset by higher product costs and weaker product mix provided
another $0.3 million. Higher product costs include the effect of higher steel
prices estimated at $1.9 million on cost of sales, but offset partially by an
estimated $0.6 million recovered from related selling price increases. SG&A
expense is up $0.9 million, or 17%, for the quarter compared to last year due
to additional staffing and marketing programs related to the Timberking
products and international market growth initiatives. For the six months year
to date, the $8.7 million increase in segment contribution from last year
reflects growth in sales volume of $9.6 million, offset by the net effect of
selling price increases, higher product costs and weaker product mix of $0.9
million. Higher product costs for the six months include an estimated $2.0
million due to higher steel prices. SG&A expenses for the six months are up by
$1.8 million over last year due to the segment's growth initiatives.
Lawnmower
Sales for the Lawnmower segment in the second quarter of 2004 were $14.2
million compared to $10.2 million in the second quarter of 2003, a 39%
increase. For the six months year to date, sales were $23.8 million compared
to $18.1 million for the same period in the prior year, representing a 31%
increase. Much of the improvement is due to the successful introduction of a
new product line late last year, marketed under the RAM name, the Lawnmower
segment's first all-steel bodied residential mower. For the quarter and year
to date, this new line has represented more than one-half of the unit sales
and has contributed to an increase in average unit prices as well. Overall
unit volumes are up 31% for the quarter and 26% year to date, and have
resulted in incremental revenues of $2.5 million for the quarter and $3.7
million year to date. The increase in average unit prices, due primarily to a
shift in product mix towards higher priced units, have contributed an
estimated $1.5 million for the quarter and $2.0 million for the six months
compared to the same periods last year. Backlog at the end of the second
quarter was $0.2 million compared to $4.9 million at December 31, 2003 and
$0.1 million at the end of the second quarter of 2003. The Lawnmower segment's
backlog at the end of the second quarter in each year generally reflects the
seasonality of the industry.
The Lawnmower segment's contribution to operating income for the second
quarter was $1.5 million compared to a contribution of $0.4 million for the
same period in 2003. For the six months year to date, the contribution was
$1.3 million compared to a contribution loss of $0.3 million in 2003. The
improvement in the contribution was primarily due to higher gross profit on
increases in sales volume estimated at $0.9 million and $1.4 million
respectively for the quarter and year to date, and $0.3 and $0.5 million
increases respectively for the quarter and year to date for the net effect of
selling price, manufacturing costs and mix, offset partially by increases in
SG&A expense of $0.1 million for the quarter and $0.3 million year to date
compared to the year prior.
Corporate Office
Corporate office expense was $3.9 million for the second quarter compared to
$3.1 million for the same period in 2003. For the six months year to date,
corporate office expense was $7.6 million compared to $5.7 million for the
same period in 2003. We expect our corporate expense to increase over the
course of the year as we add headcount and incur professional services to
ensure compliance with the Sarbanes-Oxley Act. For the quarter and year to
date respectively, professional services have shown increases of $0.6 and $1.2
million compared to the same periods last year. Increase in compensation
expense accounts for increases of $0.4 and $0.6 million respectively for the
quarter and year to date with three-fourths of the increase a result of higher
incentive compensation.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On August 9, 2004, the Company executed a series of financing transactions.
These three transactions, referred to as the "Refinancing Transactions",
included:
o Issuance of 13,800,000 shares of Company stock that generated gross
proceeds of $138.0 million.
Page 26
o Issuance of new 8.875% Senior Subordinated Notes due in 2012 that
generated gross proceeds of $175.0 million.
o Amendment and restatement of the Company's existing senior credit
facilities, including an increase in amounts available, with the
total amounts drawn increasing by $246.6 million.
The Company used the net proceeds of the financing transactions as follows:
o Redeemed 7% Senior Notes with $150.0 million principal outstanding.
o Called with 30 days notice the 13% Senior Subordinated Notes with
$323.2 million principal outstanding, placing necessary funds into a
trust account.
o Redeemed 12% Convertible Preferred Equivalent Security for $29.6
million principal and accrued interest outstanding.
o Paid fees and expenses of $26.9 million.
Total debt at June 30, 2004 was $607.6 million compared with total debt at
December 31, 2003 of $610.5 million. Our term loans were subject to certain
reporting and financial covenant compliance requirements and the Company was
in compliance with all debt covenants as of June 30, 2004. Outstanding debt as
of June 30, 2004 consisted of term loans of $110.6 million, Senior Notes of
$149.8 million, Senior Subordinated Notes of $323.2 million and $24.0 million
in a convertible preferred equivalent security (the amount outstanding on such
convertible preferred equivalent security as of June 30, 2004 was $29.2
million, which reflects the original principal amount plus the value of
accumulated interest, payments-in-kind and amortization of discounts). The
Company's debt has required significant annual cash interest and principal
payments, and the 7% Senior Notes are reported as a current liability at June
30, 2004 since they mature within one year, on June 15, 2005.
As a result of the refinancing transactions, completed on August 9, 2004, the
Company's total outstanding debt was $536.7 million, which continues to be a
significant amount for the Company. Interest and principal payments continue
to represent significant obligations for the Company as well, but have now
been reduced substantially. The Company's interest expense will be reduced due
primarily to a decrease in the Company's average borrowing rate and, to a
lesser extent, the reduction in long term debt. After giving effect to the
refinancing transactions, and using 2003 as a point of comparison, pro forma
net interest expense will be reduced to $36.2 million from $69.0 million
reported for that year. The Company's annual interest expense may vary in the
future due to the fact that the senior credit facility interest rates are
variable. Principal payments will also be affected by the new debt structure,
and most significantly, the $150.0 million payment required to redeem the 7%
Senior Notes by June of 2005 has been satisfied.
This level of debt continues to represent a substantial amount of leverage,
which may adversely affect our operations and could have important
consequences, including the following:
o A substantial portion of cash flows available from operations
continue to be required for the payment of interest expense and
principal, which reduces the funds that are otherwise available for
operations and investment in future business opportunities;
o 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 us to modify operations;
o The amount of leverage continues to make us more vulnerable to
economic downturns and competitive pressure; and
o The ability to obtain additional financing to fund our operational
needs may be impaired or may not be available on favorable terms.
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, from the revolving credit facility, and the debt
and equity offerings issued in August of 2004. Interest on loan and credit
facilities is payable in arrears according to varying interest rates and
periods. The Company expects remaining resources will be sufficient to cover
any additional increases in working
Page 27
capital and capital expenditures. There can be no assurance, however, that
this will be the case. We may also consider other options available to us in
connection with future liquidity needs.
The revolving credit facility, previously with availability of up to $67.0
million, has been amended and increased to $100.0 million as part of the
Refinancing Transactions dated August 9, 2004 and discussed in Note 14 to the
consolidated financial statements. Prior to the amendment and restatement,
total availability was adjusted for borrowing base calculations, outstanding
letters of credit issued under the facility, and a minimum of $10.0 million
excess availability. The adjusted availability at June 30, 2004 was $47.9
million compared to $43.8 million at December 31, 2003. There were no amounts
drawn down on the revolving credit facility as of June 30, 2004 or December
31, 2003. The new credit facility does not require a borrowing base
calculation.
Cash balances at June 30, 2004 were $36.7 million compared to $35.2 million at
December 31, 2003. The increase of $1.5 million in cash balance in the six
months ended June 30, 2004 compares to a decline of $1.7 million for the same
period in 2003.
Cash generated by operating activities in the first six months of 2004 was
$15.4 million compared to $32.8 million for the same period in 2003. The $17.4
million decrease in generated cash includes the following:
o Cash generation for the first six months of 2003 included the
release of $25.0 million previously held in escrow in connection
with the disposition of assets in a prior year.
o Year-over-year increase in net income of $14.0 million, after
adjusting for the 2003 expense associated with the early
extinguishment in debt, and the year-over-year increase in non-cash
charges.
o Net additional usage in working capital accounts of $3.3 million for
the impact of increased business activity as follows: usage of an
additional $9.3 million and $11.1 million respectively compared to
the prior year for increases in inventory and accounts receivable
partially offset by increases of $7.2 million and $9.9 million in
accounts payable and accrued expenses.
The net increase in accounts receivable, due primarily to the increase in
trade sales, also includes a reduction in allowance for doubtful accounts of
$0.2 million from December 31, 2003 to $2.8 million reported on June 30, 2004.
The decrease in the allowance reflects the combination of actual amounts
written off and reduction in specific concerns included in the December 31,
2003 balance, offset partially by an increase in trade receivables.
On account of the decline in asset values of our company sponsored defined
benefit plan during 2001 and 2002, annual cash contributions to the pension
fund increased in 2003 and will increase by a greater amount in 2004. The
decline in asset value is due to overall weakness in the stock and bond
markets prior to 2003. Cash contributions for domestic plans were $3.5 million
for 2003 and are expected to be approximately $12.0 million for 2004. As of
June 30, 2004, $3.0 million in contributions have been made. We do not expect
to make any contributions to our other post-retirement benefits plans in 2004.
Furthermore, we adjusted our minimum pension liability at the end of 2003 in
accordance with SFAS No. 87 "Employers' Accounting for Pensions." The
adjustment resulted in a non-cash increase of shareholders' equity of $2.5
million compared to a reduction of $14.2 million recorded at the end of 2002.
We believe that cash flow from operations and amounts available under our
revolving credit agreement will be sufficient to cover the higher pension
contribution levels.
Net cash used for investing activities for the first six months of 2004 was
$8.4 million compared to $7.2 million for the same period of 2003. Purchases
for property, plant and equipment during this period of 2004 were $8.4 million
compared to $6.8 million for the same period of 2003. We expect to utilize
approximately $24.0 million in available cash for capital expenditures in
2004, including approximately $5.0 million for the construction of a
manufacturing plant in the People's Republic of China. In the second quarter,
the Company spent $1.0 million on the China project. The results for
Page 28
the first six months of 2003 also included $0.4 million for payments
associated with the 2002 sale of an office building in Montgomery, Alabama.
Cash used in financing activities for the six months ended June 30, 2004 was
$5.5 million compared to usage of $27.3 million for the same period of 2003.
The 2004 results include the use of $4.9 million for scheduled payments on the
Company's long term debt, $0.5 million capital contribution from the exercise
of stock options, and the use of $1.1 million to pay additional fees related
to the May 2003 refinancing of the Company's credit facilities. The results
for the first six months of 2003 included a net use of $17.3 million to reduce
long term debt that involved $118.0 million in new term loans under a new
credit facilities and extinguishment of $135.8 million of existing long term
debt, $9.7 million use for fees associated with the issuance of new and
extinguishment of old debt, offset partially by a $0.2 million capital
contribution from the exercise of stock options.
With the Refinancing Transactions completed in August 2004, the Company
refinanced its debt by issuing 13.8 million shares of additional common stock
at a price of $10 per share, new 8.875% Senior Subordinated Notes due in 2012,
and amending and restating its secured credit facilities. The amended and
restated credit facilities consist of the new $100.0 million revolving credit
facility, a $4.9 million Canadian term loan facility, a $265.0 million Term B
loan facility and a $50.0 million Second Collateral Institutional Loan
("SCIL") facility. The amended and restated credit facilities also provided
for, among other things, revisions and additions to our financial covenants,
interest rates, compliance reporting requirements and prepayment premiums. The
loans are secured primarily by substantially all of our domestic assets and
stock of certain subsidiaries. In addition, the Canadian term loan facility is
secured by the assets of our Canadian subsidiaries.
As of the filing date of this report, the Refinancing Transactions are
complete except for the redemption of the 13% Senior Subordinated notes which
have now been called. Upon completion of the 30 day notice period, during
which funds to retire these notes are being held in trust, these notes will be
fully redeemed. Giving effect to the completion of these transactions, our
total outstanding debt as of August 9, 2004 was $536.7 million, consisting of
$41.8 million drawn on the revolving credit facility, $4.9 million drawn on
the Canadian term loan facility, $265.0 million drawn on the Term B loan
facility, $50.0 million drawn on the SCIL facility, and $175.0 million in
aggregate principal amount of 8.875% Senior Subordinated Notes due 2012. A
total of 13,800,000 shares of common stock were issued, increasing outstanding
shares to 44,760,948. Cash fees and expenses related to these transactions
were $26.9 million as of August, 2004.
Subsequent to the amendment and restatement of our senior credit facilities,
the terms of the revolving credit facility will be five years, the terms of
the Canadian term loan facility and Term B loan facility will be six years and
the terms of the SCIL facility will be six and one half years, in each case,
from the date of the completion of the refinancing transactions. Scheduled
quarterly payments under the amended and restated credit facilities will be as
follows: the Canadian term loan facility will require quarterly payments of US
$12,212, with a final payment of $4.6 million due on the maturity date, the
Term B loan facility will require quarterly payments of $662,500, with a final
payment of $249.1 million due on the maturity date, and the SCIL facility will
not require any quarterly payments and will be payable in a single payment on
the maturity date. The amended and restated senior credit facilities may be
prepaid at any time, however, any repayment of the SCIL facility during the
first two years of the term will result in a prepayment fee to the lenders
under most circumstances. The amount available to be drawn on the revolving
credit facility will be restricted by our First Lien Credit Facilities
leverage ratio. As of August 9, 2004, unused availability under our new
revolver facility was $50.4 million after giving effect to approximately $7.8
million of letters of credit outstanding. We believe that, with the completion
of the Refinancing Transactions, cash flows from operations and the revolver
facility will be sufficient to meet the interest and principal payment
obligations of all of our outstanding debt.
Page 29
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 will not have 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,
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 June
30, 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 errors 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
Page 30
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 a 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 period ended June 30, 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 June 30,
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 June 30,
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 June 30,
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 June 30,
2004.
Item 6(b) Reports on Form 8-K
On July 19, 2004, the Company released on Form 8-K its financial results
and public release for the second quarter 2004.
On July 20, 2004, the Company issued a press release announcing the
filing of an amendment to a registration statement with the Securities and
Exchange Commission for a proposed offering of $125 million of its common
stock and a proposed offering by Blount, Inc., its wholly-owned subsidiary, of
$175 million in principal amount of Senior Subordinated Notes due 2012.
On August 12, 2004, the Company released on Form 8-K an announcement
regarding the completion of financing transactions.
** 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.
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BLOUNT INTERNATIONAL, INC.
- ----------------------------------
Registrant
Date: August 13, 2004 /s/ Calvin E. Jenness
-----------------------------
Calvin E. Jenness
Senior Vice President, Chief Financial Officer
and Treasurer
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