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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-11549
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BLOUNT INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 63-0780521
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4520 Executive Park Drive, Montgomery, Alabama 36116-1602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 244-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Class A Common Stock, $.01 par value New York Stock Exchange
Class B Common Stock, $.01 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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Page 1
State the aggregate market value of the voting common stock held by
nonaffiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the common stock was sold, or the average bid
and asked prices of such common stock, as of a specified date within 60 days
prior to the date of filing.
Aggregate market value of voting common stock held by nonaffiliates as of
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January 31, 1998: $608,827,000
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock $.01 par value, as of January 31, 1998: 25,832,000 shares
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Class B Common Stock $.01 par value, as of January 31, 1998: 11,620,536 shares
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes.
Portions of proxy statement for the annual meeting of stockholders to be held
April 20, 1998, are incorporated by reference in Part III.
Page 2
PART I
ITEM 1. BUSINESS
Blount International, Inc. ("the Company") was incorporated on October 5, 1979,
to act as a holding company for businesses to be acquired by the Company, and to
hold shares of Blount, Inc. Common Stock owned by the family of Winton M.
Blount. After incorporation, the Company acquired and operated several
businesses, the last of which was sold in February, 1993. Except for the equity
interest in Blount, Inc. (an approximate 62% voting interest and 38% total
interest at November 3, 1995), the Company had no significant assets or business
from February, 1993, until November, 1995. On November 3, 1995, through a
merger approved by the stockholders of Blount, Inc., Blount, Inc. became a
wholly-owned subsidiary of the Company and the equity ownership of the Company
became the same as that which previously existed for Blount, Inc. Blount
International, Inc. and its subsidiaries are hereinafter referred to as the
"Company."
The Company is an international manufacturing company with operations in three
business segments: Outdoor Products, Industrial and Power Equipment and
Sporting Equipment. The Company's current operations date largely to the
acquisition of Omark Industries, Inc. by Blount, Inc. in 1985. The predecessor
to Blount, Inc. was founded in 1946 as a general construction company and, over
the succeeding years, grew into one of the largest construction companies in the
United States. In February, 1994, the construction business was discontinued.
See "Business - Acquisitions and Dispositions" on page 7.
The following text contains various trademarks of Blount, Inc. and its
subsidiaries.
OUTDOOR PRODUCTS
The Company's Outdoor Products segment is comprised of the Oregon Cutting
Systems Division ("Oregon"), Dixon Industries, Inc. ("Dixon"), Frederick
Manufacturing Corporation ("Frederick") and Orbex, Inc. ("Orbex"). Oregon
produces a wide variety of saw chain, chain saw guide bars, saw chain drive
sprockets and maintenance tools for use primarily on portable gasoline and
electric chain saws, and mechanical timber harvesting equipment. The Oregon
trademark is well known to end-users and the Company believes that it is the
world leader in the production of saw chain. Oregon's saw chain and related
products are used primarily by professional loggers, construction workers,
farmers, arborists and homeowners. Oregon markets an Industrial Cutting System
("ICS"). ICS, a diamond-segmented chain cutting system for concrete (including
steel-reinforced concrete), is a faster and more flexible concrete cutting
method than others currently employed in the construction and demolition
industries.
Oregon sells to distributors, dealers and mass merchandisers serving the retail
replacement market. In 1997, approximately 16.8% of the sales by the Outdoor
Products segment were to one customer. In addition, Oregon currently sells its
products to more than 50 original equipment manufacturers ("OEMs"). Due to the
high level of technical expertise and capital investment required to manufacture
saw chain and guide bars, the Company believes that it is able to produce
durable, high-quality saw chain and guide bars more efficiently than most of its
competitors. The use of Oregon cutting chain as original equipment on chain
saws is also promoted through cooperation with OEMs in improving the design and
specifications of chain and saws. Sales of saw chain for replacement use, which
accounted for approximately three-quarters of the Company's saw chain sales in
1997, are generally more profitable than sales of saw chain to OEMs.
Page 3
The Company has Oregon marketing personnel throughout the United States and in a
number of foreign countries. Sales derived from operations outside the United
States accounted for 37%, and export sales accounted for an additional 22%, of
Oregon's sales during 1997. Oregon manufactures saw chain and related products
in Milwaukie, Oregon; Guelph, Ontario, Canada; and Curitiba, Parana, Brazil.
Oregon's products compete with other saw chain manufacturers as well as a small
number of international chain saw manufacturers, some of whom are also
customers. This segment's principal raw material, strip steel, is generally
purchased from two vendors, and can be obtained from other sources.
Dixon, located in Coffeyville, Kansas, was acquired in 1990 and has manufactured
ZTR (zero turning radius) lawn mowers and related attachments since 1974. Dixon
pioneered the development of ZTR and is the only manufacturer to offer a full
line of ZTR lawn mowers for both homeowner and commercial applications.
The key element which differentiates Dixon from its competitors is its unique
mechanical transaxle. The transaxle transmits power independently to the rear
drive wheels and enables the operator to move the back wheels at different
speeds and turn the mower in a circle no larger than the machine, a "zero radius
turn". This unique transmission enables the Dixon mower to out-maneuver
conventional ride-on products available in the market today and provides a cost
advantage over the more expensive hydrostatic drives used by competitors in the
market. The latest product additions are in the hydrostatic portion of the
product line. In late 1997, Dixon introduced the "Estate Line" featuring mowers
which are designed for large, homeowner lawns and are lower priced than
commercial hydrostatic units. Models are available in 42-inch, 50-inch and 60-
inch sizes.
Dixon sells its products through distribution channels comprised of full-service
dealers, North American distributors and export distributors. Sales by Dixon
accounted for 14% of Outdoor Products sales in 1997.
Frederick and Orbex, located in Kansas City, Missouri, were acquired in January
1997 (see "Business - Acquisitions and Dispositions" on page 7) and fully
integrated into the Outdoor Products segment in 1997. Frederick is a well-known
and highly respected manufacturer that supplies quality Silver Streak brand
accessories for lawn mowers and other outdoor products. Orbex markets high-end
lawn mower blades. They fit well into the company's niche product markets and
provide new international sales opportunities through the worldwide distribution
system of the Oregon Cutting Systems Division. Frederick and Orbex sales are 7%
of Outdoor Products segment sales in 1997.
INDUSTRIAL AND POWER EQUIPMENT
The Company's Industrial and Power Equipment segment manufactures equipment for
the timber harvesting industry, industrial tractors for land and utility right-
of-way clearing, and components for the gear industry. Major users of these
products include logging contractors, harvesters, land reclamation companies,
utility contractors, building materials distributors, scrap yard operators and
original equipment manufacturers of hydraulic equipment.
The Company believes that it is a world leader in the manufacture of hydraulic
timber harvesting equipment, which includes a line of truck-mounted, trailer-
mounted, stationary-mounted and self-propelled loaders and crawler feller
bunchers (tractors with hydraulic attachments for felling timber) under the
Prentice brand name; a line of rubber-tired feller bunchers and related
attachments under the Hydro-Ax brand name; and a line of delimbers, slashers and
firewood processors under the CTR brand name.
Page 4
The Company is a competitive force in the gear industry, selling power
transmissions and gear components under the Gear Products brand name.
Total sales by Gear Products and CTR accounted for approximately 20% of this
segment's sales in 1997.
The Company sells its timber harvesting products through a network of
approximately 250 dealers in over 400 locations in the United States and
currently has an additional 20 offshore dealers, primarily in the timber
harvesting regions of South America and Southeast Asia. Gear Products, Inc.
sells its products to over 350 original equipment manufacturers servicing the
utility, construction, forestry and marine industries. Over 85% of this
segment's sales in 1997 were in the United States, primarily in the southeastern
and south central states.
The Company places a strong emphasis on the quality, safety, comfort, durability
and productivity of its products and on the after-market service provided by its
distribution and support network. The Company's Industrial and Power Equipment
segment competes primarily on the basis of quality with a number of domestic and
foreign manufacturers.
The Company attempts to capitalize on its technological and manufacturing
expertise as a means of increasing its participation in the market for
replacement parts for products which it manufactures, as well as of developing
new product applications both within and beyond the timber, material handling,
scrap, land clearing and gear industries. The Company is committed to
continuing research and development in this segment to respond quickly to
increasing mechanization and environmental awareness in the timber harvesting
industry.
The Company's Industrial and Power Equipment segment has manufacturing
facilities in Owatonna, Minnesota; Prentice and Spencer, Wisconsin; Tulsa,
Oklahoma; and Zebulon and Union Grove, North Carolina. A majority of the
components used in the Company's products are obtained from a number of domestic
manufacturers.
SPORTING EQUIPMENT
On November 4, 1997, the Company acquired the Federal Cartridge Company
("Federal"). See "Business - Acquisitions and Dispositions" on page 7. Federal
manufactures and markets shotshell, centerfire, and rimfire cartridges,
ammunition components, and clay targets. These products are distributed
throughout the United States through a network of distributors and directly to
large retail chains, the U.S. government and federal, state, local and
international law enforcement agencies. The Federal acquisition both
complements and significantly expands the Sporting Equipment segment's product
offerings. Shotgun shells, a product not previously manufactured or sold by the
Company, represented approximately 42% of Federal's sales for 1997. Federal is
also a significant producer and marketer of centerfire rifle ammunition,
products as to which the Company's market share has been much smaller. Federal
markets its products under the brand names of "Premium," "Gold Medal," "American
Eagle," "Classic," "BallistiClean" and "Tactical." On the basis of Federal's
1997 sales of approximately $140 million, the acquisition places the Company
among the leading United States producers of ammunition products.
The Company's other Sporting Equipment segment operations manufacture small arms
ammunition, reloading equipment, primers, gun care products and accessories, and
distribute imported sports optical products under the Simmons and Weaver brand
names. Principal products include CCI and Speer ammunition sold for use by
hunters, sportsmen and law enforcement and military personnel; RCBS reloading
Page 5
equipment for use by hunters and sportsmen who prefer to reload their own
ammunition; Outers gun care and trap-shooting products; Ram-Line accessories;
Weaver mounting systems; and Simmons and Weaver optics. The Company believes
that it is a market leader in the domestic gun care and reloading markets with
high levels of brand name recognition in each of these areas. The Company
believes that the Sporting Equipment segment is also a world leader in the
production of industrial powerloads which are used in the construction industry
to drive fastening pins into metal or concrete.
The market for Sporting Equipment products is characterized by a high degree of
customer loyalty to brand names and historically has not been affected by
adverse economic conditions. A continuing focus on new and better technologies
has enabled the Company to introduce a number of new and improved products in
recent years. These products include Speer Gold Dot high performance pistol
ammunition which is rapidly gaining favor with law enforcement agencies around
the world, as well as Clean-Fire and non-toxic ammunition used extensively for
indoor training. The Company's exclusive aluminum case technology continues to
provide low cost Blazer ammunition to consumers and for law enforcement training
applications. New for 1998 is a series of fully automatic electric traps
specifically designed for commercial trap, skeet, and sporting clays
applications.
Principal raw materials include brass, lead, aluminum and powder, which are
purchased from several suppliers. The Company manufactures ammunition in
Lewiston, Idaho; shotshell, ammunition and ammunition components in Anoka,
Minnesota; reloading equipment in Oroville, California; mounts, shooting
accessories and gun care equipment in Onalaska, Wisconsin; and clay targets in
Richmond, Indiana. The Company imports substantially all its optical products
from foreign suppliers and does not rely on long-term agreements, although it
does have long-term relationships with some of its suppliers. Optical products
are distributed from a warehouse in Thomasville, Georgia.
In the market for small arms ammunition and primers, the Company competes with
several other manufacturers with well established brand names and market share
positions. In the segment's other product lines, the Company competes with a
number of smaller competitors, none of whom has a dominant market share.
CAPACITY UTILIZATION
Based on an 80-hour work week, the Outdoor Products, Industrial and Power
Equipment and Sporting Equipment segments utilized approximately 91%, 71% and
55%, respectively, of their production capacity in the year ended December 31,
1997.
BACKLOG
The backlog for each of the Company's business segments as of the end of each of
its last four reporting periods was as follows (in millions):
Last Day of February,
December 31, ---------------------
1997 1996 1996 1995
------ ------ ------ ------
Outdoor Products $ 42.0 $ 35.5 $ 33.7 $ 44.4
Industrial and Power Equipment 56.2 29.2 63.6 74.4
Sporting Equipment 19.7 9.5 15.5 15.6
------ ------ ------ ------
$117.9 $ 74.2 $112.8 $134.4
====== ====== ====== ======
Page 6
The total backlog as of December 31, 1997, is expected to be completed and
shipped within twelve months.
ACQUISITIONS AND DISPOSITIONS
In February 1994, the Company adopted a plan to discontinue its construction
business through the orderly completion and close-out of the Company's principal
domestic and foreign construction projects and the sale of Pozzo Construction
Co. ("Pozzo"), a subsidiary headquartered in Los Angeles, California. During
the first quarter of fiscal 1996, Pozzo was sold with no material effect on the
Company's financial condition. All construction projects are complete.
In fiscal 1995, the Company acquired all the outstanding capital stock of CTR
Manufacturing, Inc., a manufacturer of automated forestry harvesting equipment,
and the operating assets of Ram-Line, Inc., a manufacturer of stocks, magazines,
lens caps and other products for the shooting sports markets. The purchase
price paid for the two businesses was approximately $18.2 million, including
notes issued of $7.2 million.
In December 1995, the Company acquired all the outstanding capital stock of
Simmons Outdoor Corporation, a sports optics distributor, for cash of
approximately $38 million.
In January 1997, the Company acquired the outstanding capital stock of the
Frederick Manufacturing Corporation and Orbex, Inc. for approximately $19
million and paid existing debt of the acquired companies in the amount of $5.8
million. The principal products of the acquired companies are accessories for
lawn mowers and sporting goods.
On November 4, 1997, the Company acquired Federal Cartridge Company (formerly
Federal-Hoffman, Inc.), a manufacturer of shotshell, centerfire and rimfire
cartridges, ammunition components and clay targets. The estimated purchase
price is approximately $128 million, including a post-closing adjustment to be
determined by an audit and acquisition expenses.
See Note 4 of Notes to Consolidated Financial Statements on pages 27 and 28.
EMPLOYEES
At December 31, 1997, the Company employed approximately 5,700 individuals.
None of the Company's employees is unionized. The Company believes its
relations with its employees are satisfactory.
ENVIRONMENTAL MATTERS
For information regarding certain environmental matters, see Note 8 of Notes to
Consolidated Financial Statements on pages 33 and 34.
From time to time the Company may be identified as a potentially responsible
party with respect to a Superfund site. The United States Environmental
Protection Agency (or a state) can either (a) allow such a party to conduct and
pay for a remedial investigation and feasibility study and remedial action or
(b) conduct the remedial investigation and action and then seek reimbursement
from the parties. Each party can be held jointly, severally and strictly liable
for all costs, but the parties can then bring contribution actions against each
other, where available. As a result of the Superfund Act, the Company may be
required to expend amounts on such remedial investigations and actions which
amounts cannot be determined at the present time but may ultimately prove to be
significant.
Page 7
The Company expects to spend approximately $0.7 million, $0.8 million and $0.8
million during 1998, 1999 and 2000, respectively, on environmental compliance
costs.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS AND FOREIGN AND DOMESTIC
OPERATIONS
For information about industry segments and foreign and domestic operations, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" on pages 11 through 16 and Note 10 of Notes to Consolidated Financial
Statements on pages 35 through 37.
SEASONALITY
The Company's Sporting Equipment segment experiences higher sales in the second
half of the year than the first half of the year.
ITEM 2. PROPERTIES
The corporate headquarters of the Company occupy executive offices at 4520
Executive Park Drive, Montgomery, Alabama.
The other principal properties of the Company and its subsidiaries are as
follows:
Cutting chain and accessories manufacturing plants are located in Milwaukie,
Oregon; Guelph, Ontario, Canada; and Curitiba, Parana, Brazil, and sales and
distribution offices are located in Europe, Japan and Russia. Lawn mowers and
related accessories are manufactured at plants in Coffeyville, Kansas and Kansas
City, Missouri. Log loaders, feller bunchers and accessories for automated
forestry equipment are manufactured at plants in Prentice and Spencer,
Wisconsin; Zebulon and Union Grove, North Carolina; and Owatonna, Minnesota.
Rotation bearings and mechanical power transmission components are manufactured
at a plant in Tulsa, Oklahoma. Sporting ammunition, reloading equipment
products, gun care equipment, industrial powerloads and shooting sports
accessories are manufactured at plants in Anoka, Minnesota; Lewiston, Idaho;
Oroville, California; Onalaska, Wisconsin; and Richmond, Indiana. The Company
maintains a warehouse facility in Thomasville, Georgia for distribution of
sports optics and hunting accessories.
All of these facilities are in good condition, are currently in normal operation
and are generally suitable and adequate for the business activity conducted
therein. Approximate square footage of principal properties is as follows:
Area in Square Feet
---------------------
Owned Leased
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Outdoor Products 996,000 236,000
Industrial and Power Equipment 768,000 0
Sporting Equipment 1,583,000 122,000
Corporate Office 192,000 13,000
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Total 3,539,000 371,000
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ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings see Note 8 of Notes to Consolidated
Financial Statements on pages 33 and 34.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. The
following table presents for the Company's last two reporting periods, the
quarterly high and low prices and cash dividends declared for the Company's
Common Stock. All prior periods have been restated for the stock split effected
on December 8, 1997. The Company had approximately 8,800 shareholders as of
January 31, 1998.
Class A Common Stock Class B Common Stock
------------------------ ------------------------
High Low Dividend High Low Dividend
- -------------------------- ------ ------ -------- ------ ------ --------
Twelve Months Ended
December 31, 1997
First quarter $21.63 $18.81 $.063 $21.25 $18.75 $.059
Second quarter 22.75 19.00 .063 22.25 19.63 .059
Third quarter 25.25 20.75 .063 23.69 21.13 .059
Fourth quarter 26.88 23.00 .072 27.00 25.28 .067
Ten Months Ended
December 31, 1996
Month Ended March 31, 1996 $16.00 $14.88 $.055 $16.00 $15.44 $.051
Second quarter 16.88 15.06 .055 16.88 15.50 .051
Third quarter 17.25 14.13 .055 17.19 14.75 .051
Fourth quarter 19.44 16.44 .063 18.94 17.06 .059
For information regarding restrictions on the Company's ability to pay cash
dividends, see Note 3 of Notes to Consolidated Financial Statements on pages 26
and 27.
For information regarding restrictions on the net assets of foreign
subsidiaries, see Note 11 of Notes to Consolidated Financial Statements on pages
38 and 39.
Page 9
ITEM 6. SELECTED FINANCIAL DATA
Twelve Months Ended Ten Months Twelve Months Ended
December 31, Ended the Last Day of February,
Dollar amounts in millions, -------------------------- December 31, --------------------------
except per share data 1997 1996(1) 1995(1) 1996(1) 1996 1995 1994
- ---------------------------------------- ------ ------- ------- ------------ ------ ------ ------
(Unaudited)
-----------------
Operating Results:
Sales $716.9 $649.3 $621.4 $526.7 $644.3 $588.4 $488.0
Operating income from segments 117.9 113.1 104.9 91.2 112.8 101.9 73.6
Income from continuing operations 59.1 53.8 49.4 44.0 53.6 40.7 21.6
Net income 59.1 55.2 49.4 45.4 53.6 40.7 11.3
Earnings per share:
Basic:
Income from continuing operations 1.57 1.40 1.30 1.14 1.41 1.08 .58
Net income 1.57 1.44 1.30 1.18 1.41 1.08 .30
Diluted:
Income from continuing operations 1.53 1.38 1.27 1.13 1.38 1.05 .56
Net income 1.53 1.41 1.27 1.16 1.38 1.05 .29
- ---------------------------------------- -------- -------- -------- -------- -------- -------- --------
End of Period Financial Position:
Total assets $637.8 $533.8 $522.4 $533.8 $546.5 $520.8 $499.6
Working capital 171.1 166.2 122.2 166.2 136.2 123.3 105.1
Property, plant and equipment-gross 376.8 301.9 293.8 301.9 295.5 279.9 276.2
Property, plant and equipment-net 188.5 131.7 136.7 131.7 135.5 134.4 140.5
Long-term debt 138.8 84.6 95.9 84.6 95.9 98.3 106.2
Total debt 140.3 85.8 108.7 85.8 107.6 106.0 112.2
Net debt to total capitalization (2) 28.8% 5.9% 24.8% 5.9% 23.6% 16.8% 20.5%
Stockholders' equity 316.1 290.8 244.6 290.8 255.0 207.7 171.0
Current ratio 2.3 to 1 2.4 to 1 1.9 to 1 2.4 to 1 1.9 to 1 1.7 to 1 1.6 to 1
- ---------------------------------------- -------- -------- -------- -------- -------- -------- --------
Other Data:
Property, plant and equipment additions(3) $ 78.5 $ 21.3 $ 19.8 $ 18.7 $ 19.3 $ 14.7 $ 14.7
Depreciation and amortization 25.0 23.3 22.3 19.2 22.2 22.9 22.8
Interest expense, net of interest income 7.0 7.5 6.8 5.6 7.4 8.5 9.5
Stock price: Class A high 26.88 19.44 17.58 19.44 17.58 16.38 10.83
Class A low 18.81 12.69 12.25 14.13 12.25 9.38 4.04
Stock price: Class B high 27.00 18.94 17.58 18.94 17.58 16.29 10.83
Class B low 18.75 14.75 12.58 14.75 12.58 9.67 4.25
Per common share dividends: Class A .261 .228 .198 .228 .198 .173 .154
Class B .244 .212 .181 .212 .181 .156 .138
Shares used in earnings per share
computations (in millions):
Basic 37.6 38.4 37.9 38.4 38.0 37.8 37.3
Diluted 38.5 39.1 38.9 39.2 38.9 38.8 38.2
Employees (approximate) 5,700 4,400 4,400 4,400 4,400 4,600 4,700
- ---------------------------------------- -------- -------- -------- -------- -------- -------- --------
(1) In April 1996, the Company changed its fiscal year from one ending on the
last day of February to one ending on December 31. See Note 1 of Notes to
Consolidated Financial Statements. Unaudited financial data for the twelve
months ended December 31, 1996 and 1995 is also presented in the table above.
(2) Total debt less cash, cash equivalents and unexpended industrial
development revenue bond proceeds.
(3) Includes property, plant and equipment of acquired companies at date of
purchase of $59.8 million in the twelve months ended December 31, 1997, and
$0.6 million and $5.0 million in the twelve months ended the last day of
February, 1996 and 1995.
Page 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This discussion and analysis should be read in conjunction with the consolidated
financial statements and related notes.
OPERATING RESULTS
In April 1996, the Company changed its fiscal year from one ending on the last
day of February to one ending on December 31. See Note 1 of Notes to
Consolidated Financial Statements. The audited financial statements in this
annual report include the results for the year ended December 31, 1997 ("1997"),
the ten-month transition period ended December 31, 1996 ("transition period")
and the year ended February 29, 1996 ("fiscal 1996"). This discussion and
analysis includes a discussion of 1997 compared to the twelve months ended
December 31, 1996, and both the twelve months and ten months ended December 31,
1996 compared to similar periods during calendar year 1995.
All references to earnings per share included in this discussion are to diluted
earnings per share computed in accordance with SFAS No. 128 (see Notes 1 and 5
of Notes to Consolidated Financial Statements).
TWELVE MONTHS ENDED DECEMBER 31, 1997 (AUDITED) COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1996 (UNAUDITED)
Sales in 1997 were $716.9 million compared to $649.3 million in 1996. Income
from continuing operations improved to $59.1 million ($1.53 per share) in 1997
from $53.8 million ($1.38 per share) during the prior year. Net income for 1996
included income of $1.4 million ($.03 per share) from discontinued operations.
The sales increase reflected higher sales in 1997 by each operating segment,
while the income increase resulted primarily from improved performance by the
Outdoor Products segment.
Selling, general and administrative expenses were 19% of sales in 1997 compared
to 20% in 1996. Total selling, general and administrative expenses increased by
$4.6 million in 1997 principally due to the acquisitions of Federal Cartridge
Company ("Federal") and Frederick Manufacturing Company and Orbex, Inc.
("Frederick-Orbex"). See Note 4 of Notes to Consolidated Financial Statements.
Other income was higher in 1997 as a result of gains on sales of securities.
Total backlog was $117.9 million at December 31, 1997 compared to $74.2 million
at the prior year-end reflecting improved backlogs at each operating segment,
particularly at the Industrial and Power Equipment segment due to improved
market conditions. In 1998, the Company believes that difficult economic
conditions in certain international markets and the adverse impact of a strong
U.S. dollar will likely continue to affect the Company's operations. However,
the Company expects continued sales and income growth in 1998, aided by the
recent acquisition of Federal.
Sales and operating income for the Outdoor Products segment for 1997 were $319.3
million and $67.1 million, respectively, compared to $292.7 million and $61.4
million during 1996. The operating results for this segment reflect an increase
in sales and operating income of $25.7 million and $7.2 million, respectively,
at the Company's Oregon Cutting Systems Division ("Oregon") and flat sales and
lower operating income at Dixon Industries, Inc. ("Dixon"). Oregon's results
reflect a 7% increase in the sales volume of saw chain and a 15% increase in the
sales volume of saw bars, Oregon's two principal products, partially offset by
lower average selling prices, due to a higher percentage of lower priced sales
to original equipment manufacturers and unfavorable exchange rates.
Additionally, the acquisition of Frederick-Orbex increased sales by 7.5% in
Page 11
1997. Oregon has foreign manufacturing or distribution operations in Canada,
Europe, Brazil, Japan and Russia and, as a result, fluctuations in foreign
exchange rates impact the amount of reported sales and operating margins.
Approximately 24% and 36% of Oregon's sales and operating costs and expenses,
respectively, were transacted in foreign currencies in 1997. The Company
estimates that unfavorable exchange rates in 1997, as compared to 1996, reduced
operating income by approximately $2.0 million. Operations in Brazil have
historically been significantly affected by high inflation, currency devaluation
and resulting governmental policies. During 1997, operating income from Brazil
was $2.6 million compared to $0.3 million during 1996, principally as a result
of improved economic conditions. Dixon's sales and operating income were $45.4
million and $7.1 million, respectively, in 1997 compared to $44.9 million and
$8.4 million during the prior year as the effects of reduced volume and higher
costs were partially offset by higher average selling prices.
Sales and operating income for the Industrial and Power Equipment segment were
$239.1 million and $32.7 million, respectively, in 1997 compared to $209.5
million and $31.9 million in 1996. The higher sales during the current year are
principally due to a higher volume of forestry equipment sold as a result of
improving market conditions and higher average selling prices. The improved
demand is reflected in this segment's backlog which has increased by 92% since
the prior year-end. Operating income increased by $0.8 million during 1997 as
higher forestry equipment product and warranty costs offset much of the effect
of the sales increase. The operating results of this segment's Gear Products,
Inc. subsidiary continued to improve in 1997 as its sales and operating income
increased by 8% and 15%, respectively, primarily due to higher volume.
Sales for the Sporting Equipment segment were $158.5 million in 1997 compared to
$147.1 million in 1996. Operating income was $18.1 million during 1997,
compared to $19.8 million during 1996. Sales reflect a higher volume of
ammunition products sales and the contribution by Federal since acquisition in
November 1997, partially offset by a lower volume of sales of sports optics.
Operating income was lower in 1997 as lower sports optics sales offset the
effect of higher ammunition products sales. Additionally, operating income for
the prior year included the positive effect of reduced environmental cost
estimates of $1.9 million resulting from the resolution of an environmental
matter.
TWELVE MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED) COMPARED TO TWELVE MONTHS
ENDED DECEMBER 31, 1995 (UNAUDITED)
Sales for the twelve months ended December 31, 1996 ("calendar 1996") were
$649.3 million compared to $621.4 million for the twelve months ended December
31, 1995 ("calendar 1995"). Income from continuing operations was $53.8 million
($1.38 per share) compared to $49.4 million ($1.27 per share) in calendar 1995.
Net income of $55.2 million ($1.41 per share) in calendar 1996 included income
of $1.4 million ($.03 per share) from discontinued operations, principally due
to favorable claim settlements and improved international job profits. These
operating results reflected continued strong performance by the Outdoor Products
segment and improved performance by the Sporting Equipment segment, offset by
lower sales and earnings from the Industrial and Power Equipment segment,
primarily due to unfavorable market conditions.
Selling, general and administrative expenses were 20% of sales in both calendar
1996 and calendar 1995. Total selling, general and administrative expenses were
higher during calendar 1996, principally due to the inclusion of Simmons Outdoor
Corporation ("Simmons"), acquired in December 1995, in the consolidated
financial statements for the entire twelve-month period.
Page 12
Sales and operating income for the Outdoor Products segment for calendar 1996
were $292.7 million and $61.4 million, respectively, compared to $282.0 million
and $53.5 million during calendar 1995. The improved results for this segment
were due to an increase in sales and operating income at Oregon. This reflected
a 7% increase in the sales volume of saw chain and a 12% increase in the sales
volume of saw bars, Oregon's two principal products, principally to foreign
markets, partially offset by lower average selling prices. During calendar
1996, operating income from Oregon's operations in Brazil was $0.3 million
compared to an operating loss of $0.8 million during calendar 1995. As a result
of unfavorable weather conditions in the spring, Dixon's operating results were
flat in calendar 1996 with sales and operating income of $44.9 million and $8.4
million, respectively, compared to $44.8 million and $8.4 million during
calendar 1995.
Market conditions adversely affected the Industrial and Power Equipment segment
during calendar 1996. Sales and operating income were $209.5 million and $31.9
million, respectively, in calendar 1996 compared to $232.2 million and $39.6
million during calendar 1995. The sales reduction resulted principally from
lower sales of forestry harvesting equipment as a result of the adverse effect
of depressed pulp prices and high mill inventories. The volume of loaders and
tractors sold by this segment during calendar 1996 was approximately 20% lower
than calendar 1995. The reduction in operating income was due to the effect of
the sales decline, partially offset by an increase in sales and operating income
at the Company's Gear Products, Inc. subsidiary, resulting primarily from a
higher sales volume of rotation bearings.
The operating results for the Sporting Equipment segment improved significantly
during calendar 1996, reflecting the favorable impact of including Simmons,
acquired in December 1995, for the entire twelve-month period in 1996. Total
segment sales and operating income were $147.1 million and $19.8 million,
respectively, in calendar 1996 compared to $107.2 million and $11.8 million
during calendar 1995. Simmons added sales of $45.6 million and operating income
of $5.0 million in 1996. Sales at the remaining Sporting Equipment operations
were approximately 5.2% lower during calendar 1996 due to a continued market
slowdown. Operating income increased by $2.9 million at these Sporting
Equipment operations in calendar 1996 principally due to reduced selling,
general and administrative expenses and income of $1.9 million resulting from
the resolution of an environmental matter during calendar 1996 at the Company's
Lewiston, Idaho facility.
TEN MONTHS ENDED DECEMBER 31, 1996 (AUDITED) COMPARED TO TEN MONTHS ENDED
DECEMBER 31, 1995 (UNAUDITED)
Sales during the transition period were $526.7 million compared to $521.6
million in the comparable period of the prior year. Income from continuing
operations was flat at $44.0 million ($1.13 per share) compared to $43.8 million
($1.12 per share) for the same period during 1995. Net income of $45.4 million
($1.16 per share) in the transition period included income of $1.4 million ($.03
per share) from discontinued operations, principally due to favorable claim
settlements and improved international job profits. These operating results
reflected continued strong performance by the Outdoor Products segment and
improved performance by the Sporting Equipment segment, offset by lower sales
and earnings from the Industrial and Power Equipment segment, primarily due to
unfavorable market conditions.
Selling, general and administrative expenses were 20% of sales in the transition
period compared to 20% in the same period of 1995. Total selling, general and
administrative expenses were higher during the transition period, principally
due to the inclusion of Simmons, acquired in December 1995, in the consolidated
financial statements for the entire ten-month period.
Page 13
Sales and operating income for the Outdoor Products segment for the transition
period were $239.3 million and $50.7 million, respectively, compared to $238.2
million and $46.8 million during the same period of 1995. The operating results
for this segment reflected an increase in sales and operating income of $3.5
million and $5.3 million, respectively, at Oregon, partially offset by lower
sales and operating income from Dixon. Oregon's results reflect a 4% increase
in the sales volume of saw chain and an 8% increase in the sales volume of saw
bars, Oregon's two principal products, partially offset by lower average selling
prices. Lower foreign exchange expenses and improved manufacturing costs
contributed to higher margins during the current year. During the transition
period, operating income from Brazil was $0.7 million compared to an operating
loss of $0.7 million during the comparable period of 1995. Unfavorable weather
conditions in the spring adversely affected the lawncare market. As a result,
the volume of mowers sold by Dixon was approximately 9% less during the
transition period as compared to the same period last year. Dixon's sales and
operating income were $34.4 million and $5.4 million, respectively, in the
transition period compared to $36.8 million and $6.7 million during the
comparable period of the prior year.
Market conditions adversely affected the Industrial and Power Equipment segment
during the transition period. Sales and operating income were $165.7 million
and $24.0 million, respectively, compared to $196.8 million and $34.2 million
during the comparable period of 1995. The sales reduction resulted principally
from lower sales of forestry harvesting equipment as a result of the adverse
effect of depressed pulp prices and high mill inventories. The number of units
of loaders and tractors sold by this segment during the ten months ended
December 31, 1996, was approximately 24% lower than the comparable period in
1995. The reduction in operating income is due to the effect of the sales
decline, partially offset by an increase in sales and operating income at the
Company's Gear Products, Inc. subsidiary, resulting primarily from a higher
sales volume of rotation bearings.
The operating results for the Sporting Equipment segment improved significantly
during the ten months ended December 31, 1996, reflecting the favorable impact
of including Simmons, acquired in December 1995, for the entire ten-month period
in 1996. Total segment sales and operating income were $121.7 million and $16.5
million, respectively, during the transition period compared to $86.6 million
and $9.9 million during the same period in 1995. Simmons added sales of $39.1
million and operating income of $4.6 million in the transition period. Sales at
the remaining Sporting Equipment operations were approximately 4.6% lower during
the transition period due to a continued market slowdown. Operating income
increased by $1.9 million at these Sporting Equipment operations in the
transition period principally due to reduced selling, general and administrative
expenses and income of $1.9 million resulting from the resolution of an
environmental matter at the Company's Lewiston, Idaho facility.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On November 4, 1997, the Company acquired Federal. The Company borrowed $62
million under its $150 million revolving credit agreement to finance part of the
$112 million paid at closing to acquire Federal. Prior to year-end, $8 million
of this loan had been repaid, resulting in a balance of $54 million outstanding
under the revolving credit agreement at December 31, 1997. The balance of the
$112 million paid at closing was financed through the use of cash or short-term
borrowings repaid prior to year-end. At December 31, 1997, the Company had 9%
senior subordinated notes ("the 9% notes") outstanding in the principal amount
of $68.8 million which are due in 2003. At December 31, 1997, the Company's
long-term debt to equity ratio was 0.4 to 1 compared to a ratio of 0.3 to 1 at
December 31, 1996. See Note 3 of Notes to Consolidated Financial Statements for
a description of the terms and conditions of the 9% notes and the $150 million
Page 14
revolving credit agreement. In December 1997, the Company filed a Form S-3
Registration Statement with the Securities and Exchange Commission for an issue
in early 1998 of $150 million Senior Notes due 2008. The Company plans to use
the proceeds of these Senior Notes to repay outstanding indebtedness under the
$150 million revolving credit agreement, redeem all the 9% notes, and for
general corporate purposes, including the post-closing adjustment to the
purchase price of Federal.
Working capital increased to $171.1 million at December 31, 1997, compared to
$166.2 million at December 31, 1996, principally due to the acquired working
capital of Federal and Frederick-Orbex, partially offset by cash used for the
acquisitions. Accounts receivable, inventories and accounts payable increased
by $19.8 million, $50.9 million and $20.4 million, respectively, since December
31, 1996, primarily due to the balances of the acquired companies. The accounts
payable increase also includes the estimated post-closing adjustment to the
purchase price of Federal. The Company's operating cash flows for the year
ended December 31, 1997 were $80.3 million compared to $87.5 million in 1996.
Cash and cash equivalent balances were $4.8 million at December 31, 1997,
compared to $58.7 million at December 31, 1996, as the Company's cash
expenditures for investing and financing activities exceeded operating
expenditures, primarily due to acquisition expenditures.
Management believes that the Company will generate sufficient future taxable
income to realize all deferred income tax assets.
The Company believes that its operating cash flows, $150 million revolving
credit facility and expected new issue of long-term debt will provide both
short-term and long-term liquidity. The ability of the Company to pay dividends
is dependent upon Blount, Inc.'s ability to pay dividends to the Company.
Restrictions on the ability of Blount, Inc. to pay cash dividends are contained
in the indenture related to the 9% notes and in certain financial covenants of
the $150 million revolving credit agreement. Under the most restrictive
requirement, retained earnings of approximately $73.9 million were available for
the payment of dividends at December 31, 1997.
The Company and its operations are subject to various environmental laws and
regulations. See Note 8 of Notes to Consolidated Financial Statements for a
description of certain environmental matters.
Management believes that the impact of domestic inflation on the Company has not
been material in recent years as inflation rates have remained low.
The Company continues to evaluate the estimated costs associated with the Year
2000 transition on its products and its financial, information and other
computer-based systems. The Company believes, based on available information,
that the Year 2000 transition will have no material adverse effect on its
products, business operations or financial results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is
effective for the Company's fiscal year beginning January 1, 1998.
Reclassification of financial statements for earlier periods presented for
comparative purposes is required. The adoption of SFAS No. 130 will have no
material impact on the Company's consolidated results of operations, financial
position or cash flows.
Page 15
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual and interim financial statements. It also establishes standards for
related disclosures about products and services and geographic areas. SFAS No.
131 is required to be applied beginning with the Company's 1998 annual financial
statements. Financial statement disclosures for prior periods are required to
be restated. The Company is in the process of evaluating the disclosure
requirements. The adoption of SFAS No. 131 will have no material impact on the
Company's consolidated results of operations, financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders, Blount International, Inc.:
We have audited the consolidated financial statements and the financial
statement schedules of Blount International, Inc. and subsidiaries listed in
Item 14(a) of this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Blount
International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 1997, the ten-month period ended December 31, 1996, and the year
ended February 29, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
January 26, 1998
Page 16
MANAGEMENT RESPONSIBILITY
All information contained in the consolidated financial statements of Blount
International, Inc., has been prepared by management, which is responsible for
the accuracy and internal consistency of the information. Generally accepted
accounting principles have been followed. Reasonable judgments and estimates
have been made where necessary.
Management is responsible for establishing and maintaining a system of internal
accounting controls designed to provide reasonable assurance as to the integrity
and reliability of financial reporting. The system of internal accounting
controls is tested by the internal audit department as part of its normal
responsibilities and by the independent auditors to the extent deemed necessary
in accordance with generally accepted auditing standards. Management believes
the system of internal controls has been effective during the Company's most
recent fiscal year and that no matters have arisen which indicate a material
weakness in the system. Management follows the policy of responding to the
recommendations concerning the system of internal controls made both by the
independent auditors and by the internal audit department. Management implements
those recommendations that it believes would improve the system of internal
controls and be cost justified.
Six directors of the Company, not members of management, serve as the Audit
Committee of the Board and are the principal means through which the Board
discharges its financial reporting responsibility. The Audit Committee meets
with management personnel, the internal auditors and the Company's independent
auditors each year to consider the results of internal and external audits of
the Company and to discuss internal accounting control, auditing and financial
reporting matters. At these meetings, the Audit Committee also meets privately
with the independent auditors and the General Auditor of the Company to ensure
free access by the independent auditors and internal auditors to the committee.
The Company's independent auditors, Coopers & Lybrand L.L.P., audited the
financial statements prepared by the Company. Their opinion on these statements
appears herein.
JOHN M. PANETTIERE HAROLD E. LAYMAN
President and Executive Vice President
Chief Executive Officer Finance Operations and
Chief Financial Officer
Page 17
CONSOLIDATED STATEMENTS OF INCOME
Blount International, Inc. and Subsidiaries
Twelve Months Ended Ten Months Ended Twelve Months
December 31, December 31, Ended
(Dollar amounts in millions, -------------------------- ---------------- February 29,
except per share data) 1997 1996 1995 1996 1995 1996
- ----------------------------------- ------ ------ ------ ------ ------ ------------
(Unaudited) (Unaudited)
---------------- ------
Sales $716.9 $649.3 $621.4 $526.7 $521.6 $644.3
Cost of sales 482.9 426.9 412.8 346.5 346.0 427.3
- ----------------------------------- ------ ------ ------ ------ ------ ------
Gross profit 234.0 222.4 208.6 180.2 175.6 217.0
Selling, general and administrative
expenses 134.6 130.0 124.2 105.2 102.6 126.5
- ----------------------------------- ------ ------ ------ ------ ------ ------
Income from operations 99.4 92.4 84.4 75.0 73.0 90.5
Interest expense (9.5) (9.9) (10.6) (7.9) (8.9) (10.8)
Interest income 2.5 2.4 3.8 2.3 3.4 3.4
Other income (expense), net 1.3 0.5 (0.4) 0.2 0.4 0.6
- ----------------------------------- ------ ------ ------ ------ ------ ------
Income before income taxes 93.7 85.4 77.2 69.6 67.9 83.7
Provision for income taxes 34.6 31.6 27.8 25.6 24.1 30.1
- ----------------------------------- ------ ------ ------ ------ ------ ------
Income from continuing operations 59.1 53.8 49.4 44.0 43.8 53.6
Discontinued operations -
Income on disposal, net 1.4 1.4
- ----------------------------------- ------ ------ ------ ------ ------ ------
Net income $ 59.1 $ 55.2 $ 49.4 $ 45.4 $ 43.8 $ 53.6
- ----------------------------------- ------ ------ ------ ------ ------ ------
Basic earnings per share:
Continuing operations $ 1.57 $ 1.40 $ 1.30 $ 1.14 $ 1.15 $ 1.41
Discontinued operations .04 .04
- ----------------------------------- ------ ------ ------ ------ ------ ------
Net income $ 1.57 $ 1.44 $ 1.30 $ 1.18 $ 1.15 $ 1.41
- ----------------------------------- ------ ------ ------ ------ ------ ------
Diluted earnings per share:
Continuing operations $ 1.53 $ 1.38 $ 1.27 $ 1.13 $ 1.12 $ 1.38
Discontinued operations .03 .03
- ----------------------------------- ------ ------ ------ ------ ------ ------
Net income $ 1.53 $ 1.41 $ 1.27 $ 1.16 $ 1.12 $ 1.38
- ----------------------------------- ------ ------ ------ ------ ------ ------
Cash dividends per share:
Class A $ .261 $ .228 $ .198 $ .228 $ .198 $ .198
Class B .244 .212 .181 .212 .181 .181
- ----------------------------------- ------ ------ ------ ------ ------ ------
The accompanying notes are an integral part of the audited financial statements.
Page 18
CONSOLIDATED BALANCE SHEETS
Blount International, Inc. and Subsidiaries
December 31,
(Dollar amounts in millions, except share data) 1997 1996
- -------------------------------------------------------- ------ ------
Assets
- -------------------------------------------------------- ------ ------
Current assets:
Cash and cash equivalents, including short-term
investments of $3.0 and $55.3 $ 4.8 $ 58.7
Accounts receivable, net of allowance for
doubtful accounts of $3.7 and $3.0 135.7 115.9
Inventories 132.9 82.0
Deferred income taxes 22.0 20.9
Other current assets 5.8 3.5
- -------------------------------------------------------- ------ ------
Total current assets 301.2 281.0
Property, plant and equipment, net of accumulated
depreciation of $188.3 and $170.2 188.5 131.7
Cost in excess of net assets of acquired businesses, net 116.4 85.4
Other assets 31.7 35.7
- -------------------------------------------------------- ------ ------
Total Assets $637.8 $533.8
- -------------------------------------------------------- ------ ------
Liabilities and Stockholders' Equity
- -------------------------------------------------------- ------ ------
Current liabilities:
Notes payable and current maturities of long-term debt $ 1.5 $ 1.2
Accounts payable 56.6 36.2
Accrued expenses 72.0 77.4
- -------------------------------------------------------- ------ ------
Total current liabilities 130.1 114.8
Long-term debt, exclusive of current maturities 138.8 84.6
Deferred income taxes, exclusive of current portion 15.2 15.8
Other liabilities 37.6 27.8
- -------------------------------------------------------- ------ ------
Total liabilities 321.7 243.0
- -------------------------------------------------------- ------ ------
Commitments and Contingent Liabilities
- -------------------------------------------------------- ------ ------
Stockholders' equity:
Common stock: par value $.01 per share (see
Note 5 for voting rights by class);
Class A: 27,277,969 and 26,818,184 shares issued 0.3 0.1
Class B, convertible: 11,620,552 and
11,754,156 shares issued 0.1 0.1
Capital in excess of par value of stock 37.7 34.8
Retained earnings 300.3 252.2
Accumulated translation adjustment 7.0 7.9
Less Class A treasury stock at cost, 1,453,180 and
236,360 shares (29.3) (4.3)
- -------------------------------------------------------- ------ ------
Total stockholders' equity 316.1 290.8
- -------------------------------------------------------- ------ ------
Total Liabilities and Stockholders' Equity $637.8 $533.8
- -------------------------------------------------------- ------ ------
The accompanying notes are an integral part of the audited financial statements.
Page 19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Blount International, Inc. and Subsidiaries
Twelve Months Ended Ten Months Ended Twelve Months
December 31, December 31, Ended
---------------------- -------------- February 29,
(Dollar amounts in millions) 1997 1996 1995 1996 1995 1996
- --------------------------------------------------- ------ ------ ------ ------ ------ -------------
(Unaudited) (Unaudited)
-------------- ------
Cash flows from operating activities:
Net income $ 59.1 $ 55.2 $ 49.4 $ 45.4 $ 43.8 $ 53.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other
noncash charges 25.0 23.6 22.4 19.6 18.3 22.3
Deferred income taxes (1.7) 2.1 (1.4) (2.1) (0.6) 3.7
Loss (gain) on disposals of property, plant
and equipment (0.6) (0.2) 0.3 (0.9) 0.3 1.0
Changes in assets and liabilities, net
of effects of businesses acquired and sold:
(Increase) decrease in accounts receivable 20.4 (0.6) 18.0 34.0 16.2 (18.4)
(Increase) decrease in inventories (10.4) 13.2 (10.5) 11.4 (2.1) (0.3)
(Increase) decrease in other assets 0.8 1.9 (8.3) (1.8) (6.5) (2.8)
Increase (decrease) in accounts payable 0.8 (6.7) (11.3) (15.5) (15.7) (7.0)
Decrease in accrued expenses (15.5) (4.3) (19.2) (6.8) (11.5) (8.9)
Increase (decrease) in other liabilities 2.4 3.3 (6.3) (0.1) (6.3) (3.0)
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
Net cash provided by operating activities 80.3 87.5 33.1 83.2 35.9 40.2
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
Cash flows from investing activities:
Proceeds from sales of businesses and property,
plant and equipment 0.9 1.9 5.0 1.8 5.0 5.1
Purchases of property, plant and equipment (17.8) (21.2) (19.2) (18.7) (16.0) (18.5)
Acquisitions of businesses (132.5) (37.4) (37.4) (37.4)
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
Net cash used in investing activities (149.4) (19.3) (51.6) (16.9) (48.4) (50.8)
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
Cash flows from financing activities:
Net increase (reduction) in short-term borrowings (2.7) 1.8 (1.6) 1.9 0.8
Issuance of long-term debt 62.0 3.1 0.8 0.8
Reduction of long-term debt (14.9) (13.9) (15.7) (13.9) (15.6) (15.7)
(Increase) decrease in restricted funds 1.0 3.7 (0.2) 2.7 1.5 2.6
Dividends paid (9.4) (8.5) (10.7) (8.5) (8.9) (8.9)
Purchase of treasury stock (27.5) (4.3) (4.3)
Other 4.0 3.7 2.3 3.4 1.9 2.2
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
Net cash provided by (used) in financing activities 15.2 (22.0) (19.4) (22.2) (18.4) (18.2)
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
Net increase (decrease) in cash and cash equivalents (53.9) 46.2 (37.9) 44.1 (30.9) (28.8)
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
Cash and cash equivalents at beginning of period 58.7 12.5 50.4 14.6 43.4 43.4
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
Cash and cash equivalents at end of period $ 4.8 $ 58.7 $ 12.5 $ 58.7 $ 12.5 $ 14.6
- --------------------------------------------------- ------ ------ ------ ------ ------ ------
The accompanying notes are an integral part of the audited financial statements.
Page 20
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Blount International, Inc. and Subsidiaries
Common Stock Capital Accumulated
(Dollar amounts in millions, ---------------- In Excess Retained Translation Treasury
shares in thousands) Class A Class B of Par Earnings Adjustment Stock
- --------------------------- ------- ------- --------- -------- ----------- --------
Balance, February 28, 1995 $ 0.1 $ 0.1 $28.6 $170.6 $ 8.3
Exercise of employee stock
options (207 Class A shares) 2.6
Issuance of shares under
dividend reinvestment plan
(3 Class A shares) 0.1
Conversion of Class B to Class A
Common stock (122 shares)
Aggregate adjustment resulting
from translation of foreign
currency statements (0.1)
Net income 53.6
Dividends (8.9)
- --------------------------- ------- ------- --------- -------- ---------- --------
Balance, February 29, 1996 0.1 0.1 31.3 215.3 8.2
Exercise of employee stock
options (183 Class A shares) 3.4
Issuance of shares under
dividend reinvestment plan
(4 Class A shares) 0.1
Conversion of Class B to Class A
Common stock (35 shares)
Aggregate adjustment resulting
from translation of foreign
currency statements (0.3)
Purchase of treasury stock
(118 Class A shares) $ (4.3)
Net income 45.4
Dividends (8.5)
- --------------------------- ------- ------- --------- -------- ---------- --------
Balance, December 31, 1996 0.1 0.1 34.8 252.2 7.9 (4.3)
Stock split (13,638 Class A
shares, 728 shares to treasury
and 5,811 Class B shares) 0.2 (0.2)
Exercise of employee stock
options (225 Class A shares,
66 from treasury) 2.9 (1.4) 2.5
Issuance of shares under
dividend reinvestment plan
(4 Class A shares) 0.2
Conversion of Class B to Class A
Common stock (79 shares)
Aggregate adjustment resulting
from translation of foreign
currency statements (0.9)
Purchase of treasury stock
(673 Class A shares) (27.5)
Net income 59.1
Dividends (9.6)
- --------------------------- ------- ------- --------- -------- ----------- --------
Balance, December 31, 1997 $ 0.3 $ 0.1 $37.7 $300.3 $ 7.0 $(29.3)
- --------------------------- ------- ------- --------- -------- ----------- --------
The accompanying notes are an integral part of the audited financial statements.
Page 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Blount International, Inc. and Subsidiaries
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
The consolidated financial statements include the accounts of Blount
International, Inc. and its subsidiaries ("the Company"). All significant
intercompany balances and transactions are eliminated in consolidation.
Change in fiscal year:
In April 1996, the Company changed its fiscal year from one ending on the last
day of February to one ending on December 31. Accordingly, the audited
financial statements include the results for the twelve-month period ended
December 31, 1997 ("1997"), the ten-month period ended December 31, 1996
("transition period") and the fiscal year ended February 29, 1996 ("fiscal
1996"). In addition to the basic audited financial statements and related
notes, unaudited financial information for the twelve-month periods ended
December 31, 1996 and 1995, and the ten-month period ended December 31, 1995,
has been presented to enhance comparability.
Reclassifications:
Certain amounts in the transition period and fiscal 1996 financial statements
and notes to consolidated financial statements have been reclassified to conform
with the 1997 presentation.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Estimates are used when accounting for the allowance for doubtful accounts,
inventory obsolescence, long-lived assets, product warranty expenses, casualty
insurance costs, employee benefit plans, income taxes, discontinued operations
and contingencies. It is reasonably possible that actual results could differ
significantly from those estimates and significant changes to estimates could
occur in the near term.
Cash and cash equivalents:
The Company considers all highly liquid temporary cash investments that are
readily convertible to known amounts of cash and present minimal risk of changes
in value because of changes in interest rates to be cash equivalents.
Checks in transit are classified as accounts payable to the extent the aggregate
of such checks exceeds available cash balances not temporarily invested. Checks
classified as accounts payable were $4.0 million and $2.8 million as of December
31, 1997 and 1996. All other checks in transit are recorded as reductions of
cash.
Inventories:
Inventories are stated at the lower of first-in, first-out cost or market.
Property, plant and equipment:
These assets are stated at cost and are depreciated principally on the straight-
line method over the estimated useful lives of the individual assets. The
principal ranges of estimated useful lives for depreciation purposes are as
follows: buildings and improvements - 5 years to 45 years; machinery and
equipment - 3 years to 15 years; furniture, fixtures and office equipment - 3
Page 22
years to 10 years; and transportation equipment - 3 years to 15 years. Gains or
losses on disposal are reflected in income. Property, plant and equipment held
under leases which are essentially installment purchases are capitalized with
the related obligations stated at the principal portion of future lease
payments. Depreciation charged to costs and expenses was $21.1 million, $16.4
million and $19.3 million in 1997, the transition period and fiscal 1996.
Interest cost incurred during the period of construction of plant and equipment
is capitalized. No material amounts of interest were capitalized on plant and
equipment during the three reporting periods ended December 31, 1997.
Cost in excess of net assets of acquired businesses:
The excess cost is being amortized by the straight-line method over periods
ranging from 10 to 40 years. Accumulated amortization was $25.0 million and
$21.7 million as of December 31, 1997 and 1996. The excess cost is evaluated
for impairment based on the historic and estimated future profitability and cash
flows of the business units to which it relates. Adjustments to carrying value
are made if required.
Insurance accruals:
It is the Company's policy to retain a portion of expected losses related to
workers' compensation and general, product and vehicle liability through large
retentions or deductibles under its insurance programs. Provisions for losses
expected under these programs are recorded based on estimates of the
undiscounted aggregate liabilities for claims incurred.
Foreign currency:
For foreign subsidiaries which have a majority of transactions denominated in
U.S. dollars, monetary assets and liabilities are translated into U.S. dollars
at the current exchange rate, while other assets (principally property, plant
and equipment and inventories) and related costs and expenses are generally
translated at historic exchange rates. Sales and other costs and expenses are
translated at the average exchange rate for the period and the resulting foreign
exchange adjustments are recognized in income. Assets and liabilities of the
remaining foreign operations are translated into U.S. dollars at the current
exchange rate and their statements of income are translated at the average
exchange rate for the period. Gains and losses resulting from translation of the
financial statements of these operations are accumulated in a separate component
of stockholders' equity. The amount of income taxes allocated to this
translation adjustment is not significant. Foreign exchange adjustments reduced
pretax income by $0.3 million, $0.1 million and $1.9 million in 1997, the
transition period and fiscal 1996.
Derivative financial instruments:
The Company has entered into a forward interest rate lock contract which
effectively locks in the treasury rate component of the interest rate on an
expected issue of long-term debt of approximately $150 million in early 1998
(see Note 3). This contract is accounted for as a hedge and any gains or losses
on the contract will be deferred and reflected as an adjustment of interest
expense over the term of the long-term debt.
The Company accounts for copper and zinc futures contracts in accordance with
SFAS No. 80, Accounting for Futures Contracts. These contracts (approximately
8.4 million pounds at December 31, 1997) hedge anticipated brass purchases the
Company expects to carry out in the normal course of business. Any gain or loss
on futures contracts accounted for as a hedge which are closed before the date
of the anticipated transaction is deferred until completion of the transaction.
Deferred gains or losses are amortized over the transaction period.
Page 23
Deferred gains and losses on derivative financial instruments are generally
classified as other assets or other liabilities in the consolidated balance
sheets.
Revenue recognition:
The Company's policy is to record sales as orders are shipped.
Advertising:
Advertising costs are generally expensed as incurred.
Research and development:
Expenditures for research and development are expensed as incurred. These costs
were $8.0 million, $6.0 million and $8.8 million for 1997, the transition period
and fiscal 1996.
Earnings per share:
As of December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share,"
which requires a dual presentation of basic earnings per share and diluted
earnings per share on the face of the statements of income. All prior period
earnings per share data has been restated to comply with the provisions of SFAS
No. 128.
Stock split:
In November 1997, the Company announced that its Board of Directors approved a
split in the outstanding shares of the Company's common stock on a two-for-one
basis. The split was effected on December 8, 1997. All prior period share and
per share data have been restated to reflect the split.
NOTE 2:
INCOME TAXES
The provision for income taxes attributable to continuing operations is as
follows:
Twelve Months Ten Months Twelve Months
Ended Ended Ended
December 31, December 31, February 29,
(Dollar amounts in millions) 1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Current provision:
Federal $ 28.6 $ 24.5 $ 20.2
State 3.8 0.8 2.1
Foreign 3.9 2.4 4.0
Deferred provision (benefit):
Federal (1.5) (3.6) 4.4
State 0.1 0.4 0.5
Foreign (0.3) 1.1 (1.1)
- ------------------------------ ------ ------ ------
$ 34.6 $ 25.6 $ 30.1
- ------------------------------ ------ ------ ------
Page 24
A reconciliation of the provision for income taxes attributable to continuing
operations to the amount computed by applying the statutory federal income tax
rate to income from continuing operations before income taxes is as follows:
Twelve Months Ten Months Twelve Months
Ended Ended Ended
December 31, December 31, February 29,
(Dollar amounts in millions) 1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Income before income taxes:
Domestic $ 83.8 $ 61.1 $ 77.6
Foreign 9.9 8.5 6.1
- ------------------------------ ------ ------ ------
$ 93.7 $ 69.6 $ 83.7
- ------------------------------ ------ ------ ------
% % %
Statutory tax rate 35.0 35.0 35.0
Impact of earnings of foreign
operations (0.7) 0.7 0.2
State income taxes, net of federal
tax benefit 2.6 1.5 2.3
Charitable contribution carryover (2.0)
Permanent differences between book
bases and tax bases 1.6 1.5 1.0
Other items, net (1.6) (1.9) (0.5)
- ------------------------------ ------ ------ ------
Effective income tax rate 36.9 36.8 36.0
- ------------------------------ ------ ------ ------
All years reflect the allocation of substantially all corporate office expenses
and interest expense to domestic operations.
As of December 31, 1997 and 1996, deferred income tax assets were $35.6 million
and $34.7 million and deferred income tax liabilities were $28.8 million and
$29.6 million. Deferred income taxes applicable to temporary differences at
December 31, 1997 and 1996 are as follows:
(Dollar amounts in millions) 1997 1996
- -------------------------------------------------- ------ ------
Property, plant and equipment basis differences $ 18.3 $ 19.7
Employee benefits (16.8) (13.0)
Other accrued expenses (16.1) (18.6)
Other - net 7.8 6.8
- -------------------------------------------------- ------ ------
$ (6.8) $ (5.1)
- -------------------------------------------------- ------ ------
Deferred income taxes of approximately $4.0 million have not been provided on
undistributed earnings of foreign subsidiaries in the amount of $40.8 million as
the earnings are considered to be permanently reinvested.
The Company has settled its issues with the Internal Revenue Service through the
1993 fiscal year with no material adverse effect. The periods from fiscal 1994
through 1997 are still open for review.
Page 25
NOTE 3:
DEBT AND FINANCING AGREEMENTS
Long-term debt at December 31, 1997 and 1996 consists of the following:
(Dollar amounts in millions) 1997 1996
- -------------------------------------------------- ------ ------
9% subordinated notes $ 68.8 $ 68.8
Revolving credit agreement 54.0
Industrial development revenue bonds payable,
maturing between 1998 and 2013, interest at varying
rates (principally 4.4% at December 31, 1997) 15.7 16.1
Other long-term debt, interest at 9.5% 0.5
Lease purchase obligations, interest at varying
rates, payable in installments to 2000 0.9 0.6
- -------------------------------------------------- ------ ------
139.9 85.5
Less current maturities (1.1) (0.9)
- -------------------------------------------------- ------ ------
$138.8 $ 84.6
- -------------------------------------------------- ------ ------
Maturities of long-term debt and the principal and interest payments on long-
term capital leases are as follows:
Capital Leases
--------------------- Total
(Dollar amounts in millions) Debt Principal Interest Payments
- ------------------------------- ------ --------- -------- --------
1998 $ 0.5 $ 0.6 $ 0.1 $ 1.2
1999 0.4 0.3 0.7
2000 0.4 0.4
2001 0.4 0.4
2002 54.5 54.5
2003 and beyond 82.8 82.8
- ------------------------------- ------ ----- ----- ------
$139.0 $ 0.9 $ 0.1 $140.0
- ------------------------------- ------ ----- ----- ------
On December 17, 1997, the Company and Blount, Inc., its wholly-owned subsidiary,
filed a Form S-3 Registration Statement with the Securities and Exchange
Commission for an issue in early 1998 of $150 million Senior Notes due 2008.
The Company plans to use the proceeds of the Senior Notes to repay outstanding
indebtedness under its revolving credit agreement and to redeem all of its
outstanding 9% senior subordinated notes. The balance of the proceeds will be
used for general corporate purposes, including the post-closing adjustment to
the purchase price of Federal Cartridge Company (see Note 4).
At December 31, 1997, the Company had $54.0 million outstanding under its $150
million revolving credit agreement with a group of five banks. The $150 million
agreement expires April 2002 and provides for interest rates to be determined at
the time of borrowings based on a choice of formulas as specified in the
agreement. The interest rates and commitment fees may vary based on the ratio
of cash flow to debt as defined in the agreement. The agreement contains
covenants relating to liens, subsidiary debt, transactions with affiliates,
consolidations, mergers and sales of assets, and requires the Company to
maintain certain leverage and fixed charge coverage ratios.
Page 26
The remaining proceeds from industrial development revenue bonds issued in
fiscal 1995 are held in trust and released as qualified capital expenditures are
made. As of December 31, 1997 and 1996, $3.9 million and $4.9 million were held
in trust and are included in "Other assets" in the Company's consolidated
balance sheets.
The Company has 9% senior subordinated notes ("the 9% notes") outstanding in the
principal amount of $68.8 million maturing on June 15, 2003. The 9% notes are
redeemable at the election of the Company, in whole or in part, at any time on
or after June 15, 1998, initially at 103 3/8% of the principal amount and
thereafter at prices declining to par on June 15, 2001. The 9% notes were
issued under an indenture ("the indenture") between the Company and a major bank
as trustee. The indenture restricts the Company's ability to incur additional
debt, pay dividends, make certain investments, dispose of assets, create liens
on assets and merge or consolidate with another entity.
Under the most restrictive debt requirement, retained earnings of approximately
$73.9 million were available for the payment of dividends at December 31, 1997.
As of December 31, 1997 and 1996, the weighted average interest rate on short-
term borrowings was 9.7% and 9.2%, respectively.
NOTE 4:
ACQUISITIONS AND DISPOSALS
The following acquisitions have been accounted for by the purchase method, and
the net assets and results of operations of the acquired companies have been
included in the Company's consolidated financial statements since the dates of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired is being amortized on a straight-line basis over 40 years.
On November 4, 1997, the Company acquired Federal Cartridge Company ("Federal"),
formerly Federal-Hoffman, Inc. The estimated purchase price is approximately
$128 million consisting of $112 million paid at closing plus a post-closing
adjustment to be determined by an audit and acquisition expenses. Federal
manufactures shotshell, centerfire and rimfire cartridges, ammunition components
and clay targets. The following summarized unaudited pro forma financial
information for the twelve months ended December 31, 1997 and 1996 assumes the
acquisition had occurred on January 1 of each year:
Pro forma information
(Dollar amounts in millions, except per share data) 1997 1996
- --------------------------------------------------- ------ ------
Sales $842.2 $779.2
Income from continuing operations 65.1 50.7
Earnings per share from continuing operations:
Basic 1.73 1.32
Diluted 1.69 1.30
The pro forma results do not necessarily represent the results which would have
occurred if the acquisition had taken place on the basis assumed nor are they
indicative of the results of future operations.
In January 1997, the Company acquired the outstanding capital stock of the
Frederick Manufacturing Corporation and Orbex, Inc. for approximately $19
million and paid existing debt of the acquired companies in the amount of $5.8
million. The principal products of the acquired companies are accessories for
lawn mowers and sporting goods. The combined sales and pretax income of the
acquired companies for their most recent year prior to the acquisition was $19.8
Page 27
million and $2.5 million, respectively.
In December 1995, the Company acquired the outstanding capital stock of Simmons
Outdoor Corporation ("Simmons"), a sports optics distributor. The purchase
price was approximately $38 million. Sales and pretax income for Simmons for
1995 were $40.9 million and $1.6 million, respectively.
In the transition period, income of $1.4 million, net of income taxes of $0.9
million, was recognized for disposal of the discontinued construction segment,
primarily due to favorable claim settlements and improved international job
profits.
NOTE 5:
CAPITAL STOCK, STOCK OPTIONS AND EARNINGS PER SHARE DATA
The Company has authorized 60 million shares of Class A Common Stock, 14 million
shares of Class B Common Stock and 4,456,855 shares of Preferred Stock. As of
December 31, 1997, no Preferred Stock was outstanding. The Class A Common Stock
is entitled to elect 25% of the Company's Board of Directors, is entitled to
one-tenth of one vote per share on all other matters and will receive an
additional dividend of $.00415 in any quarter that a cash dividend is declared
on the Class B Common Stock. The Class B Common Stock is entitled to elect 75%
of the Company's Board of Directors and is entitled to one vote per share on all
other matters. Each share of Class B Common Stock is convertible at any time at
the option of the shareholder into one share of Class A Common Stock.
The Company has granted options to purchase its Class A Common Stock to certain
officers and key employees under three fixed stock option plans. Under these
plans, options may be granted up to the following amounts: 1995 non-qualified
plan - 2,100,000 shares; 1994 non-qualified plan - 1,200,000 shares; and the
1992 incentive stock option plan - 2,250,000 shares. Each plan terminates ten
years from inception and provides for the granting of options with an option
price per share not less than the fair market value of one share of Class A
Common Stock on the date of grant. The options granted are exercisable for a
period of up to ten years under each plan and vest in installments over periods
determined by the Compensation and Management Development Committee of the Board
of Directors. As of December 31, 1997 and 1996, there were options for 26,666
shares and 949,000 shares available for grant under the 1995 non-qualified plan,
4,666 shares and no shares available for grant under the 1994 non-qualified
plan, and 68,090 shares and 142,490 shares available for grant under the 1992
incentive stock option plan, respectively.
The number of shares used in the denominators of the basic and diluted earnings
per share computations were as follows (in thousands):
Twelve Months Ten Months Twelve Months
Ended Ended Ended
December 31, December 31, February 29,
1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Shares for basic earnings per share
computation - weighted average
common shares outstanding 37,632 38,418 38,008
Dilutive effect of stock options 916 737 899
------ ------ ------
Shares for diluted earnings per
share computation 38,548 39,155 38,907
- ------------------------------ ------ ------ ------
Page 28
No adjustment was required to reported income amounts for inclusion in the
numerators of the earnings per share computations.
A summary of the status of the Company's fixed stock option plans as of December
31, 1997 and 1996, and February 29, 1996, and changes during the periods ending
on those dates is presented below:
Twelve Months Ten Months Twelve Months
Ended December 31, Ended December 31, Ended February 29,
1997 1996 1996
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(in 000's) Price (in 000's) Price (in 000's) Price
- -------------------- ---------- --------- ---------- --------- ---------- ---------
Outstanding at
beginning of period 2,918 $11.88 2,162 $ 9.05 2,613 $ 7.93
Granted 1,035 19.98 1,171 15.48 171 14.15
Exercised (444) 7.87 (365) 6.78 (414) 5.13
Forfeited (43) 13.75 (50) 10.78 (208) 6.96
---------- --------- ---------- --------- ---------- ---------
Outstanding at
end of period 3,466 $14.79 2,918 $11.88 2,162 $ 9.05
---------- --------- ---------- --------- ---------- ---------
Options exercisable
at end of period 1,385 849 1,143
- -------------------- ---------- ---------- ----------
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------ ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Remaining Exercise Shares Exercise
Range of Exercise Prices (in 000's) Contractual Life Price (in 000's) Price
- ------------------------ ---------- ---------------- --------- ---------- ---------
$2.54 to $2.73 157 4.9 years $ 2.68 40 $ 2.54
$4.48 to $4.56 72 5.0 years 4.49 54 4.49
$9.21 to $13.52 695 6.2 years 9.64 612 9.54
$14.33 to $20.72 2,490 8.4 years 17.06 679 15.36
$23.64 to $26.41 52 9.8 years 25.77
- ------------------------ ---------- ---------------- --------- ---------- ---------
Total 3,466 7.8 years $14.79 1,385 $11.99
- ------------------------ ---------- ---------------- --------- ---------- ---------
Page 29
The Company applies APB Opinion 25 and related interpretations in accounting for
fixed stock option plans. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined based on the estimated fair
value at the grant dates for awards under the Company's plans, consistent with
the method of FASB Statement 123, the Company's net income and earnings per
share would have been the pro forma amounts indicated below:
Twelve Months Ten Months Twelve Months
Ended Ended Ended
(Dollar amounts in millions, December 31, December 31, February 29,
except per share data) 1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Net income:
As reported $ 59.1 $ 45.4 $ 53.6
Pro forma 56.7 44.5 53.5
Earnings per share:
As reported:
Basic 1.57 1.18 1.41
Diluted 1.53 1.16 1.38
Pro forma:
Basic 1.51 1.16 1.41
Diluted 1.48 1.14 1.38
- ------------------------------ ------ ------ ------
For purposes of computing the pro forma amounts above, the Black-Scholes option-
pricing model was used with the following weighted-average assumptions:
Twelve Months Ten Months Twelve Months
Ended Ended Ended
December 31, December 31, February 29,
1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Estimated lives of plan options 6 years 6 years 6 years
Risk-free interest rates 6.2% 6.2% 5.9%
Expected volatility 23.0% 24.0% 23.0%
Dividend yield 1.5% 1.5% 1.5%
- ------------------------------ ------- ------- -------
The weighted-average estimated fair value of options granted during 1997, the
transition period and fiscal 1996 was $6.15, $4.87 and $4.25, respectively.
Page 30
NOTE 6:
PENSION PLANS
The Company maintains a funded, non-contributory, trusteed, defined benefit
pension plan covering the majority of domestic employees. In addition, the
Company sponsors certain supplemental defined benefit plans and employees of
certain foreign operations participate in local plans.
The formulas of defined benefit plans generally base pension benefits paid to
retired employees upon their length of service and a percentage of average
compensation during certain years of employment. The plans' assets are invested
principally in equity funds, bond funds and temporary cash investments. The
actuarial method used for financial reporting purposes is the projected unit
credit method. The components of pension expense for Company-sponsored defined
benefit plans were:
Twelve Months Ten Months Twelve Months
Ended Ended Ended
December 31, December 31, February 29,
(Dollar amounts in millions) 1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Service cost - benefits earned $ 4.9 $ 3.7 $ 3.4
Interest cost 6.7 5.5 5.8
Actual return on plan assets (12.8) (7.3) (11.1)
Net amortization and deferral 6.3 2.4 6.8
- ------------------------------ ------ ------ ------
$ 5.1 $ 4.3 $ 4.9
- ------------------------------ ------ ------ ------
The Company's general funding policy for qualified plans is to fund amounts
deductible for income tax purposes. A Rabbi Trust has been established for the
purpose of funding certain non-qualified benefits. The funded status of
qualified and non-qualified defined benefit plans at December 31, 1997 and 1996
was as follows:
1997 1996
--------------------------- ---------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
(Dollar amounts in millions) Benefits Exceed Assets Benefits Exceed Assets
- ------------------------------------------- ------------- ------------- ------------- -------------
Actuarial present value of projected
benefit obligation:
Vested $ 64.8 $ 4.7 $ 50.8 $ 4.2
Nonvested 4.4 0.2 3.1 0.1
- ------------------------------------------- -------- -------- -------- --------
Accumulated benefit obligation 69.2 4.9 53.9 4.3
Effect of projected compensation increases 32.1 1.4 22.5 1.1
- ------------------------------------------- -------- -------- -------- --------
Projected benefit obligation 101.3 6.3 76.4 5.4
Plan assets at fair value 107.2 82.0
- ------------------------------------------- -------- -------- -------- --------
Plan assets greater (less) than
projected benefit obligation 5.9 (6.3) 5.6 (5.4)
Unrecognized transition (asset) obligation (0.8) 0.2 (1.0) 0.3
Unrecognized prior service liability 0.3 0.3 1.0 0.3
Unrecognized net loss 1.2 1.0 5.2 0.7
- ------------------------------------------- -------- -------- -------- --------
Net prepaid (accrued) pension cost $ 6.6 $ (4.8) $ 10.8 $ (4.1)
- ------------------------------------------- -------- -------- -------- --------
Page 31
The weighted average rate assumptions used to determine pension expense and
related pension obligations for domestic and foreign defined benefit plans were
as follows:
Twelve Months Ten Months Twelve Months
Ended Ended Ended
December 31, December 31, February 29,
1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Discount rate 7.4% 7.6% 7.6%
Rate of increase in compensation
levels 4.0% 4.2% 4.1%
Expected long-term rate of return
on plan assets 8.7% 8.7% 8.7%
- ------------------------------ ------ ------ ------
The Company's share of unfunded liability, if any, related to multi-employer
pension plans is not determinable.
The Company provides a defined contribution 401(k) plan to the majority of
domestic employees and matches a portion of employee contributions. The expense
was $3.6 million, $2.4 million and $2.8 million in 1997, the transition period
and fiscal 1996.
NOTE 7:
POSTRETIREMENT INSURANCE BENEFITS
The Company sponsors plans which provide postretirement health care and life
insurance benefits ("postretirement benefits") to eligible domestic retirees.
The Company has funded the estimated liability for retirees of a certain
operation sold in a prior year. Other postretirement benefit plans are not
funded and benefit payments are made as they become due.
Net periodic postretirement benefit expense consisted of the following
components:
Twelve Months Ten Months Twelve Months
Ended Ended Ended
December 31, December 31, February 29,
(Dollar amounts in millions) 1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Service cost - benefits earned $ 0.3 $ 0.3 $ 0.3
Interest cost 1.2 0.9 1.3
Actual return on plan assets (0.3) (0.2) (0.3)
Net amortization and deferral 0.2 0.1 0.1
- ------------------------------ ------ ------ ------
$ 1.4 $ 1.1 $ 1.4
- ------------------------------ ------ ------ ------
Page 32
The accumulated postretirement benefit obligation for the funded plan was $2.1
million and $2.2 million as of December 31, 1997 and 1996. A reconciliation of
the accumulated postretirement benefit obligation to the accrued liability
included in the Company's balance sheets at December 31, 1997 and 1996 follows:
(Dollar amounts in millions) 1997 1996
- -------------------------------------------------- ------ ------
Accumulated postretirement benefit obligation:
Retirees $ 10.6 $ 10.6
Fully eligible active plan participants 4.5 2.5
Other active plan participants 3.8 2.6
- -------------------------------------------------- ------ ------
18.9 15.7
Plan assets at fair value 2.1 2.1
- -------------------------------------------------- ------ ------
Postretirement benefits in excess of assets (16.8) (13.6)
Unrecognized net (gain) loss (0.5) 1.3
- -------------------------------------------------- ------ ------
Accrued postretirement benefit cost $(17.3) $(12.3)
- -------------------------------------------------- ------ ------
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was approximately 7 1/2% in 1997, the
transition period and fiscal 1996. The expected long-term rate of return on
plan assets was 8 3/4% in each period. A 9% annual rate of increase in the cost
of health care benefits was assumed for 1997; the rate was assumed to decrease
1% per year until 4% is reached, remain at that level for ten years and then
decrease to the ultimate trend rate of 3%. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
assumed health care cost trend rate by 1% in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997, by 10.0%
and the aggregate of the service and interest cost components of net periodic
expense for 1997 by 11.5%.
NOTE 8:
COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office space and equipment under operating leases expiring in
one to nine years. Most leases include renewal options and some contain
purchase options and escalation clauses. Future minimum rental commitments
required under operating leases having initial or remaining noncancelable lease
terms in excess of one year as of December 31, 1997, are as follows (in
millions): 1998--$3.8; 1999--$2.2; 2000--$1.4; 2001--$1.0; 2002--$0.6 and 2003
and beyond--$0.8. Rentals charged to costs and expenses under cancelable and
noncancelable lease arrangements were $4.9 million, $5.0 million and $6.3
million for 1997, the transition period and fiscal 1996, respectively.
In 1989, the United States Environmental Protection Agency ("EPA") designated a
predecessor of the Company as one of four potentially responsible parties
("PRPs") with respect to the Onalaska Municipal Landfill in Onalaska, Wisconsin
("the Site"). The waste complained of was placed in the landfill prior to 1981
by a corporation, some of whose assets were later purchased by a predecessor of
the Company. It is the view of management that because the Company's
predecessor corporation purchased assets rather than stock, the Company is not
liable and is not properly a PRP. Although management believes the EPA is wrong
on the successor liability issue, with other PRPs, the Company made a good faith
offer to the EPA to pay a portion of the Site clean-up costs. The offer was
rejected and the EPA and State of Wisconsin ("the State") proceeded with the
Page 33
clean-up at a cost of approximately $12 million. The EPA and the State brought
suit in 1996 against the Town of Onalaska ("the Town") and a second PRP,
Metallics, Inc., to recover response costs. On December 18, 1996, the United
States District Court for the Western District of Wisconsin approved and entered
Consent Decrees pursuant to which the Town and Metallics, Inc. settled the suit
and will pay a total of over $1.8 million to the EPA and the State. The Company
continues to maintain that it is not a liable party. The EPA has not taken
action against the Company, nor has the EPA accepted the Company's position.
The Company does not know the financial status of the other named and unnamed
PRPs who may have liability with respect to the Site. Management does not
expect the situation to have a material adverse effect on consolidated financial
condition or operating results.
Under the provisions of Washington State environmental laws, the Washington
State Department of Ecology ("WDOE") has notified the Company that it is one of
many companies named as a Potentially Liable Party ("PLP"), for the Pasco
Sanitary Landfill site, Pasco, Washington ("the Site"). Although the clean-up
costs are believed to be substantial, accurate estimates will not be available
until the environmental studies have been completed at the Site. However, based
upon the total documented volume of waste sent to the Site, the Company's waste
volume compared to that total waste volume should cause the Company to be
classified as a "de minimis" PLP. In July 1992, the Company and thirty-eight
other PLPs entered into an Administrative Agreed Order with WDOE to perform a
Phase I Remedial Investigation at the Site. In October 1994, WDOE issued an
administrative Unilateral Enforcement Order to all PLPs to complete a Phase II
Remedial Investigation and Feasibility Study ("RI/FS") under the Scope of Work
established by WDOE. The results of the RI/FS investigation are not expected
until 1998. The Company is unable to determine, at this time, the level of
clean-up demands that may be ultimately placed on it. Management believes that,
given the number of PLPs named with respect to the Site, their financial
condition, and the nature of the material the Company sent to the Site, the
Company's potential response costs associated with the Site will not have a
material adverse effect on consolidated financial condition or operating
results.
The Company is a defendant in a number of product liability lawsuits, some of
which seek significant or unspecified damages, involving serious personal
injuries for which there are large retentions or deductible amounts under the
Company's insurance policies. In addition, the Company is a party to a number of
other suits arising out of the conduct of its business. While there can be no
assurance as to their ultimate outcome, management does not believe these
lawsuits will have a material adverse effect on consolidated financial condition
or operating results.
NOTE 9:
FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
At December 31, 1997, substantially all of the Company's trade accounts
receivable of $131.5 million arose from manufacturing operations. The Company
has manufacturing or distribution operations in Brazil, Canada, Europe, Japan,
Russia and the United States. The Company sells to customers in these
locations, primarily in the United States, and other countries throughout the
world (see Note 10). At December 31, 1997, approximately 72% of trade accounts
receivable were from customers within the United States. Trade accounts
receivable are principally from service and dealer groups, distributors, mass
merchants, and chain saw and other original equipment manufacturers, and are
generally not collateralized.
Page 34
The estimated fair values of certain financial instruments at December 31, 1997
and 1996 are as follows:
1997 1996
-------------------- --------------------
Carrying Fair Carrying Fair
(Dollar amounts in millions) Amount Value Amount Value
- ---------------------------------- --------- --------- --------- ---------
Cash and short-term investments $ 4.8 $ 4.8 $ 58.7 $ 58.7
Futures contracts (see Note 1) 1.4 0.2
Other assets (restricted trust
funds and notes receivable) 14.7 16.1 14.8 15.8
Notes payable and long-term debt
(see Note 3) (140.3) (143.2) (85.8) (88.9)
Interest rate lock contract
(see Note 1) (1.4)
- ---------------------------------- ------- ------- ------- -------
The carrying amount of cash and short-term investments approximates fair value
because of the short maturity of those instruments. The fair value of
derivative financial instruments (futures contracts and interest rate lock
contract) is estimated by obtaining market quotes. The fair value of notes
receivable is estimated based on the discounted value of estimated future cash
flows. The fair value of restricted trust funds approximates the carrying amount
for short-term instruments and is estimated by obtaining market quotes for
longer term instruments. The fair value of long-term debt is estimated based on
recent market transaction prices or on current rates available for debt with
similar terms and maturities.
NOTE 10:
SEGMENT INFORMATION
The Company's business consists of three segments: Outdoor Products, Industrial
and Power Equipment and Sporting Equipment. The Outdoor Products segment
manufactures and markets saw chain, bars and sprockets for chain saws,
maintenance accessories, industrial cutting products and home and garden
products such as pruning tools, lawn mowers and lawn mower accessories. The
Outdoor Products segment sells to original equipment manufacturers and to a
diverse distribution and dealer network. The Industrial and Power Equipment
segment manufactures and markets large mechanical timber harvesting and
processing equipment as well as power transmission, hydraulic and gear
components for use in the timber harvesting, materials handling, construction
and utility businesses. The Sporting Equipment segment manufactures and markets
shotshell, small arms ammunition, reloading equipment and components, gun care
accessories, clay targets, shooting sports accessories and industrial
powerloads, and markets and distributes sports optical products. Major markets
include two-step distributors, cooperative buying groups, mass merchants and
government agencies. Identifiable assets consist of those assets used by the
segments; corporate assets consist principally of cash and temporary
investments, deferred income taxes and property, plant and equipment used by the
corporate office.
In 1997, the transition period and fiscal 1996, no customer accounted for more
than 10% of consolidated sales. In 1997, approximately 16.8% of sales by the
Outdoor Products segment were to one customer. While the Company expects this
business relationship to continue, the loss of this customer could affect the
operations of the Outdoor Products segment. Each of the Company's segments
purchase certain important materials from a limited number of suppliers that
Page 35
meet quality criteria. Although alternative sources of supply are available,
the sudden elimination of certain suppliers could result in manufacturing
delays, a reduction in product quality and a possible loss of sales in the near
term.
Information on Geographic Areas:
Twelve Months Ended Ten Months Ended Twelve Months
December 31, December 31, Ended
-------------------------- ---------------- February 29,
(Dollar amounts in millions) 1997 1996 1995 1996 1995 1996
- ------------------------------------ ------ ------ ------ ------ ------ ------------
(Unaudited) (Unaudited)
---------------- ------
Sales:
United States $614.4 $541.0 $518.1 $439.7 $434.6 $536.0
Outside United States 102.5 108.3 103.3 87.0 87.0 108.3
- ------------------------------------ ------ ------ ------ ------ ------ ------
$716.9 $649.3 $621.4 $526.7 $521.6 $644.3
- ------------------------------------ ------ ------ ------ ------ ------ ------
Operating income:
United States $108.9 $104.0 $ 99.7 $ 83.4 $ 86.9 $106.2
Outside United States 9.0 9.1 5.2 7.8 4.0 6.6
- ------------------------------------ ------ ------ ------ ------ ------ ------
Operating income from segments $117.9 $113.1 $104.9 $ 91.2 $ 90.9 $112.8
- ------------------------------------ ------ ------ ------ ------ ------ ------
Identifiable assets:
United States $557.9 $458.2 $435.2 $458.2 $435.2 $461.2
Outside United States 79.9 75.6 87.2 75.6 87.2 85.3
- ------------------------------------ ------ ------ ------ ------ ------ ------
$637.8 $533.8 $522.4 $533.8 $522.4 $546.5
- ------------------------------------ ------ ------ ------ ------ ------ ------
Included in United States sales were export sales of $116.2 million, $89.7
million and $106.2 million in 1997, the transition period and fiscal 1996.
Total sales from international activities, including those in the above table
and export sales, provided 30.5% of consolidated sales in 1997, 33.6% in the
transition period and 33.3% in fiscal 1996. In 1997, the transition period and
fiscal 1996, approximately 51.4%, 57.5% and 56.4%, respectively, of sales by the
Outdoor Products segment were from international sources.
Page 36
Information on Segments:
Twelve Months Ended Ten Months Ended Twelve Months
December 31, December 31, Ended
-------------------------- ---------------- February 29,
(Dollar amounts in millions) 1997 1996 1995 1996 1995 1996
- --------------------------------- ------ ------ ------ ------ ------ ------------
(Unaudited) (Unaudited)
---------------- ------
Sales:
Outdoor products $319.3 $292.7 $282.0 $239.3 $238.2 $291.6
Industrial and power equipment 239.1 209.5 232.2 165.7 196.8 240.6
Sporting equipment 158.5 147.1 107.2 121.7 86.6 112.1
- --------------------------------- ------ ------ ------ ------ ------ ------
$716.9 $649.3 $621.4 $526.7 $521.6 $644.3
- --------------------------------- ------ ------ ------ ------ ------ ------
Operating income:
Outdoor products $ 67.1 $ 61.4 $ 53.5 $ 50.7 $ 46.8 $ 57.4
Industrial and power equipment 32.7 31.9 39.6 24.0 34.2 42.2
Sporting equipment 18.1 19.8 11.8 16.5 9.9 13.2
- --------------------------------- ------ ------ ------ ------ ------ ------
Operating income from segments 117.9 113.1 104.9 91.2 90.9 112.8
Corporate office expenses (18.5) (20.7) (20.5) (16.2) (17.9) (22.3)
- --------------------------------- ------ ------ ------ ------ ------ ------
Income from operations 99.4 92.4 84.4 75.0 73.0 90.5
Interest expense (9.5) (9.9) (10.6) (7.9) (8.9) (10.8)
Interest income 2.5 2.4 3.8 2.3 3.4 3.4
Other income (expense), net 1.3 0.5 (0.4) 0.2 0.4 0.6
- --------------------------------- ------ ------ ------ ------ ------ ------
Income before income taxes $ 93.7 $ 85.4 $ 77.2 $ 69.6 $ 67.9 $ 83.7
- --------------------------------- ------ ------ ------ ------ ------ ------
Identifiable assets:
Outdoor products $221.9 $196.2 $195.4 $196.2 $195.4 $202.1
Industrial and power equipment 102.7 102.6 90.5 102.6 90.5 95.9
Sporting equipment 236.6 107.7 85.6 107.7 85.6 118.4
Corporate office 72.8 121.0 124.7 121.0 124.7 103.5
Discontinued operations 3.8 6.3 26.2 6.3 26.2 26.6
- --------------------------------- ------ ------ ------ ------ ------ ------
$637.8 $533.8 $522.4 $533.8 $522.4 $546.5
- --------------------------------- ------ ------ ------ ------ ------ ------
Depreciation and amortization:
Outdoor products $ 13.4 $ 12.8 $ 12.9 $ 10.6 $ 10.6 $ 12.7
Industrial and power equipment 4.1 3.9 3.7 3.2 3.0 3.6
Sporting equipment 5.7 4.8 4.3 4.0 3.5 4.3
Corporate office 1.8 1.8 1.4 1.4 1.1 1.6
- --------------------------------- ------ ------ ------ ------ ------ ------
$ 25.0 $ 23.3 $ 22.3 $ 19.2 $ 18.2 $ 22.2
- --------------------------------- ------ ------ ------ ------ ------ ------
Capital expenditures:
Outdoor products $ 13.5 $ 11.4 $ 7.8 $ 10.2 $ 5.5 $ 6.8
Industrial and power equipment 4.2 6.0 2.4 5.6 1.8 2.2
Sporting equipment 60.5 3.3 2.9 2.5 2.7 3.5
Corporate office 0.3 0.6 6.7 0.4 6.6 6.8
- --------------------------------- ------ ------ ------ ------ ------ ------
$ 78.5 $ 21.3 $ 19.8 $ 18.7 $ 16.6 $ 19.3
- --------------------------------- ------ ------ ------ ------ ------ ------
Page 37
NOTE 11:
OTHER INFORMATION
At December 31, 1997 and 1996, the following balance sheet captions are
comprised of the items specified below:
(Dollar amounts in millions) 1997 1996
- ----------------------------------------------- ------------ ------------
Accounts receivable:
Trade accounts $ 131.5 $ 111.9
Other 7.9 7.0
Allowance for doubtful accounts (3.7) (3.0)
- ----------------------------------------------- --------- ---------
$ 135.7 $ 115.9
- ----------------------------------------------- --------- ---------
Inventories:
Finished goods $ 79.0 $ 42.4
Work in process 20.9 14.5
Raw materials and supplies 33.0 25.1
- ----------------------------------------------- --------- ---------
$ 132.9 $ 82.0
- ----------------------------------------------- --------- ---------
Property, plant and equipment:
Land $ 13.1 $ 6.4
Buildings and improvements 106.1 84.3
Machinery and equipment 204.8 161.9
Furniture, fixtures and office equipment 25.6 23.2
Transportation equipment 16.6 16.6
Construction in progress 10.6 9.5
Accumulated depreciation (188.3) (170.2)
- ----------------------------------------------- --------- ---------
$ 188.5 $ 131.7
- ----------------------------------------------- --------- ---------
Accrued expenses:
Salaries, wages and related withholdings $ 25.8 $ 21.8
Employee benefits 7.5 8.4
Casualty insurance costs 9.5 14.1
Income taxes payable 1.3 4.6
Other 27.9 28.5
- ----------------------------------------------- --------- ---------
$ 72.0 $ 77.4
- ----------------------------------------------- --------- ---------
Other liabilities:
Employee benefits $ 31.9 $ 25.6
Casualty insurance costs 1.7 0.4
Other 4.0 1.8
- ----------------------------------------------- --------- ---------
$ 37.6 $ 27.8
- ----------------------------------------------- --------- ---------
At December 31, 1997, the Company's manufacturing operation in Canada had net
assets of $17.7 million which were subject to withdrawal restrictions resulting
from a financing agreement. The majority of this amount was invested in
property, plant and equipment.
Advertising costs were $14.6 million, $10.1 million and $11.9 million for 1997,
the transition period and fiscal 1996.
Page 38
Supplemental cash flow information is as follows:
Twelve Months Ten Months Twelve Months
Ended Ended Ended
December 31, December 31, February 29,
(Dollar amounts in millions) 1997 1996 1996
- ------------------------------ ------------- ------------ -------------
Interest paid $ 10.4 $ 9.1 $ 10.5
Income taxes paid 38.4 16.9 35.5
Capital lease obligations
incurred (terminated) 0.8 (6.4) 7.1
Acquisitions of businesses
(see Note 4):
Assets acquired 175.3 49.9
Liabilities assumed and incurred (42.8) (12.5)
Cash paid 132.5 37.4
- ------------------------------ ------ ------ ------
Page 39
SUPPLEMENTARY DATA
QUARTERLY RESULTS OF OPERATIONS
(unaudited)
The following table sets forth a summary of the unaudited quarterly results of
operations for the twelve-month periods ended December 31, 1997 and 1996.
(Dollar amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
in millions, except Ended Ended Ended Ended
per share data) March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997 Total
- ----------------- -------------- ------------- ------------------ ----------------- -------
Twelve months ended
December 31, 1997
Sales $170.1 $160.5 $182.1 $204.2 $716.9
Gross profit 56.3 51.8 58.9 67.0 234.0
Net income 13.6 11.4 15.8 18.3 59.1
Earnings per share:
Basic .36 .30 .42 .49 1.57
Diluted .35 .30 .41 .47 1.53
The fourth quarter includes the results of Federal, acquired on November 4, 1997
(see Note 4 of Notes to Consolidated Financial Statements). Federal's sales
were $14.5 million in the fourth quarter since acquisition.
(Dollar amounts 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
in millions, except Ended Ended Ended Ended
per share data) March 31, 1996 June 30, 1996 September 30, 1996 December 31, 1996 Total
- ----------------- -------------- ------------- ------------------ ----------------- -------
Twelve months ended
December 31, 1996
Sales $173.2 $142.0 $160.0 $174.1 $649.3
Gross profit 58.5 48.8 55.9 59.2 222.4
Net income 13.4 10.6 13.8 17.4 55.2
Earnings per share:
Basic .35 .28 .36 .45 1.44
Diluted .34 .28 .35 .44 1.41
The second quarter includes net income of $1.2 million ($.03 per share, diluted)
resulting from revised product liability estimates for the Industrial and Power
Equipment segment. The third quarter includes net income of $1.2 million ($.03
per share, diluted) from resolution of an environmental matter at the Company's
Lewiston, Idaho facility. The fourth quarter includes net income of $1.4
million ($.03 per share, diluted) recognized for disposal of construction
operations which were discontinued in a prior year.
Page 40
The following table sets forth a summary of the unaudited quarterly results of
operations for the ten-month transition period ended December 31, 1996.
(Dollar amounts One Month 2nd Quarter 3rd Quarter 4th Quarter
in millions, except Ended Ended Ended Ended
per share data) March 31, 1996 June 30, 1996 September 30, 1996 December 31, 1996 Total
- ----------------- -------------- ------------- ------------------ ----------------- -------
Transition Period
Sales $ 50.6 $142.0 $160.0 $174.1 $526.7
Gross profit 16.3 48.8 55.9 59.2 180.2
Net income 3.6 10.6 13.8 17.4 45.4
Earnings per share:
Basic .09 .28 .36 .45 1.18
Diluted .09 .28 .35 .44 1.16
The second quarter includes net income of $1.2 million ($.03 per share, diluted)
resulting from revised product liability estimates for the Industrial and Power
Equipment segment. The third quarter includes net income of $1.2 million ($.03
per share, diluted) from resolution of an environmental matter at the Company's
Lewiston, Idaho facility. The fourth quarter includes net income of $1.4
million ($.03 per share, diluted) recognized for disposal of construction
operations which were discontinued in a prior year.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 41
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
See the "Election of Directors," "Executive Officers," and "Filing Disclosure"
sections of the proxy statement for the April 20, 1998, Annual Meeting of
Stockholders of Blount International, Inc., which sections are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the "Executive Compensation," "Compensation of Directors," "Compensation
Committee Interlocks and Insider Participation," and "Employment Contracts,
Termination of Employment and Change in Control Arrangements" sections of the
proxy statement for the April 20, 1998, Annual Meeting of Stockholders of Blount
International, Inc., which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the "Principal Stockholders" section of the proxy statement for the April
20, 1998, Annual Meeting of Stockholders of Blount International, Inc., which
section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the "Indebtedness of Management" and "Certain Transactions and Other
Matters" sections of the proxy statement for the April 20, 1998, Annual Meeting
of Stockholders of Blount International, Inc., which sections are incorporated
herein by reference.
Page 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
Reference
---------
(a) Certain documents filed as part of Form 10-K
(1) Financial Statements and Supplementary Data
Report of Independent Accountants 16
Consolidated Statements of Income for the year ended
December 31, 1997, the ten-month period ended
December 31, 1996 and the year ended February 29, 1996 18
Consolidated Balance Sheets as of
December 31, 1997 and 1996 19
Consolidated Statements of Cash Flows for the year
ended December 31, 1997, the ten-month period ended
December 31, 1996 and the year ended February 29, 1996 20
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1997, the ten-month period
ended December 31, 1996 and the year ended February 29, 1996 21
Notes to Consolidated Financial Statements 22 - 39
Supplementary Data 40 - 41
(2) Financial Statement Schedules
Schedule II - Valuation and qualifying accounts for the
year ended December 31, 1997, the ten-month period ended
December 31, 1996 and the year ended February 29, 1996 48
All other schedules have been omitted because they are not required or
because the information is presented in the Notes to Consolidated Financial
Statements.
(b) Reports on Form 8-K in the Fourth Quarter
The Registrant filed reports on Form 8-K during the fourth quarter of 1997
as follows:
(1) A report on Form 8-K filed on November 19, 1997 reporting under Item 2
the acquisition of Federal Cartridge Company and reporting under Item
5 a split in the outstanding shares of the Company's common stock on a
two-for-one basis.
(c) Exhibits required by Item 601 of Regulation S-K:
* 2(a) Plan and Agreement of Merger among Blount International, Inc.,
HBC Transaction Subsidiary, Inc. and Blount, Inc., dated August 17, 1995 filed
as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount
International, Inc., including amendments and exhibits, which became effective
on October 4, 1995 (Commission File No. 33-63141).
Page 43
* 2(b) Stock Purchase Agreement, dated November 4, 1997, by and among
Blount, Inc., Hoffman Enclosures, Inc., Pentair, Inc. and Federal-Hoffman, Inc.
which was filed as Exhibit No. 2 to the Form 8-K filed by Blount International,
Inc. on November 19, 1997 (Commission File No. 001-11549).
* 3(a) Restated Certificate of Incorporation of Blount International,
Inc. filed as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of
Blount International, Inc., including amendments and exhibits, which became
effective on October 4, 1995 (Commission File No. 33-63141).
* 3(b) By-Laws of Blount International, Inc. filed as part of
Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount International,
Inc., including amendments and exhibits, which became effective on October 4,
1995 (Commission File No. 33-63141).
* 4(a) Registration Rights and Stock Transfer Restriction agreement
filed as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of
Blount International, Inc., including amendments and exhibits, which became
effective on October 4, 1995 (Commission File No. 33-63141).
* 4(b) Registration Statement on Form S-2 (Reg. No. 33-62728) of
Blount, Inc. with respect to the 9% subordinated notes due June 2003 of Blount,
Inc., including amendments and exhibits, which became effective on June 30, 1993
(Commission File No. 1-7002).
* 4(c) Registration Statement Form S-3 filed on December 17, 1997,
with respect to a proposed issue of $150 million Senior Notes due 2008 of
Blount, Inc. to be guaranteed by Blount International, Inc.
** 4(d) $150,000,000 Credit Agreement dated as of April 1, 1997 among
Blount, Inc., Blount International, Inc. and certain banks.
*10(a) Form of Indemnification Agreement between Blount International,
Inc. and The Blount Holding Company, L.P. filed as part of Registration
Statement on Form S-4 (Reg. No. 33-63141) of Blount International, Inc.,
including amendments and exhibits, which became effective on October 4, 1995
(Commission File No. 33-63141).
*10(b) Insurance Agreement between Blount, Inc. and Winton M. Blount
which was filed as an exhibit to the Annual Report of Blount, Inc. on Form 10-K
for the fiscal year ended February 28, 1983.
*10(c) Supplemental Retirement and Disability Plan of Blount, Inc.
which was filed as Exhibit 10(e) to the Annual Report of Blount, Inc. on Form
10-K for the fiscal year ended February 29, 1992 (Commission File No. 1-7002).
*10(d) Written description of the Management Incentive Plan of Blount,
Inc. which was included within the Proxy Statement of Blount, Inc. for the
Annual Meeting of Stockholders held June 27, 1994 (Commission File No. 1-7002).
*10(e) Supplemental Retirement Savings Plan of Blount, Inc. which was
filed as Exhibit 10(i) to the Annual Report of Blount, Inc. on Form 10-K for the
fiscal year ended February 29, 1992 (Commission File No. 1-7002).
*10(f) Insurance Agreement between Blount, Inc. and D. Joseph McInnes
which was filed as Exhibit 10(y) to the Annual Report of Blount, Inc. on Form
10-K for the fiscal year ended February 28, 1991 (Commission File No. 1-7002).
Page 44
*10(g) Supplemental Executive Retirement Plan between Blount, Inc. and
Winton M. Blount which was filed as Exhibit 10(z) to the Annual Report of
Blount, Inc. on Form 10-K for the fiscal year ended February 28, 1991
(Commission File No. 1-7002).
*10(h) 1992 Blount Incentive Stock Option Plan of Blount, Inc. filed
as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount
International, Inc., including amendments and exhibits, which became effective
on October 4, 1995 (Commission File No. 33-63141).
*10(i) Supplemental Executive Retirement Plan between Blount, Inc. and
John M. Panettiere which was filed as Exhibit 10(t) to the Annual Report of
Blount, Inc. on Form 10-K for the fiscal year ended February 28, 1993
(Commission File No. 1-7002).
*10(j) 1994 Blount Executive Stock Option Plan of Blount, Inc. filed
as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of Blount
International, Inc., including amendments and exhibits, which became effective
on October 4, 1995 (Commission File No. 33-63141).
*10(k) Executive Management Target Incentive Plan of Blount, Inc.
which was filed as Exhibit B to the Proxy Statement of Blount, Inc. for the
Annual Meeting of Stockholders held June 27, 1994 (Commission File No. 1-7002).
*10(l) 1995 Blount Long-Term Executive Stock Option Plan of Blount,
Inc. filed as part of Registration Statement on Form S-4 (Reg. No. 33-63141) of
Blount International, Inc., including amendments and exhibits, which became
effective on October 4, 1995 (Commission File No. 33-63141).
*10(m) Employment Agreement between Blount, Inc. and John M.
Panettiere which was filed as Exhibit 10(p) to the Annual Report of Blount, Inc.
on Form 10-K for the fiscal year ended February 28, 1995 (Commission File No.
1-7002).
*10(n) Employment Agreement between Blount, Inc. and Harold E. Layman
which was filed as Exhibit 10(q) to the Annual Report of Blount, Inc. on Form
10-K for the fiscal year ended February 28, 1995 (Commission File No. 1-7002).
*10(o) Employment Agreement between Blount, Inc. and D. Joseph McInnes
which was filed as Exhibit 10(r) to the Annual Report of Blount, Inc. on Form
10-K for the fiscal year ended February 28, 1995 (Commission File No. 1-7002).
*10(p) Employment Agreement between Blount, Inc. and James S. Osterman
which was filed as Exhibit 10(s) to the Annual Report of Blount, Inc. on Form
10-K for the fiscal year ended February 28, 1995 (Commission File No. 1-7002).
*10(q) Employment Agreement between Blount, Inc. and Donald B. Zorn
which was filed as Exhibit 10(t) to the Annual Report of Blount, Inc. on Form
10-K for the fiscal year ended February 28, 1995 (Commission File No. 1-7002).
*10(r) Supplemental Executive Retirement Plan between Blount, Inc. and
Donald B. Zorn which was filed as Exhibit 10(v) to the Annual Report of Blount,
Inc. on Form 10-K for the fiscal year ended February 28, 1995 (Commission File
No. 1-7002).
*10(s) Employment Agreement between Blount, Inc. and Richard H. Irving
III which was filed as Exhibit 10(t) to the Transition Report of Blount
International, Inc. on Form 10-K for the transition period from March 1, 1996 to
December 31, 1996 (Commission File No. 001-11549).
Page 45
*10(t) Blount, Inc. Non-Employee Directors' Stock Compensation Plan
which was filed as Exhibit 10(u) to the Annual Report of Blount International,
Inc. on Form 10-K for the fiscal year ended February 29, 1996 (Commission File
No. 001-11549).
*10(u) Agreement and Plan of Merger By and Among Simmons Outdoor
Corporation, Blount, Inc., and S.O.C. Corporation filed as part of Schedule 14D-
1 and Schedule 13D of Simmons Outdoor Corporation, S.O.C. Corporation, Blount,
Inc., and Blount International, Inc., which was filed on November 17, 1995.
*10(v) Amendments to and Assumptions of Employment Agreements with the
following individuals which were filed as Exhibit 10(w) to the Annual Report of
Blount International, Inc. on Form 10-K for the fiscal year ended February 29,
1996 (Commission File No. 001-11549):
John M. Panettiere
Harold E. Layman
D. Joseph McInnes
James S. Osterman
Donald B. Zorn
*10(w) Blount, Inc. Executive Benefit Plans Trust Agreement and
Amendment to and Assumption of Blount, Inc. Executive Benefit Plans Trust which
were filed as Exhibits 10(x)(i) and 10(x)(ii) to the Annual Report of Blount
International, Inc. on Form 10-K for the fiscal year ended February 29, 1996
(Commission File No. 001-11549).
*10(x) Blount, Inc. Benefits Protection Trust Agreement and Amendment
To and Assumption of Blount, Inc. Benefits Protection Trust which were filed as
Exhibits 10(y)(i) and 10(y)(ii) to the Annual Report of Blount International,
Inc. on Form 10-K for the fiscal year ended February 29, 1996 (Commission File
No. 001-11549).
*10(y) Employment Agreement between Blount, Inc. and Leonard C. Hale
which was filed as Exhibit 10(z) to the Transition Report of Blount
International, Inc. on Form 10-K for the transition period from March 1, 1996 to
December 31, 1996.
*10(z) Employment Agreement between Simmons Outdoor Corporation and
Larry W. Bridgman which was filed as Exhibit 10(aa) to the Transition Report of
Blount International, Inc. on Form 10-K for the transition period from March 1,
1996 to December 31, 1996.
21. A list of the significant subsidiaries of Blount International, Inc.
included herein on page 49.
23. Consent of Independent Accountants included herein on page 50.
27. Financial Data Schedule included herein on page 51.
* Incorporated by reference.
** Filed electronically herewith. Copies of such exhibits may be obtained
upon written request from:
Blount International, Inc.
P.O. Box 949
Montgomery, AL 36101-0949
Page 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BLOUNT INTERNATIONAL, INC.
By: /s/ Harold E. Layman
Harold E. Layman
Executive Vice President Finance Operations
and Chief Financial Officer
Dated: February 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Dated: February 23, 1998
/s/ Winton M. Blount /s/ Emory M. Folmar
Winton M. Blount Emory M. Folmar
Chairman of the Board Director
and Director
/s/ Haley Barbour /s/ Mary D. Nelson
Haley Barbour Mary D. Nelson
Director Director
/s/ W. Houston Blount /s/ John M. Panettiere
W. Houston Blount John M. Panettiere
Director President and Chief Executive
Officer and Director
/s/ R. Eugene Cartledge /s/ Arthur P. Ronan
R. Eugene Cartledge Arthur P. Ronan
Director Director
/s/ C. Todd Conover /s/ Andrew A. Sorensen
C. Todd Conover Andrew A. Sorensen
Director Director
/s/ H. Corbin Day /s/ Rodney W. Blankenship
H. Corbin Day Rodney W. Blankenship
Director Vice President and Controller
(Chief Accounting Officer)
/s/ Herbert J. Dickson
Herbert J. Dickson
Director
Page 47
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(Dollar amounts in millions)
- ----------------------------
Column A Column B Column C Column D Column E
-------- ------------ ------------------------- ----------- ----------
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning of Cost and Other End of
Description Period Expenses Accounts Deductions Period
----------- ------------ ---------- ---------- ------------ ----------
Year ended
February 29, 1996
- -------------------
Allowance for doubtful
accounts receivable $ 2.6 $ 1.1 $ 0.6 (2) $ 0.4 (1) $ 3.9
======= ======= ======= ======= =======
Ten months ended
December 31, 1996
- -----------------
Allowance for doubtful
accounts receivable $ 3.9 $ 0.6 $ 1.5 (1) $ 3.0
======= ======= ======= =======
Year ended
December 31, 1997
- -------------------
Allowance for doubtful
accounts receivable $ 3.0 $ 1.0 $ 0.9 (2) $ 1.2 (1) $ 3.7
======= ======= ======= ======= =======
(1) Principally amounts written-off less recoveries of amounts previously
written-off.
(2) Principally allowances established for companies acquired by purchase.
Page 48