Attached files
| file | filename |
|---|---|
| EX-23 - CONSENT - BLOUNT INTERNATIONAL INC | a2012form10-kaex23.htm |
| EX-31.1 - CERTIFICATION - BLOUNT INTERNATIONAL INC | a2012form10-kaex311.htm |
| EX-31.2 - CERTIFICATION - BLOUNT INTERNATIONAL INC | a2012form10-kaex312.htm |
| EX-32.1 - CERTIFICATION - BLOUNT INTERNATIONAL INC | a2012form10-kaex321.htm |
| EX-32.2 - CERTIFICATION - BLOUNT INTERNATIONAL INC | a2012form10-kaex322.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
Amendment No. 1
to Form 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012.
Or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission file number 001-11549
BLOUNT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 63 0780521 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
4909 SE International Way, Portland, Oregon | 97222-4679 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (503) 653-8881
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $.01 par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes x No
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. x Yes ¨ No
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 the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | o | Accelerated filer | x | |||
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
At June 30, 2012, the aggregate market value of the voting and non-voting common stock held by non-affiliates, computed by reference to the last sales price 14.65 as reported by the New York Stock Exchange, was $465,683,740 (affiliates being, for these purposes only, directors, executive officers, and holders of more than 10% of the registrant’s Common Stock).
The number of shares outstanding of $0.01 par value common stock as of February 26, 2013 was 49,146,484 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2013 are incorporated by reference in Part III.
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Table of Contents
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
Table of Contents
Explanatory Note
We are filing this Amendment No. 1 on Form 10-K/A (the "Amended Filing" or "Form 10-K/A") to our previously issued Annual Report on Form 10-K for the year ended December 31, 2012 (the "Original Filing") to i) reissue the Report of the Independent Registered Public Accounting Firm to change the firm’s opinion regarding the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 and (ii) restate management’s conclusions regarding the effectiveness of our disclosure controls and procedures ("DCP"), as defined in Rules 13a-15(e) and 15d-15(d) under the Securities Exchange Act of 1934 (the “Exchange Act”), and internal control over financial reporting ("ICFR"), as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as of December 31, 2012. Accordingly, the Company hereby amends and replaces in their entirety Items 8, 9A, and 15 in the Original Filing. The Original Filing was filed with the Securities and Exchange Commission ("SEC") on March 8, 2013. Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing.
Restatement of Conclusions Regarding Effectiveness of Disclosure Controls Procedures and of Internal Control Over Financial Reporting
On March 8, 2013, when we filed the original filing, our Chief Executive Officer ("CEO") (principal executive officer) and Chief Financial Officer ("CFO") (principal financial officer),had concluded that our both our ICFR and our DCP were effective as of December 31, 2012. The Original Filing also included PwC’s audit reports on our Financial Statements and on our ICFR, in which PwC had concluded that our ICFR was effective as of December 31, 2012. In July 2013, PwC informed us that it had come to believe that one or more material weaknesses in our ICFR may in fact have existed as of December 31, 2012.
After being advised by PwC of the apparent material weaknesses in our ICFR at December 31, 2012, the Company's management, under the supervision and with the participation of our CEO and CFO, re-evaluated the effectiveness of our ICFR and of our DCP as of December 31, 2012.Subsequent to these re-evaluations, our CEO and CFO concluded that neither our DCP nor our ICFR was effective at December 31, 2012 due to material weaknesses in our ICFR related to the design and operation of certain controls over information technology and financial reporting that were identified by those re-evaluations. These material weaknesses are further described in Item 9A of this Annual Report on Form 10-K/A. As a result, we have restated our Item 9A Controls and Procedures disclosures related to the effectiveness of both our DCP and ICFR to include the material weaknesses and reflect our conclusion that DCP was not effective as of December 31, 2012, and ICFR was not effective as of December 31, 2012.
In light of the material weaknesses in ICFR described in Item 9A, the Company performed additional analyses and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Following those additional analyses and procedures, management concluded that no changes were required to the financial statements previously filed and that the financial statements included in this Annual
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Report on Form 10-K/A present fairly, in all material respects, our financial condition, results of operations, and cash flows for the periods presented.
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PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Blount International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of cash flows and of changes in stockholders' equity (deficit) present fairly, in all material respects, the financial position of Blount International, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2012. However, management has subsequently determined that material weaknesses in internal control over financial reporting existed as of that date related to the Company not designing and maintaining effective controls over (1) the accounting for goodwill, (2) the accounting for intangible assets other than goodwill, (3) information technology general controls and controls that were dependent on the effective operation of information technology at the Woods/TISCO subsidiary, and (4) restricted access and segregation of duties within the SAP system as certain personnel have administrator access to execute certain conflicting transactions and certain personnel have the ability to prepare and post journal entries without an independent review required by someone other than the preparer. Accordingly, management’s report has been restated and our opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting existed as of that date related to (1) the accounting for goodwill, (2) the accounting for intangible assets other than goodwill, (3) information technology general controls and controls that were dependent on the effective operation of information technology at the Woods/TISCO subsidiary, and (4) restricted access and segregation of duties within the SAP system as certain personnel have administrator access to execute certain conflicting transactions and certain personnel have the ability to prepare and post journal entries without an independent review required by someone other than the preparer. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2012 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
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company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP |
Portland, Oregon |
March 8, 2013, except with respect to our opinion on internal control over financial reporting insofar as it relates to the effects of the matter described in the seventh paragraph of Management’s Report on Internal Control over Financial Reporting, as to which the date is November 22, 2013 |
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CONSOLIDATED STATEMENTS OF INCOME
Blount International, Inc. and Subsidiaries
Year Ended December 31, | ||||||||||||
(Amounts in thousands, except per share data) | 2012 | 2011 | 2010 | |||||||||
Sales | $ | 927,666 | $ | 831,630 | $ | 611,480 | ||||||
Cost of sales | 671,451 | 575,821 | 407,454 | |||||||||
Gross profit | 256,215 | 255,809 | 204,026 | |||||||||
Selling, general, and administrative expenses | 170,535 | 157,856 | 118,471 | |||||||||
Facility closure and restructuring costs | 6,400 | — | — | |||||||||
Operating income | 79,280 | 97,953 | 85,555 | |||||||||
Interest income | 158 | 171 | 119 | |||||||||
Interest expense | (17,364 | ) | (18,721 | ) | (25,636 | ) | ||||||
Other income (expense), net | (284 | ) | (4,453 | ) | (7,427 | ) | ||||||
Income from continuing operations before taxes | 61,790 | 74,950 | 52,611 | |||||||||
Provision for income taxes | 22,202 | 25,268 | 11,209 | |||||||||
Income from continuing operations | 39,588 | 49,682 | 41,402 | |||||||||
Discontinued operations: | ||||||||||||
Income from discontinued operations before taxes | — | — | 12,972 | |||||||||
Provision for income taxes | — | — | 7,174 | |||||||||
Income from discontinued operations | — | — | 5,798 | |||||||||
Net income | $ | 39,588 | $ | 49,682 | $ | 47,200 | ||||||
Basic income per share: | ||||||||||||
Continuing operations | $ | 0.81 | $ | 1.02 | $ | 0.86 | ||||||
Discontinued operations | — | — | 0.13 | |||||||||
Net income | $ | 0.81 | $ | 1.02 | $ | 0.99 | ||||||
Diluted income per share: | ||||||||||||
Continuing operations | $ | 0.79 | $ | 1.01 | $ | 0.85 | ||||||
Discontinued operations | — | — | 0.12 | |||||||||
Net income | $ | 0.79 | $ | 1.01 | $ | 0.97 | ||||||
Weighted average shares used in per share calculations: | ||||||||||||
Basic | 49,170 | 48,701 | 47,917 | |||||||||
Diluted | 49,899 | 49,434 | 48,508 | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Blount International, Inc. and Subsidiaries
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Net income | $ | 39,588 | $ | 49,682 | $ | 47,200 | ||||||
Unrealized gains (losses): | ||||||||||||
Unrealized holding gains (losses) | (2,242 | ) | (1,819 | ) | 837 | |||||||
Gains (losses) reclassified to net income | 75 | (644 | ) | (2,353 | ) | |||||||
Unrealized losses, net | (2,167 | ) | (2,463 | ) | (1,516 | ) | ||||||
Foreign currency translation adjustment | 1,434 | (2,984 | ) | 309 | ||||||||
Pension liability adjustment: | ||||||||||||
Net loss | (14,358 | ) | (49,349 | ) | (9,351 | ) | ||||||
Amortization of net loss | 8,573 | 5,137 | 4,562 | |||||||||
Amortization of prior service cost | (6 | ) | (6 | ) | (6 | ) | ||||||
Pension liability adjustment | (5,791 | ) | (44,218 | ) | (4,795 | ) | ||||||
Other comprehensive loss, before tax | (6,524 | ) | (49,665 | ) | (6,002 | ) | ||||||
Income tax benefit on other comprehensive items | 1,144 | 16,249 | 1,253 | |||||||||
Other comprehensive loss, net of tax | (5,380 | ) | (33,416 | ) | (4,749 | ) | ||||||
Comprehensive income | $ | 34,208 | $ | 16,266 | $ | 42,451 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
Blount International, Inc. and Subsidiaries
December 31, | ||||||||
(Amounts in thousands, except share and per share data) | 2012 | 2011 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 50,267 | $ | 62,118 | ||||
Accounts receivable, net | 128,444 | 133,965 | ||||||
Inventories | 174,816 | 149,825 | ||||||
Deferred income taxes | 19,522 | 15,812 | ||||||
Other current assets | 20,273 | 21,618 | ||||||
Total current assets | 393,322 | 383,338 | ||||||
Property, plant, and equipment, net | 177,702 | 155,872 | ||||||
Deferred income taxes | 2,438 | 589 | ||||||
Intangible assets | 143,161 | 158,085 | ||||||
Goodwill | 165,175 | 165,084 | ||||||
Other assets | 23,493 | 21,239 | ||||||
Total Assets | $ | 905,291 | $ | 884,207 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 15,072 | $ | 20,348 | ||||
Accounts payable | 54,295 | 52,884 | ||||||
Accrued expenses | 71,473 | 72,991 | ||||||
Deferred income taxes | 292 | 1,255 | ||||||
Total current liabilities | 141,132 | 147,478 | ||||||
Long-term debt, excluding current maturities | 501,685 | 510,014 | ||||||
Deferred income taxes | 40,501 | 42,455 | ||||||
Employee benefit obligations | 93,086 | 96,974 | ||||||
Other liabilities | 17,405 | 17,821 | ||||||
Total liabilities | 793,809 | 814,742 | ||||||
Commitments and contingent liabilities | ||||||||
Stockholders’ equity: | ||||||||
Common stock: par value $0.01 per share, 100,000,000 shares authorized, 49,140,091 and 48,814,912 outstanding, respectively | 491 | 488 | ||||||
Capital in excess of par value of stock | 606,495 | 598,689 | ||||||
Accumulated deficit | (420,085 | ) | (459,673 | ) | ||||
Accumulated other comprehensive loss | (75,419 | ) | (70,039 | ) | ||||
Total stockholders’ equity | 111,482 | 69,465 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 905,291 | $ | 884,207 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Blount International, Inc. and Subsidiaries
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 39,588 | $ | 49,682 | $ | 47,200 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Income from discontinued operations | — | — | (5,798 | ) | ||||||||
Early extinguishment of debt | — | 3,871 | 7,010 | |||||||||
Depreciation | 28,586 | 23,482 | 20,971 | |||||||||
Amortization | 16,532 | 12,325 | 6,628 | |||||||||
Stock-based compensation | 5,592 | 4,441 | 3,290 | |||||||||
Excess tax benefit from stock-based compensation | (1,187 | ) | (877 | ) | (1,340 | ) | ||||||
Deferred income taxes | (7,589 | ) | 2,331 | 2,658 | ||||||||
Change in uncertain tax positions | (369 | ) | (1,240 | ) | (7,827 | ) | ||||||
Loss on disposal of assets | 955 | 899 | 1,202 | |||||||||
Other non-cash charges, net | 801 | 5,026 | 784 | |||||||||
Changes in assets and liabilities, excluding acquisitions: | ||||||||||||
(Increase) decrease in accounts receivable | 4,985 | (12,057 | ) | 1,048 | ||||||||
(Increase) decrease in inventories | (25,487 | ) | 2,188 | (6,788 | ) | |||||||
(Increase) decrease in other assets | (781 | ) | (2,228 | ) | 1,741 | |||||||
Increase (decrease) in accounts payable | 1,414 | 58 | (6,883 | ) | ||||||||
Increase (decrease) in accrued expenses | (2,070 | ) | 6,571 | 3,708 | ||||||||
Increase (decrease) in other liabilities | (9,699 | ) | (16,405 | ) | (11,726 | ) | ||||||
Discontinued operations | — | (334 | ) | (6,712 | ) | |||||||
Net cash provided by operating activities | 51,271 | 77,733 | 49,166 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property, plant, and equipment | (51,925 | ) | (40,373 | ) | (20,002 | ) | ||||||
Proceeds from sale of assets | 198 | 967 | 159 | |||||||||
Acquisitions, net of cash acquired | — | (217,362 | ) | (90,854 | ) | |||||||
Discontinued operations | — | — | 25,176 | |||||||||
Net cash used in investing activities | (51,727 | ) | (256,768 | ) | (85,521 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Net borrowings (payments) under revolving credit facility | 6,800 | 228,200 | (3,400 | ) | ||||||||
Proceeds from issuance of term debt | — | 300,000 | 350,000 | |||||||||
Repayment of term loan principal | (15,000 | ) | (353,750 | ) | (107,465 | ) | ||||||
Repayment of PBL debt principal | (5,416 | ) | (7,813 | ) | — | |||||||
Repayment of 8 7/8% senior subordinated notes | — | — | (175,000 | ) | ||||||||
Debt issuance costs | (1,115 | ) | (6,509 | ) | (6,267 | ) | ||||||
Excess tax benefit from stock-based compensation | 1,187 | 877 | 1,340 | |||||||||
Proceeds from stock-based compensation activity | 1,152 | 1,041 | 2,398 | |||||||||
Taxes paid under stock-based compensation activity | (122 | ) | (267 | ) | (333 | ) | ||||||
Net cash provided by (used in) financing activities | (12,514 | ) | 161,779 | 61,273 | ||||||||
Effect of exchange rate changes | 1,119 | (1,334 | ) | 720 | ||||||||
Net increase (decrease) in cash and cash equivalents | (11,851 | ) | (18,590 | ) | 25,638 | |||||||
Cash and cash equivalents at beginning of year | 62,118 | 80,708 | 55,070 | |||||||||
Cash and cash equivalents at end of year | $ | 50,267 | $ | 62,118 | $ | 80,708 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
Blount International, Inc. and Subsidiaries
(Amounts in thousands) | Shares | Common Stock | Capital in Excess of Par | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
Balance December 31, 2009 | 47,759 | $ | 478 | $ | 581,211 | $ | (556,555 | ) | $ | (31,874 | ) | $ | (6,740 | ) | |||||||||
Net income | 47,200 | 47,200 | |||||||||||||||||||||
Foreign currency translation adjustment | 309 | 309 | |||||||||||||||||||||
Unrealized losses | (963 | ) | (963 | ) | |||||||||||||||||||
Pension liability adjustment | (4,095 | ) | (4,095 | ) | |||||||||||||||||||
Stock options, stock appreciation rights, and restricted stock | 477 | 4 | 3,393 | 3,397 | |||||||||||||||||||
Stock compensation expense | 3,290 | 3,290 | |||||||||||||||||||||
Balance December 31, 2010 | 48,236 | 482 | 587,894 | (509,355 | ) | (36,623 | ) | 42,398 | |||||||||||||||
Net income | 49,682 | 49,682 | |||||||||||||||||||||
Foreign currency translation adjustment | (2,984 | ) | (2,984 | ) | |||||||||||||||||||
Unrealized losses | (1,554 | ) | (1,554 | ) | |||||||||||||||||||
Pension liability adjustment | (28,878 | ) | (28,878 | ) | |||||||||||||||||||
Acquisition of KOX | 310 | 3 | 4,706 | 4,709 | |||||||||||||||||||
Stock options, stock appreciation rights, and restricted stock | 269 | 3 | 1,648 | 1,651 | |||||||||||||||||||
Stock compensation expense | 4,441 | 4,441 | |||||||||||||||||||||
Balance December 31, 2011 | 48,815 | 488 | 598,689 | (459,673 | ) | (70,039 | ) | 69,465 | |||||||||||||||
Net income | 39,588 | 39,588 | |||||||||||||||||||||
Foreign currency translation adjustment | 1,434 | 1,434 | |||||||||||||||||||||
Unrealized losses | (1,364 | ) | (1,364 | ) | |||||||||||||||||||
Pension liability adjustment | (5,450 | ) | (5,450 | ) | |||||||||||||||||||
Stock options, stock appreciation rights, and restricted stock | 325 | 3 | 2,214 | 2,217 | |||||||||||||||||||
Stock compensation expense | 5,592 | 5,592 | |||||||||||||||||||||
Balance December 31, 2012 | 49,140 | $ | 491 | $ | 606,495 | $ | (420,085 | ) | $ | (75,419 | ) | $ | 111,482 | ||||||||||
The Company holds 382,380 shares of its common stock in treasury. These shares have been accounted for as constructively retired in the Consolidated Financial Statements, and are not included in the number of shares outstanding.
On March 1, 2011, we issued 309,834 shares of common stock valued at $4.7 million as part of the acquisition price of KOX.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. The Company is a global manufacturer and marketer of equipment, accessories, and replacement parts sold to consumers and professionals in select end-markets, including the forestry, lawn and garden, farm, ranch, agriculture, and construction sectors. The Company manufactures and markets branded products, serving professional loggers, arborists, construction workers, homeowners, equipment dealers, landscapers, farmers, rural land owners, and OEMs. The Company’s manufactured products include products such as cutting chain, guide bars, and sprockets for chain saw use, lawnmower and edger blades, grass and crop cutting equipment, electric and gas-powered log splitters, riding lawnmowers, tractor attachments, and concrete cutting and finishing equipment. The Company maintains manufacturing facilities in the U.S., Brazil, Canada, China, France, and Mexico. We also market and distribute other products and accessories closely aligned with the products that we manufacture, including cutting line and spools for line trimmers, safety equipment and clothing, small engine replacement parts, small tractor linkage parts and attachments, and other accessories used in the market sectors we serve. Many of the products we manufacture are sold to OEMs for use on new chain saws and landscaping equipment, or for private branding purposes, using the OEMs’ brands. See additional information about our business in Item 1, Business, included elsewhere in this report.
Basis of Presentation. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries and are prepared in conformity with accounting principles generally accepted in the U.S. All significant intercompany balances and transactions have been eliminated.
Foreign Currency. For foreign subsidiaries whose operations are principally conducted 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 to 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 reflected as “other comprehensive income (loss)” in stockholders’ equity and in the Consolidated Statements of Comprehensive Income. Foreign currency transaction gains and losses from settling transactions denominated in currencies other than the U.S. Dollar are recognized in the Consolidated Statements of Income when realized.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles recognized in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the components of equity, and the disclosure of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses recognized during the reporting periods. Estimates are used when accounting for the allowance for doubtful accounts, inventory obsolescence, goodwill and other long-lived assets, product warranties, casualty insurance costs, product liability reserves and related expenses, other legal proceedings, employee benefit plans, income taxes and deferred tax assets and liabilities, and contingencies. It is reasonably possible that actual results could differ materially from these estimates and assumptions and significant changes to estimates could occur in the near term.
Cash and Cash Equivalents. All highly liquid temporary cash investments with maturities of 90 days or less at the date of investment that are readily convertible to known amounts of cash and present minimal risk of changes in value because of changes in interest rates are considered to be cash equivalents.
Allowance for Doubtful Accounts. The Company estimates the amount of accounts receivable that are not collectible and records an allowance for doubtful accounts which is presented net with accounts receivable on the Consolidated Balance Sheets. As of December 31, 2012 and 2011, the allowance for doubtful accounts was $3.1 million. It is reasonably possible that actual collection experience may differ significantly from management’s estimate.
Inventories. Inventories are valued at the lower of cost or market. The Company determines the cost of most raw materials, work in process, and finished goods inventories by standard cost, which approximates cost determined on the first in, first out (“FIFO”) method. The Company writes down its inventories for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
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Property, Plant, and Equipment. Property, plant, and equipment is stated at cost and is depreciated 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:
Asset Category | Useful Life | |||
Buildings and building improvements | 10 to 45 years | |||
Machinery and equipment | 3 to 10 years | |||
Furniture, fixtures, and office equipment | 3 to 10 years | |||
Transportation equipment | 3 to 15 years | |||
Gains or losses on disposal are reflected in income. Property, plant, and equipment under capital lease is capitalized, with the related obligations stated at the principal portion of future lease payments. Interest cost incurred during the period of construction of plant and equipment is capitalized. Capitalized interest was $0.5 million in 2012, $0.2 million in 2011, and $0.1 million in 2010.
Goodwill and Other Intangible Assets with Indefinite Useful Lives. The Company accounts for goodwill and other intangible assets with indefinite useful lives under ASC 350. Under the provisions of ASC 350, the Company evaluates annually in the fourth quarter, or whenever circumstances indicate, whether or not there are any qualitative indications of potential impairment of these assets. If there is indication of potential impairment, the Company performs a quantitative analysis. The quantitative analysis of impairment is performed by estimating the fair values of the reporting units using a discounted cash flow model and comparing those fair values to the carrying values of the reporting units, including goodwill. If the fair value of a reporting unit is less than its carrying value, the Company then allocates the fair value of the unit to all the assets and liabilities of that unit, including any unrecognized intangible assets, as if the reporting unit’s fair value were the price to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Events or changes in circumstances may occur that could cause underperformance relative to projected future cash flows that would create future impairments. No impairments have been recognized in 2012, 2011, or 2010 for goodwill or other intangible assets with indefinite useful lives.
Impairment of Long-Lived Assets. The Company evaluates the carrying value of long-lived assets to be held and used, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such asset are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the projected cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for disposal costs. No significant impairment charges were recognized in 2012, 2011, or 2010.
Deferred Financing Costs. The Company capitalizes costs incurred in connection with borrowings or establishment of credit facilities. These costs are amortized as an adjustment to interest expense over the life of the borrowing or life of the credit facility using the straight line method, which approximates the effective interest rate method. In the case of early debt principal repayments, the Company adjusts the value of the corresponding deferred financing costs with a charge to other expense, and similarly adjusts the future amortization expense.
Income Taxes. In accordance with ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Included in recorded tax liabilities are estimated amounts related to uncertain tax positions. Actual tax liabilities may differ materially from these estimates. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The American Jobs Creation Act of 2004 includes a deduction of up to 9 percent of “qualified production activities income,” as defined in the law and subject to certain limitations. The benefit of this deduction is accounted for as a special deduction when realized in accordance with ASC 740-10, Section 55. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense.
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Product Liability. The Company monitors claims that relate to the alleged malfunction or defects of its products that may result in an injury to the equipment operator or others. The Company records an accrued liability and charge to cost of sales for its estimated obligation as claims are incurred and evaluated. The accrual may increase or decrease as additional information regarding claims develops.
Environmental Remediation Liabilities. The Company is conducting several testing, monitoring, and in some cases, remediation efforts regarding environmental matters at certain of its current and former operating sites. In addition, from time to time, regulatory bodies and third parties have asserted claims to the Company alleging responsibility for environmental remediation. The Company records an accrued liability and charge to expense for its estimated cost of environmental remediation as situations are evaluated. The accrual may increase or decrease as new information is received, regulatory changes are enacted, or changes in estimate are developed.
Insurance Accruals. It is the Company’s policy to retain a portion of expected losses related to general and product liability, workers’ compensation, and vehicle liability losses through retentions or deductibles under its risk management and insurance programs. Provisions for losses expected under these programs are recorded based on estimates of the ultimate undiscounted aggregate liabilities for claims incurred.
Warranty. The Company offers certain product warranties with the sale of its products. An estimate of warranty costs is recognized at the time the related revenue is recognized and the warranty obligation is recorded as a charge to cost of sales and as a liability on the balance sheet. Warranty cost is estimated using historical customer claims, supplier performance, and new product performance.
Derivative Financial Instruments. The Company accounts for derivative financial instruments in accordance with ASC 815. The Company’s earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, interest rates, and commodity prices. The Company’s risk management policy allows for the use of derivative financial instruments to manage foreign currency exchange rate, interest rate, and commodity price exposures. The policy specifies that derivatives are not to be used for speculative or trading purposes and formally designates the financial instruments used as a hedge of a specific underlying exposure or forecasted transaction. The Company formally assesses, both at inception and at least quarterly thereafter, using the hypothetical derivative method, whether the derivatives used qualify for hedge accounting and are effective at offsetting the related underlying exposure. All derivatives are recognized on the Consolidated Balance Sheets at their fair value. As of December 31, 2012 and 2011, derivatives consisted of foreign currency hedge instruments, interest rate swap agreements, and an interest rate cap agreement, all of which are designated as cash flow hedges. The effective portion of changes in the fair value of hedging derivative instruments is recognized in other comprehensive income (loss) until the instrument is settled, at which time the gain or loss is recognized in current earnings. Any ineffective portion of changes in the fair value of hedging derivative instruments, should it occur, would be recognized immediately in earnings. See further information in Note 19.
Revenue Recognition. The Company recognizes revenue when persuasive evidence that a sales arrangement exists, title and risk of loss have passed to the customer, the price to the customer is fixed or determinable, and collectability is reasonably assured, which has historically been upon the date of shipment of product for the majority of the Company’s sales transactions. There are a small number of shipments with FOB destination or similar shipping terms, for which revenue is not recognized until delivery has occurred.
Shipping and Handling Costs. The Company incurs expenses for the shipment of goods to customers. These expenses are recognized in the period in which they occur and are classified as revenue if billed to the customer and as cost of sales if incurred by the Company in accordance with ASC 605-45.
Sales Incentives. The Company provides various sales incentives to customers in the form of coupons, rebates, discounts, free product, and advertising allowances. The estimated cost of such expenses is recorded at the time of revenue recognition and recorded as a reduction to revenue, except that free product is recorded as cost of sales, in accordance with ASC 605-50.
Advertising. Advertising costs are expensed as incurred, except for cooperative advertising allowances, which are accrued over the period the revenues are recognized. Advertising costs were $12.5 million, $12.8 million, and $7.3 million for 2012, 2011, and 2010, respectively.
Research and Development. Expenditures for research and development are expensed as incurred and include costs of direct labor, indirect labor, materials, overhead, and outside services. These costs were $17.0 million, $19.6 million, and $14.8 million for 2012, 2011, and 2010, respectively.
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Reclassifications. Certain amounts in the prior period financial statements and footnotes may have been reclassified to conform to the current period presentation. Such reclassifications, if any, have no effect on previously reported net income, comprehensive income, total cash flows, or net stockholders’ equity.
Recent Accounting Pronouncements. In July 2012, the FASB issued revised guidance on how an entity tests indefinite-lived intangible assets for impairment. Under the new guidance, an entity is no longer required to calculate the fair value of the indefinite-lived intangible assets and perform the quantitative impairment test unless the entity determines, based on a qualitative assessment, that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. This revised guidance is effective on January 1, 2013. We elected to adopt this new guidance early and implemented it in 2012.
NOTE 2: ACQUISITIONS
The Company accounts for acquisitions in accordance with ASC 805. Accordingly, assets acquired and liabilities assumed are recorded at their estimated fair values on the date of acquisition. The Company estimates the fair value of assets using various methods and considering, among other factors, projected discounted cash flows, replacement cost less an allowance for depreciation, recent comparable transactions, and historical book values. The Company estimates the fair value of inventory that is considered to be readily marketable by considering the estimated costs to complete the manufacturing, assembly, and selling processes, and the normal gross profit margin typically associated with its sale. The Company estimates the fair value of inventory that is not considered to be readily marketable by evaluating the estimated net realizable value for such inventory. The Company estimates the fair value of identifiable intangible assets based on discounted projected cash flows or estimated royalty avoidance costs. The Company estimates the fair value of liabilities assumed considering the historical book values and projected future cash outflows. The fair value of goodwill represents the residual enterprise value which does not qualify for separate recognition, including the value of the assembled workforce.
2010 Acquisition of SpeeCo
On August 10, 2010, we acquired SpeeCo, located in Golden, Colorado, a supplier of log splitters, post-hole diggers, tractor three-point linkage parts and equipment, and farm and ranch accessories. The acquisition of SpeeCo expanded our product offerings and broadened our customer base. The acquisition of SpeeCo also created opportunities for synergies in the areas of marketing, sales, assembly operations, distribution, and back office consolidation of support functions. We also believe there are opportunities to sell some of SpeeCo’s products into our FLAG distribution network domestically and internationally and began such sales in 2011. The opportunities for synergies were further enhanced when we acquired PBL and Woods/TISCO during 2011.
The purchase price was $91.7 million in cash, consisting of $90.0 million in negotiated enterprise value and a $1.7 million working capital adjustment. SpeeCo had $0.8 million of cash on the acquisition date, resulting in a net cash outflow of $90.9 million. We assumed none of SpeeCo’s debt in the transaction. In addition, we incurred legal and other third party fees totaling $1.0 million in conjunction with the acquisition that were expensed to SG&A in the Consolidated Statement of Income in 2010. The acquisition was financed with a combination of cash on hand and borrowing under the Company’s revolving credit facility.
SpeeCo’s pre-acquisition operating results (unaudited) for the twelve months preceding the acquisition date are summarized below.
(Amounts in thousands) | Twelve Months Ended July 31, 2010 | ||
Sales | $ | 77,077 | |
Operating income | 8,174 | ||
Depreciation and amortization | 4,469 | ||
SpeeCo’s operating income for the twelve months ended July 31, 2010 includes $0.4 million in management fees charged by SpeeCo’s former owner.
2011 Establishment of Blount B.V.
On January 19, 2011, we acquired a dormant shelf company registered in the Netherlands and changed the name to Blount Netherlands B.V. (“Blount B.V.”). The acquisition price was $21 thousand, net of cash acquired, plus the assumption of certain liabilities. This acquisition, along with the formation of an additional holding entity named BI Holdings C.V., a limited partnership registered with the Dutch Trade Register with a Bermuda office address and parent of Blount B.V., increases our flexibility to make international acquisitions. Direct ownership of certain of our foreign subsidiaries was transferred from our wholly-owned subsidiary, Blount, Inc., to Blount B.V. through a series of transactions executed in February 2011.
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2011 Acquisition of KOX
On March 1, 2011, we acquired KOX, a Germany-based direct-to-customer distributor of forestry-related replacement parts and accessories, primarily serving professional loggers and consumers in Europe. The acquisition of KOX increased our distribution capabilities and expanded our geographic presence in Europe. KOX has been a customer of Blount for over 30 years and purchased approximately $9.2 million of forestry replacement parts from Blount in 2010.
The total purchase price was $23.9 million, consisting of $19.2 million in cash and 309,834 shares of our common stock valued at $4.7 million based on the closing price of our stock on the acquisition date. KOX had $5.1 million of cash on the acquisition date, resulting in a net cash outflow of $14.1 million. We assumed none of KOX’s debt in the transaction. In addition, we incurred legal and other third party fees totaling $1.2 million in conjunction with the acquisition that were expensed to SG&A in the Consolidated Statements of Income during 2010 and 2011. The cash portion of the acquisition was funded from available cash on hand at Blount B.V. The common stock shares issued in the purchase were subject to certain restrictions through March 1, 2013 under terms of the related stock purchase agreement.
KOX’s pre-acquisition operating results (unaudited) for calendar year 2010 are summarized below.
(Amounts in thousands) | Year Ended December 31, 2010 | ||
Sales | $ | 34,889 | |
Operating income | 3,266 | ||
Depreciation | 128 | ||
2011 Acquisition of PBL
On August 5, 2011, we acquired PBL, a manufacturer of lawnmower blades and agricultural cutting parts based in Civray, France, with a second manufacturing facility in Queretaro, Mexico. The acquisition of PBL increased our manufacturing capacity for lawnmower blades, increased our market share for lawnmower blades in Europe, and provided an entrance into the agricultural cutting parts market in Europe. We also expect to benefit from PBL’s low-cost manufacturing methods and technology utilized at its facilities in France and Mexico.
The purchase price consisted of $14.2 million in cash and the assumption of $13.5 million of PBL’s debt. PBL had $1.3 million of cash on the acquisition date, resulting in a net cash outflow of $13.0 million. In addition, we incurred legal and other third party fees totaling $0.9 million in conjunction with the acquisition that were expensed to SG&A in the Consolidated Statement of Income during 2011. The cash portion of the acquisition was funded from available cash on hand at Blount B.V.
The initial acquisition accounting for PBL included provisional amounts for inventory obsolescence reserves and income tax accounting, as we were not able to obtain sufficient details and complete our analysis of these matters at the time of the acquisition. During March and April 2012, we obtained additional details about PBL’s inventory and performed an analysis of obsolescence as of the acquisition date. This analysis supported the recognition of additional obsolescence reserves in the amount of $1.7 million to reduce the acquisition date inventory to fair value. Accordingly, we have revised the Consolidated Balance Sheet as of December 31, 2011 to reflect this adjustment to the PBL acquisition accounting. The effect of this revision was to reduce inventory by $1.7 million, increase goodwill by $1.1 million, and increase current deferred tax assets by $0.6 million as of December 31, 2011.
PBL’s pre-acquisition operating results (unaudited) for the twelve months preceding the acquisition date are summarized below.
(Amounts in thousands) | Twelve Months Ended July 31, 2011 | ||
Sales | $ | 33,162 | |
Operating income | 1,804 | ||
Depreciation and amortization | 2,857 | ||
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2011 Acquisition of Woods/TISCO
On September 7, 2011, we acquired Woods/TISCO, with operations primarily in the Midwestern U.S., a manufacturer and marketer of equipment and replacement parts primarily for the agriculture end market. The acquisition of Woods/TISCO:
• | Increased distribution for our FRAG segment, particularly in the agricultural dealer channel. |
• | Expanded our FRAG product line offerings of tractor attachments and aftermarket replacement parts. |
• | Provided opportunities to leverage our manufacturing and product development expertise and global distribution and supply chain network, particularly in the area of product sourcing. |
• | Enhanced our U.S. manufacturing and distribution capabilities through the addition of three manufacturing and five distribution facilities. |
The purchase price was $190.5 million in cash, consisting of $185.0 million in negotiated enterprise value and a $5.5 million working capital adjustment. Woods/TISCO had $0.2 million of cash on the acquisition date, resulting in a net cash outflow of $190.3 million. We assumed none of Woods/TISCO’s debt in the transaction. In addition, we incurred legal and other third party fees totaling $2.0 million in conjunction with the acquisition that were expensed to SG&A in the Consolidated Statement of Income during 2011. The acquisition was funded from cash on hand and borrowing under the Company’s revolving credit facility.
The initial acquisition accounting for Woods/TISCO included provisional amounts for income tax accounting, as we were not able to obtain sufficient details and complete our analysis of these matters at the time of the acquisition. During September 2012, we obtained additional details about deferred income taxes at Woods/TISCO and, accordingly, we have revised the Consolidated Balance Sheet as of December 31, 2011. The effect of the adjustment was to reduce long-term deferred income tax liabilities by $0.4 million, reduce current deferred tax assets by $38 thousand, and reduce goodwill by the net amount of $0.3 million.
Woods/TISCO’s pre-acquisition operating results (unaudited) for the twelve months preceding the acquisition date are summarized below.
(Amounts in thousands) | Twelve Months Ended August 31, 2011 | ||
Sales | $ | 164,810 | |
Operating income | 17,870 | ||
Depreciation and amortization | 2,549 | ||
Woods/TISCO’s operating income for the twelve months ended August 31, 2011 included expenses of $0.7 million related to Woods/TISCO’s former chief executive officer, $0.5 million in management fees charged by Woods/TISCO’s former owner, $0.4 million in expenses attributed to Woods/TISCO’s efforts to sell its business, $0.3 million in costs associated with the closure of a facility, and $0.3 million in fees associated with Woods/TISCO’s September 2010 refinancing transaction.
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Purchase Price Allocations
We allocated the purchase price for each acquisition to the following assets and liabilities based on their estimated fair values.
(Amounts in thousands) | Woods/TISCO | PBL | KOX | SpeeCo | ||||||||||||
Cash | $ | 230 | $ | 1,275 | $ | 5,126 | $ | 816 | ||||||||
Accounts receivable | 34,784 | 5,109 | 3,365 | 7,525 | ||||||||||||
Inventories | 38,512 | 9,729 | 8,879 | 18,868 | ||||||||||||
Current intangible assets subject to amortization | — | 157 | — | 401 | ||||||||||||
Current deferred tax assets | 3,716 | 608 | — | 657 | ||||||||||||
Other current assets | 3,057 | 1,162 | 268 | 625 | ||||||||||||
Property, plant, and equipment | 19,259 | 13,041 | 383 | 1,812 | ||||||||||||
Non-current deferred tax assets | 1,943 | 378 | — | — | ||||||||||||
Non-current intangible assets subject to amortization | 52,400 | 5,612 | 4,594 | 43,214 | ||||||||||||
Non-current intangible assets not subject to amortization | 44,330 | 470 | 5,241 | 5,968 | ||||||||||||
Goodwill | 54,846 | 3,301 | 3,709 | 42,794 | ||||||||||||
Other non-current assets | 3,474 | — | — | — | ||||||||||||
Total assets acquired | 256,551 | 40,842 | 31,565 | 122,680 | ||||||||||||
Current liabilities | 19,319 | 11,065 | 4,793 | 13,762 | ||||||||||||
Long-term debt | — | 13,304 | — | — | ||||||||||||
Non-current deferred income tax liability | 41,510 | 609 | 2,836 | 17,142 | ||||||||||||
Other non-current liabilities | 5,220 | 1,620 | — | 106 | ||||||||||||
Total liabilities assumed | 66,049 | 26,598 | 7,629 | 31,010 | ||||||||||||
Acquisition price | $ | 190,502 | $ | 14,244 | $ | 23,936 | $ | 91,670 | ||||||||
Goodwill deductible for income tax purposes | $ | 9,255 | $ | — | $ | — | $ | 6,998 | ||||||||
The operating results of acquisitions are included in the Consolidated Statements of Income from the acquisition dates forward. These 2011 results, excluding the post-acquisition allocation of the cost of certain shared services and corporate support functions, are summarized in the following table.
Year Ended December 31, 2011 | ||||||||||||
(Amounts in thousands) | KOX | PBL | Woods/TISCO | |||||||||
Incremental net sales | $ | 21,639 | $ | 9,679 | $ | 55,464 | ||||||
Incremental income (loss) before income taxes | (2,864 | ) | (2,727 | ) | 1,326 | |||||||
Acquisition accounting effects | 2,152 | 1,734 | 4,913 | |||||||||
The 2010 results of SpeeCo, excluding the post-acquisition allocation of the cost of certain shared services and corporate support functions, are summarized in the following table.
Year Ended December 31, 2010 | |||
(Amounts in thousands) | SpeeCo | ||
Incremental net sales | $ | 34,200 | |
Incremental income before income taxes | 2,097 | ||
Acquisition accounting effects | 3,368 | ||
Acquisition accounting effects included in the above tables represent non-cash charges included in cost of sales for amortization of intangible assets and adjustments to fair value on acquired property, plant, and equipment, as well as expensing of the step-up to fair value of acquired inventory. Acquisition accounting effects do not include transaction costs associated with the acquisitions.
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The following table summarizes the acquisition accounting effects charged to cost of sales for the years indicated:
Year Ending December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
SpeeCo | $ | 4,671 | $ | 5,555 | $ | 3,368 | ||||||
KOX | 1,016 | 2,152 | — | |||||||||
PBL | 2,028 | 1,734 | — | |||||||||
Woods/TISCO | 7,013 | 4,913 | — | |||||||||
Prior acquisitions | 1,270 | 1,525 | 1,789 | |||||||||
Total acquisition accounting effects | $ | 15,998 | $ | 15,879 | $ | 5,157 | ||||||
The following unaudited pro forma results present the estimated effect as if the acquisition of SpeeCo had occurred on January 1, 2009, and as if the acquisitions of KOX, PBL, and Woods/TISCO had occurred on January 1, 2010. The unaudited pro forma results include the historical results of each acquired business, pro forma elimination of sales from Blount to each acquired business, if any, pro forma acquisition accounting effects, pro forma interest expense effects of additional borrowings to fund each transaction, pro forma interest effects from reduced cash and cash equivalents following use of cash to fund each transaction, and the related pro forma income tax effects.
Twelve Months Ended December 31, 2011 | Twelve Months Ended December 31, 2010 | |||||||||||||||
(Amounts in thousands, except per share data) | As Reported | Pro Forma | As Reported | Pro Forma | ||||||||||||
Sales | $ | 831,630 | $ | 975,455 | $ | 611,480 | $ | 863,014 | ||||||||
Net income | 49,682 | 58,192 | 47,200 | 47,487 | ||||||||||||
Basic income per share | $ | 1.02 | $ | 1.19 | $ | 0.99 | $ | 1.00 | ||||||||
Diluted income per share | $ | 1.01 | $ | 1.18 | $ | 0.97 | $ | 0.98 | ||||||||
NOTE 3: FACILITY CLOSURE AND RESTRUCTURING COSTS
During 2012, we completed certain actions to consolidate our operations in the U.S. In Kansas City, Missouri, we moved into a new, larger North American assembly and distribution center, and closed our previous distribution center in that city. In Golden, Colorado, we closed our assembly, warehouse, and distribution operations and consolidated those functions into the new North American facility in Kansas City. During 2012, we recognized direct costs of $7.4 million associated with these two actions. These costs consisted of lease exit costs, charges to expense the book value of certain assets located in Golden and in the previous distribution center in Kansas City that will not be utilized in the new distribution center, temporary labor costs associated with moving inventory items and stabilizing shipping activities, costs to move inventory and equipment, and rent expense on duplicate facilities during the transition period. Of these total costs, $1.0 million are reported in cost of sales in the Consolidated Statement of Income for the twelve months ended December 31, 2012.
NOTE 4: INVENTORIES
Inventories consisted of the following:
December 31, | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Raw materials and supplies | $ | 22,815 | $ | 24,022 | ||||
Work in progress | 19,388 | 16,006 | ||||||
Finished goods | 132,613 | 109,797 | ||||||
Total inventories | $ | 174,816 | $ | 149,825 | ||||
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NOTE 5: PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment, net consisted of the following:
December 31, | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Land | $ | 9,081 | $ | 9,081 | ||||
Buildings and improvements | 82,910 | 65,699 | ||||||
Machinery and equipment | 262,058 | 239,882 | ||||||
Furniture, fixtures, and office equipment | 42,498 | 33,342 | ||||||
Transportation equipment | 1,126 | 1,105 | ||||||
Construction or equipment acquisitions in progress | 23,075 | 30,568 | ||||||
Accumulated depreciation | (243,046 | ) | (223,805 | ) | ||||
Total property, plant, and equipment, net | $ | 177,702 | $ | 155,872 | ||||
NOTE 6: DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred in conjunction with the Company’s debt financing activities and are amortized over the term of the related debt instruments. Deferred financing costs and the related amortization expense are adjusted when any pre-payments of principal are made to the related outstanding loan. See also Note 9. The following activity occurred during the years indicated:
Year Ended December 31, | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Beginning balance | $ | 5,716 | $ | 4,088 | ||||
Financing costs deferred | 1,115 | 4,006 | ||||||
Write off due to early extinguishment of debt | — | (1,368 | ) | |||||
Amortization | (1,336 | ) | (1,010 | ) | ||||
Ending balance | $ | 5,495 | $ | 5,716 | ||||
Amortization expense, assuming no further cost deferrals or prepayments of principal, is expected to be as follows:
(Amounts in thousands) | Expected Annual Amortization | ||
2013 | $ | 1,499 | |
2014 | 1,499 | ||
2015 | 1,499 | ||
2016 | 998 | ||
Total scheduled amortization | $ | 5,495 | |
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NOTE 7: INTANGIBLE ASSETS
The following table summarizes intangible assets:
December 31, 2012 | December 31, 2011 | ||||||||||||||||||
Life | Gross | Accumulated | Gross | Accumulated | |||||||||||||||
(Amounts in thousands) | In Years | Amount | Amortization | Amount | Amortization | ||||||||||||||
Goodwill | Indefinite | $ | 165,175 | $ | — | $ | 165,084 | $ | — | ||||||||||
Trademarks and trade names | Indefinite | 61,251 | — | 61,176 | — | ||||||||||||||
Total with indefinite lives | 226,426 | — | 226,260 | — | |||||||||||||||
Covenants not to compete | 2 - 4 | 1,112 | 985 | 1,112 | 843 | ||||||||||||||
Patents | 11 - 13 | 5,320 | 1,554 | 5,320 | 1,121 | ||||||||||||||
Manufacturing technology | 1 | 2,563 | 2,563 | 2,516 | 1,124 | ||||||||||||||
Customer relationships, including backlog | 10 - 19 | 107,333 | 29,316 | 107,234 | 16,170 | ||||||||||||||
Total with finite lives | 116,328 | 34,418 | 116,182 | 19,258 | |||||||||||||||
Total intangible assets | $ | 342,754 | $ | 34,418 | $ | 342,442 | $ | 19,258 | |||||||||||
On the December 31, 2011 Consolidated Balance Sheet, $15 thousand of intangible assets, representing unamortized backlog, are included in other current assets.
Amortization expense for intangible assets included in the Consolidated Statements of Income was as follows:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Amortization expense | $ | 15,196 | $ | 11,315 | $ | 4,382 | ||||||
Amortization expense for these intangible assets is expected to total $14.2 million in 2013, $12.0 million in 2014, $10.5 million in 2015, $9.1 million in 2016, and $7.5 million in 2017.
Through December 31, 2012, no impairment of these assets has been recognized. A total of $38.3 million of goodwill is deductible for tax purposes, and is being amortized on the U.S. tax return. The accumulated tax amortization on this deductible goodwill was $26.3 million and $21.9 million at December 31, 2012 and 2011, respectively.
NOTE 8: ACCRUED EXPENSES
Accrued expenses consisted of the following:
December 31, | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Salaries, wages, and related withholdings | $ | 21,095 | $ | 29,275 | ||||
Accrued taxes | 9,769 | 5,758 | ||||||
Advertising | 7,899 | 6,814 | ||||||
Employee benefits | 6,550 | 8,425 | ||||||
Accrued customer incentive programs | 4,933 | 6,020 | ||||||
Unrealized loss on derivative instruments | 3,988 | 1,813 | ||||||
Product liability reserves | 2,905 | 4,841 | ||||||
Accrued professional services fees | 2,070 | 2,088 | ||||||
Product warranty reserve | 1,914 | 1,539 | ||||||
Accrued interest | 1,253 | 1,340 | ||||||
Other | 9,097 | 5,078 | ||||||
Total accrued expenses | $ | 71,473 | $ | 72,991 | ||||
21
NOTE 9: DEBT
Debt consisted of the following:
As of December 31, | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Revolving credit facility borrowings | $ | 235,000 | $ | 228,200 | ||||
Term loans | 281,250 | 296,250 | ||||||
Debt and capital lease obligation of PBL | 507 | 5,912 | ||||||
Total debt | 516,757 | 530,362 | ||||||
Less current maturities | (15,072 | ) | (20,348 | ) | ||||
Long-term debt, excluding current maturities | $ | 501,685 | $ | 510,014 | ||||
Weighted average interest rate at end of period | 2.71 | % | 2.85 | % | ||||
Minimum principal payments required are as follows:
(Amounts in thousands) | Payments | ||
2013 | $ | 15,072 | |
2014 | 15,072 | ||
2015 | 15,072 | ||
2016 | 471,322 | ||
2017 and thereafter | 219 | ||
Total debt | $ | 516,757 | |
Senior Credit Facilities. The Company, through its wholly-owned subsidiary, Blount, Inc., maintains a senior credit facility with General Electric Capital Corporation as Agent for the Lenders and also as a lender, which has been amended and restated on several occasions. As of December 31, 2012 and 2011, the senior credit facilities consisted of a revolving credit facility and a term loan.
August 2010 Third Amendment and Restatement of Senior Credit Facilities. On August 9, 2010, the Company entered into the Third Amendment and Restatement of its senior credit facilities. The Third Amendment and Restatement included an increase in maximum borrowings available under the revolving credit facility to $75.0 million and an extension of its maturity date to August 2015, an increase of the term loan B facility to $275.0 million and an extension of its maturity date to August 2016, establishment of a new term loan A facility at $75.0 million with a maturity date of August 2015, and modification of the interest rates and certain financial and other covenants. The Company paid $6.3 million in fees and transaction costs in connection with this amendment.
The Company used the $350.0 million combined proceeds of the two term loans to repay the principal outstanding under its previous term loan B facility and its 8 7/8% senior subordinated notes originally due August 1, 2012. These 8 7/8% senior subordinated notes were redeemed in full on September 16, 2010, following the expiration of the required redemption notification period. In conjunction with the redemption of the 8 7/8% senior subordinated notes and the repayment of principal on the previous term loan B, the Company expensed $3.5 million in unamortized deferred financing costs.
January 2011 Amendment of Senior Credit Facilities. On January 28, 2011, the senior credit facility was amended to facilitate a foreign subsidiary reorganization and to allow additional flexibility for making foreign acquisitions.
June 2011 Fourth Amendment and Restatement of Senior Credit Facilities. On June 13, 2011, the Company entered into the Fourth Amendment and Restatement of its senior credit facilities with an initial funding date of August 9, 2011. The Fourth Amendment and Restatement included an increase in maximum borrowings under the revolving credit facility to $400.0 million, a new $300.0 million term loan facility, an extension of the maturity date on both facilities to August 31, 2016, a reduction in interest rates on both facilities, and the modification of certain financial and other covenants. The Company incurred $6.5 million in fees and transaction costs in connection with the Fourth Amendment and Restatement. On the initial funding date the Company expensed $3.9 million, consisting of unamortized deferred financing costs from previous
modifications to the senior credit facilities as well as certain fees and transaction costs associated with the June 13, 2011 amendment.
August 2012 Amendment of Senior Credit Facilities. On August 3, 2012, the senior credit facilities were amended to modify the maximum leverage ratio covenant, as defined below. Certain other minor modifications to the credit agreement were made. The Company incurred $1.2 million in fees and transaction costs in connection with this amendment.
Current Terms of Senior Credit Facilities. The revolving credit facility provides for total available borrowings of up to $400.0 million, reduced by outstanding letters of credit, and further restricted by certain financial covenants. As of December 31, 2012, the Company had the ability to borrow an additional $61.8 million under the terms of the revolving credit agreement. The revolving credit facility bears interest at LIBOR plus 2.50% or at an index rate, as defined in the credit agreement, plus 1.50%, and matures on August 31, 2016. Interest is payable on the individual maturity dates for each LIBOR-based borrowing and monthly on index rate-based borrowings. Any outstanding principal is due in its entirety on the maturity date.
The term loan facility also bears interest at LIBOR plus 2.50% or at the index rate plus 1.50% and matures on August 31, 2016. The term loan facility requires quarterly principal payments of $3.8 million with a final payment of $225.0 million due on the maturity date. Once repaid, principal under the term loan facility may not be re-borrowed.
The amended and restated senior credit facilities contain financial covenants including:
• | Minimum fixed charge coverage ratio of 1.15, defined as Adjusted EBITDA divided by cash payments for interest, taxes, capital expenditures, scheduled debt principal payments, and certain other items, calculated on a trailing twelve-month basis. |
• | Maximum leverage ratio, defined as total debt divided by Adjusted EBITDA, calculated on a trailing twelve-month basis. The maximum leverage ratio is set at 4.25 through December 31, 2012, 4.00 through June 30, 2013, 3.75 through December 31, 2013, 3.50 through September 30, 2014, 3.25 through March 31, 2015, and 3.00 thereafter. |
In addition, there are covenants, restrictions, or limitations relating to acquisitions, investments, loans and advances, indebtedness, dividends on our stock, the sale or repurchase of our stock, the sale of assets, and other categories. In the opinion of management, we were in compliance with all financial covenants as of December 31, 2012. Non-compliance with these covenants is an event of default under the terms of the credit agreement, and could result in severe limitations to our overall liquidity, and the term loan lenders could require immediate repayment of outstanding amounts, potentially requiring sale of a sufficient amount of our assets to repay the outstanding loans.
The amended and restated senior credit facilities may be prepaid at any time without penalty. There can also be additional mandatory repayment requirements related to the sale of Company assets, the issuance of stock under certain circumstances, or upon the Company’s annual generation of excess cash flow, as determined under the credit agreement. Our debt is not subject to any triggers that would require early payment due to any adverse change in our credit rating.
Our senior credit facility debt is incurred by our wholly-owned subsidiary, Blount, Inc. Blount International, Inc. and all of its domestic subsidiaries other than Blount, Inc. guarantee Blount, Inc.’s obligations under the senior credit facilities. The obligations under the senior credit facilities are collateralized by a first priority security interest in substantially all of the assets of Blount, Inc. and its domestic subsidiaries, as well as a pledge of all of Blount, Inc.’s capital stock held by Blount International, Inc. and all of the stock of domestic subsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of the stock of its direct non-domestic subsidiaries as additional collateral.
Debt and Capital Lease Obligation of PBL. In conjunction with the acquisition of PBL we assumed $13.5 million of PBL’s debt, consisting of current and long-term bank obligations, revolving credit facilities, and $0.6 million in capital lease obligations. As of December 31, 2012 we have repaid all of PBL’s bank debt. PBL’s outstanding bank debt was classified as current as of December 31, 2011 on the Consolidated Balance Sheet.
NOTE 10: INCOME TAXES
The provision (benefit) for income taxes was as follows:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Current | ||||||||||||
Federal | $ | 15,781 | $ | 16,249 | $ | 7,828 | ||||||
State | 1,685 | 1,116 | 1,973 | |||||||||
Foreign | 12,325 | 5,572 | 4,521 | |||||||||
Deferred | ||||||||||||
Federal | (6,598 | ) | 155 | 2,846 | ||||||||
State | (582 | ) | 751 | 447 | ||||||||
Foreign | (409 | ) | 1,425 | 768 | ||||||||
Provision for income taxes | $ | 22,202 | $ | 25,268 | $ | 18,383 | ||||||
The provision is reported as follows: | ||||||||||||
Continuing operations | $ | 22,202 | $ | 25,268 | $ | 11,209 | ||||||
Discontinued operations | — | — | 7,174 | |||||||||
Provision for income taxes | $ | 22,202 | $ | 25,268 | $ | 18,383 | ||||||
The Company also recorded the following deferred tax amounts directly to the components of stockholders’ equity:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Pension liability adjustment | $ | 340 | $ | 15,340 | $ | 700 | ||||||
Change in unrealized losses (gains) | 2,240 | (2,180 | ) | 261 | ||||||||
Stock options exercised | 1,187 | 877 | 1,340 | |||||||||
Income from continuing operations before income taxes was as follows:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Income before income taxes: | ||||||||||||
Domestic | $ | 28,122 | $ | 50,357 | $ | 27,521 | ||||||
Foreign | 33,668 | 24,593 | 25,090 | |||||||||
Total | $ | 61,790 | $ | 74,950 | $ | 52,611 | ||||||
The decrease in domestic income before taxes in 2012 reflects the decrease in profitability of our FRAG segment, which operates primarily in the U.S. The increase in foreign income before income taxes from 2011 to 2012 was primarily driven by strong profit growth in Brazil. The increase in domestic income before taxes from 2010 to 2011 reflects the overall improvement in the Company’s operating results as the domestic economy recovered and demand for our products increased, as well as the addition of results from Woods/TISCO and SpeeCo, both of which currently operate primarily in the U.S. See further discussion in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
24
A reconciliation of the U.S. federal statutory rate to the effective income tax rate for continuing operations is presented below.
Percent of Income Before Tax | |||||||||
2012 | 2011 | 2010 | |||||||
U.S. federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
Impact of earnings of foreign operations | (2.6 | ) | (2.2 | ) | (6.6 | ) | |||
Repatriation of foreign earnings | — | 0.3 | 1.7 | ||||||
Foreign withholding taxes | 1.2 | 1.1 | 2.0 | ||||||
Federal and state research tax credits | — | (0.2 | ) | (1.7 | ) | ||||
State income taxes, net of federal tax benefit | 1.4 | 2.2 | 0.9 | ||||||
Permanent differences | (1.5 | ) | (0.4 | ) | (1.4 | ) | |||
Change in deferred taxes | — | 2.3 | 3.3 | ||||||
Change in uncertain tax positions | (0.6 | ) | (4.6 | ) | (12.4 | ) | |||
Acquisition transaction costs | — | 1.9 | 0.6 | ||||||
Other | 0.2 | 0.6 | — | ||||||
Effective income tax rate before valuation allowance | 33.1 | 36.0 | 21.4 | ||||||
Valuation allowance | 2.8 | (2.3 | ) | (0.1 | ) | ||||
Effective income tax rate after valuation allowance | 35.9 | % | 33.7 | % | 21.3 | % | |||
The tax rates that apply to our foreign locations can differ significantly from our domestic income tax rate. Also, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from year to year. Movements in currency exchange rates can generate tax deductible foreign currency losses and taxable foreign currency gains at our foreign subsidiaries that are not recognized for book purposes, thus impacting the effective tax rate reported on our book income. Different allocations in the proportional taxable income among jurisdictions from year to year can also affect the impact of state income taxes. Changes in estimated tax contingencies and valuation allowances can also significantly impact our effective tax rate from year to year.
In 2012, we recognized income tax expense of $1.9 million to increase a valuation allowance against certain deferred tax assets arising from foreign NOL carryforwards. In 2011, we recognized an income tax benefit of $4.3 million, from the release of previously provided income tax expense on uncertain tax positions, resulting from the expiration of the statute of limitations for certain tax returns. In 2010, we recognized an income tax benefit of $6.8 million, from the release of previously provided income tax expense on uncertain tax positions, resulting from the conclusion of an audit with the IRS and the expiration of the statute of limitations for certain tax returns. In 2010, the Company also recognized income tax expense of $1.7 million to write off the deferred tax asset related to the Medicare Part D subsidy, reflecting new tax legislation which made the subsidy fully taxable beginning in 2013.
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The components of deferred income taxes applicable to temporary differences at December 31, 2012 and 2011 are as follows:
December 31, | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Deferred tax assets: | ||||||||
Employee benefits and compensation | $ | 35,522 | $ | 37,119 | ||||
Other accrued expenses | 16,507 | 13,505 | ||||||
State NOL carryforwards | 516 | 741 | ||||||
Foreign | 7,149 | 2,914 | ||||||
Gross deferred tax assets | 59,694 | 54,279 | ||||||
Less valuation allowance | (2,552 | ) | (603 | ) | ||||
Deferred tax assets net of valuation allowance | 57,142 | 53,676 | ||||||
Deferred tax liabilities: | ||||||||
Property, plant, and equipment asset basis differences | (15,379 | ) | (15,252 | ) | ||||
Intangible asset basis differences | (57,501 | ) | (60,497 | ) | ||||
Foreign | (3,095 | ) | (5,236 | ) | ||||
Total deferred tax liabilities | (75,975 | ) | (80,985 | ) | ||||
Net deferred tax liability | $ | (18,833 | ) | $ | (27,309 | ) | ||
Foreign deferred tax assets include NOL carryforwards, timing differences related to retirement plans, and other differences. Certain of these foreign deferred tax assets are reduced by valuation allowances reflecting the expectation that they will expire before they are utilized to reduce cash taxes paid. In addition, a foreign tax credit carryforward of approximately $1.7 million expired unused in 2011, and was written off along with its related valuation allowance for no net effect. Our state NOL carryforwards expire at various dates beginning in 2013. Certain of our foreign NOL carryforwards expire at various dates beginning in 2017, and certain of our foreign NOL carryforwards have an indefinite carryforward period, although utilization is limited annually.
The periods from 2008 through 2012 remain open for U.S. income tax purposes and the U.S. income tax returns for years 2008 through 2010 are currently under examination by the IRS. In 2009, the Company entered into a Bilateral Advance Pricing Agreement (“BAPA”) with the Canada Revenue Agency (“CRA”) and the IRS. This BAPA brings relative certainty with respect to transfer pricing between the Company’s U.S. and Canada subsidiaries for the years 2002 through 2011, and the Company is currently working with the CRA and IRS to extend the agreement through 2016.
U.S. income taxes have not been provided on undistributed earnings of international subsidiaries. Management’s intention is to reinvest these earnings indefinitely. As of December 31, 2012, undistributed earnings of international subsidiaries were approximately $211.3 million. Repatriation of foreign earnings in 2011 and 2010 pertained to current earnings of one foreign subsidiary.
A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Balance at beginning of period | $ | 6,454 | $ | 11,905 | $ | 29,754 | ||||||
Increase (decrease) for positions taken during a prior period | — | 1,485 | (1,458 | ) | ||||||||
Increase (decrease) for positions taken during the current period | (384 | ) | 2,125 | — | ||||||||
Settlements | — | — | (766 | ) | ||||||||
Statute of limitations expirations | (287 | ) | (9,061 | ) | (15,625 | ) | ||||||
Balance at end of period | $ | 5,783 | $ | 6,454 | $ | 11,905 | ||||||
These unrecognized tax benefits are included in other liabilities on the Consolidated Balance Sheets.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2012 and 2011, the Company had recorded $2.1 million and $1.8 million of accrued interest and penalties related to uncertain tax positions, respectively. During the year ended December 31, 2012, the Company recognized a net income tax expense of $0.3 million for interest and penalties related to uncertain tax positions.
26
During the years ended December 31, 2011 and 2010, the Company recognized net income tax benefits of $0.4 million and $1.9 million, respectively, for interest and penalties related to uncertain tax positions.
The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized was $5.8 million as of December 31, 2012 and $6.5 million as of December 31, 2011. Based on current information, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations. However, the ultimate resolution of the Company’s global tax uncertainties could differ significantly from management’s expectations.
Based on the potential outcome of these uncertainties or the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the unrecognized tax benefits could decrease within the next twelve months. The associated net tax benefits, which would favorably impact the effective tax rate, excluding changes to valuation allowances, are estimated to range between zero and $0.4 million.
NOTE 11: RETIREMENT PLANS
Funded Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans covering employees in Canada and certain countries in Europe, and many of its employees and former employees in the U.S. The U.S. plan was frozen effective January 1, 2007. The changes in benefit obligations, plan assets, and funded status of these plans for the years ended December 31, 2012 and 2011 were as follows:
Pension Benefits | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Change in benefit obligations: | ||||||||
Projected benefit obligations at beginning of year | $ | (232,889 | ) | $ | (198,180 | ) | ||
Service cost | (4,066 | ) | (3,578 | ) | ||||
Interest cost | (10,532 | ) | (10,935 | ) | ||||
Actuarial losses | (24,804 | ) | (32,255 | ) | ||||
Benefits and plan expenses paid | 11,717 | 12,541 | ||||||
Projected benefit obligation assumed in acquisitions | — | (482 | ) | |||||
Projected benefit obligations at end of year | (260,574 | ) | (232,889 | ) | ||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | 190,522 | 179,570 | ||||||
Actual return on plan assets | 22,928 | 5,703 | ||||||
Company contributions | 17,399 | 17,790 | ||||||
Benefits and plan expenses paid | (11,717 | ) | (12,541 | ) | ||||
Fair value of plan assets at end of year | 219,132 | 190,522 | ||||||
Net funded status at end of year | $ | (41,442 | ) | $ | (42,367 | ) | ||
Amounts recognized on the Consolidated Balance Sheets: | ||||||||
Non-current liabilities | $ | (41,442 | ) | $ | (42,367 | ) | ||
The accumulated benefit obligations for the above defined benefit pension plans at December 31, 2012 and 2011 totaled $237.4 million and $216.7 million, respectively.
27
The fair value of plan assets was as follows:
December 31, 2012 | ||||||||||||||||
(Amounts in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Category: | ||||||||||||||||
Money market mutual funds | $ | 799 | $ | 799 | $ | — | $ | — | ||||||||
Guaranteed insurance contracts | 3,452 | — | 3,452 | — | ||||||||||||
U.S. large cap equity securities | 50,915 | — | 50,915 | — | ||||||||||||
U.S. small/mid cap equity securities | 4,794 | — | 4,794 | — | ||||||||||||
International equity securities | 50,345 | — | 50,345 | — | ||||||||||||
Emerging markets equity securities | 4,324 | — | 4,324 | — | ||||||||||||
U.S. debt securities | 71,281 | — | 71,281 | — | ||||||||||||
International debt securities | 27,466 | — | 27,466 | — | ||||||||||||
Hedge funds | 5,756 | — | — | 5,756 | ||||||||||||
Total fair value of plan assets | $ | 219,132 | $ | 799 | $ | 212,577 | $ | 5,756 | ||||||||
December 31, 2011 | ||||||||||||||||
(Amounts in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Category: | ||||||||||||||||
Money market mutual funds | $ | 639 | $ | 639 | $ | — | $ | — | ||||||||
Guaranteed insurance contracts | 2,803 | — | 2,803 | — | ||||||||||||
U.S. large cap equity securities | 45,008 | — | 45,008 | — | ||||||||||||
U.S. small/mid cap equity securities | 4,116 | — | 4,116 | — | ||||||||||||
International equity securities | 41,399 | — | 41,399 | — | ||||||||||||
Emerging markets equity securities | 3,559 | — | 3,559 | — | ||||||||||||
U.S. debt securities | 64,001 | — | 64,001 | — | ||||||||||||
International debt securities | 23,482 | — | 23,482 | — | ||||||||||||
Hedge funds | 5,515 | — | — | 5,515 | ||||||||||||
Total fair value of plan assets | $ | 190,522 | $ | 639 | $ | 184,368 | $ | 5,515 | ||||||||
As specified in ASC 820, the framework for measuring fair value is based on independent observable inputs of market data and follows the following hierarchy:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Significant observable inputs based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations for which all significant assumptions are observable.
Level 3 – Significant unobservable inputs that are supported by little or no market activity that are significant to the fair value of the assets or liabilities.
When developing fair value measurements, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs.
The money market mutual funds are valued by reference to quoted market prices.
The guaranteed insurance contracts are valued based on information provided by the investment custodians.
The U.S. large cap equity securities consist of mutual funds and commingled pooled funds that invest in equity securities of U.S. companies with large market capitalizations. These funds seek long-term growth and invest in diversified portfolios across multiple industries. These funds are valued based on information provided by the plan’s investment custodians.
The U.S. small/mid cap equity securities consist of mutual funds and commingled pooled funds that invest in equity securities of U.S. companies with small to medium market capitalizations. These funds seek higher rates of long-term growth and invest in diversified portfolios across multiple industries. These funds are valued based on information provided by the plan’s investment custodians.
28
The international equity securities consist of mutual funds and commingled pooled funds that invest in equity securities of international companies in developed countries. These funds seek long-term growth and invest in diversified portfolios across multiple industries and geographic regions. These funds are valued based on information provided by the plan’s investment custodians.
The emerging markets equity securities consist of mutual funds and commingled pooled funds that invest in equity securities of international companies in developing countries with emerging economies. These funds seek higher rates of long-term growth and invest in diversified portfolios across multiple industries and geographic regions. These funds are valued based on information provided by the plan’s investment custodians.
The U.S. debt securities consist of mutual funds and commingled pooled funds that invest in debt securities of U.S. companies. These funds seek lower volatility than equity investments and invest in diversified portfolios across multiple industries and with varying maturity periods. These funds are valued based on information provided by the plan’s investment custodians.
The international debt securities consist of mutual funds and commingled pooled funds that invest in debt securities of companies outside the U.S. These funds seek lower volatility than international equity investments and invest in diversified portfolios across multiple industries and geographies, as well as with varying maturity periods. These funds are valued based on information provided by the plan’s investment custodians.
The hedge funds consist of investments in partnerships and other entities that in turn invest in portfolios of underlying securities. The fund manager seeks returns that move in the opposite direction of the securities to which they are hedged. These funds are valued based on information provided by the plan’s investment custodians.
The financial statements of the funds are audited annually by independent accountants. The value of the underlying investments is determined by the investment manager based on the estimated fair value of the various holdings of the portfolio as reported in the financial statements at net asset value. The preceding methods described may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values. Furthermore, although the plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The assets of these plans are invested in various investment securities. There were no significant concentrations of investment risk in plan assets. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amount of the plan assets.
There were no significant transfers between assets in Level 1 and Level 2, except for amounts moved from Level 2 to money market mutual funds for the purpose of making cash disbursements for plan expenses and benefit payments. The Level 1 and Level 2 plan assets above may generally be redeemed with 5 or fewer days’ notice. The Level 3 plan assets above may be redeemed with a minimum of 30 days’ notice and after certain other conditions are met.
The change in fair value of Level 3 plan assets was as follows:
Year Ended December 31, | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Fair value at beginning of year | $ | 5,515 | $ | 5,331 | ||||
Actual return on assets: | ||||||||
Relating to assets still held at end of year | 241 | 184 | ||||||
Relating to assets sold during the year | — | — | ||||||
Purchases, sales, and settlements | — | — | ||||||
Transfers in/out of Level 3 | — | — | ||||||
Fair value at end of year | $ | 5,756 | $ | 5,515 | ||||
29
The projected benefit payments for these plans over the next ten years are estimated as follows:
(Amounts in thousands) | Estimated Benefit Payments | ||
2013 | $ | 8,844 | |
2014 | 9,319 | ||
2015 | 9,814 | ||
2016 | 10,330 | ||
2017 | 10,865 | ||
2018 – 2022 | 63,558 | ||
Total estimated benefit payments over next ten years | $ | 112,730 | |
The Company annually contributes the required minimum amounts required by pension funding regulations. From time to time, the Company also makes additional voluntary contributions to these plans in order to increase the funding levels and reduce the amount of required future contributions, as well as to reduce the amount of expense recognized for these plans. The Company expects to contribute between $7.5 million and $8.5 million to its funded defined benefit pension plans in 2013.
Unfunded Supplemental Non-Qualified Retirement Plans
The Company sponsors various supplemental non-qualified retirement plans covering certain employees and former employees in the U.S. These plans were frozen effective January 1, 2007, and employees who were participants in these non-qualified plans on that date ceased accruing additional benefits. New employees are not eligible to participate in these plans. All retirement benefits accrued up to the time of the freeze were preserved.
The changes in benefit obligations and funded status of these non-qualified plans for the years ended December 31, 2012 and 2011 were as follows:
Unfunded Retirement Plans | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Change in Benefit Obligations: | ||||||||
Projected benefit obligations at beginning of year | $ | (6,165 | ) | $ | (5,700 | ) | ||
Service cost | — | — | ||||||
Interest cost | (254 | ) | (302 | ) | ||||
Actuarial losses | (235 | ) | (746 | ) | ||||
Benefits and plan expenses paid | 576 | 583 | ||||||
Projected benefit obligations at end of year | (6,078 | ) | (6,165 | ) | ||||
Net unfunded status at end of year | $ | (6,078 | ) | $ | (6,165 | ) | ||
As of December 31, | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Amounts recognized on the Consolidated Balance Sheets: | ||||||||
Current liabilities | $ | (592 | ) | $ | (558 | ) | ||
Non-current liabilities | (5,486 | ) | (5,607 | ) | ||||
Net liability recognized on the Consolidated Balance Sheets | $ | (6,078 | ) | $ | (6,165 | ) | ||
The Company accounts for its retirement plans in accordance with ASC 715. The net obligation is included in accrued expenses and employee benefit obligations on the Consolidated Balance Sheets.
Periodic Benefit Cost and Other Comprehensive Loss
The components of net periodic benefit cost and other comprehensive loss and the weighted average assumptions used in accounting for funded and unfunded pension benefits are as follows:
30
Pension Benefits
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Components of net periodic benefit cost: | ||||||||||||
Service cost | $ | 4,066 | $ | 3,577 | $ | 2,524 | ||||||
Interest cost | 10,786 | 11,238 | 10,920 | |||||||||
Expected return on plan assets | (14,547 | ) | (13,976 | ) | (12,258 | ) | ||||||
Amortization of actuarial losses | 7,213 | 4,294 | 3,702 | |||||||||
Amortization of prior service cost | (6 | ) | (6 | ) | (6 | ) | ||||||
Total net periodic benefit cost recognized in income statement | $ | 7,512 | $ | 5,127 | $ | 4,882 | ||||||
Recognized in accumulated other comprehensive loss: | ||||||||||||
Actuarial (gains) losses | $ | 8,231 | $ | 37,491 | $ | 3,936 | ||||||
Prior service cost | 6 | 6 | 6 | |||||||||
Total recognized in accumulated other comprehensive loss | $ | 8,237 | $ | 37,497 | $ | 3,942 | ||||||
Weighted average assumptions: | ||||||||||||
Discount rate used to determine net periodic benefit cost | 4.7 | % | 5.6 | % | 6.1 | % | ||||||
Discount rate used to determine year end benefit obligations | 4.2 | % | 4.6 | % | 5.6 | % | ||||||
Expected return on assets used to determine net periodic benefit cost | 7.6 | % | 7.7 | % | 7.9 | % | ||||||
Rate of compensation increase | 3.0 | % | 3.0 | % | 3.0 | % | ||||||
Actuarial losses of $7.7 million included in accumulated other comprehensive loss are expected to be recognized as a component of net periodic benefit cost in 2013.
The Company annually evaluates and selects the discount rates to be used for its pension plans. Consideration is given to relevant indices for high quality fixed rate debt securities, as well as comparable rates for high quality corporate bonds with terms comparable to the projected cash flows for the respective plans, as of the measurement date. The expected long-term rate of return on assets was chosen from the range of likely results of compound average annual returns based on the current investment policies. The expected return and volatility for each asset class was based on historical equity, bond, and cash returns over a twenty year time horizon, based on repetitive modeling of outcomes using an extended period of historical actual results. While this approach gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate.
The Company maintains target allocation percentages among various asset classes based on investment policies established for these plans. The target allocation is designed to achieve long-term objectives of return, while mitigating downside risk and considering expected cash flows. For the U.S. retirement plan the allocation of pension plan assets as of December 31, 2012 and 2011 and target allocation as of December 31, 2012 are as follows:
Percentage of Plan Assets | |||||||||
Actual Allocation December 31, | 2012 Target Allocation | ||||||||
2012 | 2011 | ||||||||
Money market mutual funds | 0.5 | % | 0.5 | % | 2.0 | % | |||
U.S. large cap equity securities | 26.4 | % | 26.8 | % | 26.2 | % | |||
U.S. small/mid cap equity securities | 3.2 | % | 3.1 | % | 3.0 | % | |||
International equity securities | 15.3 | % | 13.6 | % | 14.3 | % | |||
Emerging markets equity securities | 1.6 | % | 1.4 | % | 1.5 | % | |||
U.S. debt securities | 47.1 | % | 48.4 | % | 46.0 | % | |||
International debt securities | 2.1 | % | 2.0 | % | 2.0 | % | |||
Hedge funds | 3.8 | % | 4.2 | % | 5.0 | % | |||
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For the Canadian retirement plan the allocation of pension plan assets as of December 31, 2012 and 2011 and target allocation as of December 31, 2012 are as follows:
Percentage of Plan Assets | |||||||||
Actual Allocation December 31, | 2012 Target Allocation | ||||||||
2012 | 2011 | ||||||||
U.S. large cap equity securities | 17.0 | % | 17.2 | % | 17.0 | % | |||
International equity securities | 42.3 | % | 42.3 | % | 42.0 | % | |||
Emerging markets equity securities | 2.9 | % | 3.0 | % | 3.0 | % | |||
International debt securities | 37.8 | % | 37.5 | % | 38.0 | % | |||
The funded defined benefit pension plans in Europe are invested wholly in guaranteed insurance contracts.
Defined Contribution Plans
The Company also sponsors a 401(k) plan covering substantially all U.S. employees and matches a portion of employee contributions as well as making an additional contribution to all employees based on years of service and regardless of whether or not the employee contributes to the plan. The Company also sponsors a similar defined contribution plan covering substantially all Canadian employees.
Total expense recognized for these defined contribution plans was as follows:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Expense | $ | 7,686 | $ | 7,422 | $ | 6,571 | ||||||
NOTE 12: OTHER POST-EMPLOYMENT BENEFIT PLANS
The Company sponsors two unfunded post-retirement medical programs covering many of its current and former employees in the U.S. and one post-retirement death benefit plan covering a limited number of former employees. The changes in benefit obligations, plan assets, and funded status of these plans for the years ended December 31, 2012 and 2011, were as follows:
Other Post-Retirement Benefits | ||||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Change in benefit obligations: | ||||||||
Projected benefit obligations at beginning of year | $ | (45,665 | ) | $ | (38,126 | ) | ||
Service cost | (355 | ) | (261 | ) | ||||
Interest cost | (1,765 | ) | (1,972 | ) | ||||
Participant contributions | (1,932 | ) | (1,878 | ) | ||||
Actuarial gains (losses), net | 1,706 | (8,083 | ) | |||||
Benefits and plan expenses paid | 4,002 | 4,655 | ||||||
Projected benefit obligations at end of year | $ | (44,009 | ) | $ | (45,665 | ) | ||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | — | $ | — | ||||
Company contributions | 2,070 | 2,777 | ||||||
Participant contributions | 1,932 | 1,878 | ||||||
Benefits and plan expenses paid | (4,002 | ) | (4,655 | ) | ||||
Fair value of plan assets at end of year | — | — | ||||||
Net unfunded status at end of year | $ | (44,009 | ) | $ | (45,665 | ) | ||
Amounts recognized on the Consolidated Balance Sheets: | ||||||||
Current liabilities | $ | (2,588 | ) | $ | (2,713 | ) | ||
Non-current liabilities | (41,421 | ) | (42,952 | ) | ||||
Net liability recognized on the Consolidated Balance Sheets | $ | (44,009 | ) | $ | (45,665 | ) | ||
The projected benefit payments for these plans, net of the estimated Medicare Part D subsidy expected to be received by the Company over the next ten years, are estimated as follows:
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(Amounts in thousands) | Estimated Gross Benefit Payments | Estimated Medicare Part D Subsidy | Estimated Net Benefit Payments | |||||||||
2013 | $ | 2,847 | $ | 207 | $ | 2,640 | ||||||
2014 | 2,903 | 221 | 2,682 | |||||||||
2015 | 2,922 | 231 | 2,691 | |||||||||
2016 | 2,936 | 238 | 2,698 | |||||||||
2017 | 2,931 | 243 | 2,688 | |||||||||
2018 – 2022 | 14,289 | 1,250 | 13,039 | |||||||||
Total estimated benefit payments over next ten years | $ | 28,828 | $ | 2,390 | $ | 26,438 | ||||||
The Company expects to meet funding requirements for its unfunded post-retirement medical and other benefit plans on a pay-as-you-go basis during 2013. The Company accounts for post-retirement medical plans in accordance with ASC 712. The obligation for these post-retirement benefit plans is reported in employee benefit obligations on the Consolidated Balance Sheets.
Periodic Benefit Cost and Other Comprehensive Loss
The components of net periodic benefit cost and other comprehensive loss and the weighted average assumptions used in accounting for other post-retirement benefits were as follows:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Components of net periodic benefit cost: | ||||||||||||
Service cost | $ | 355 | $ | 261 | $ | 270 | ||||||
Interest cost | 1,765 | 1,972 | 2,095 | |||||||||
Amortization of actuarial losses | 1,303 | 871 | 849 | |||||||||
Total net periodic benefit cost recognized in Consolidated Statements of Income | $ | 3,423 | $ | 3,104 | $ | 3,214 | ||||||
Recognized in accumulated other comprehensive loss: | ||||||||||||
Actuarial (gains) losses | $ | (3,009 | ) | $ | 7,212 | $ | 424 | |||||
Weighted average assumptions: | ||||||||||||
Discount rate used to determine net periodic benefit cost | 4.3 | % | 5.5 | % | 5.8 | % | ||||||
Discount rate used to determine year-end benefit obligations | 4.0 | % | 4.3 | % | 5.5 | % | ||||||
Actuarial losses of $1.4 million included in accumulated other comprehensive loss are expected to be recognized as a component of net periodic benefit cost in 2013.
The Company annually evaluates and selects the discount rates to be used in accounting for these plans. Consideration is given to relevant indices for high quality fixed rate debt securities and to specific debt securities with maturity dates similar to the expected timing of cash outflows for the plans as of the measurement date. The annual rate of increase in the cost of health care benefits was assumed to be 10% in 2012, 9% in 2011, and 10% in 2010. As of December 31, 2012, the annual rate of increase in cost of health care benefits is assumed to be 9% in 2013, declining by 1% per year until 5% is reached. A 1% change in assumed health care cost trend rates would have had the following effects for 2012:
(Amounts in thousands) | 1% Increase | 1% Decrease | ||||||
Effect on service and interest cost components | $ | 300 | $ | (240 | ) | |||
Effect on other post-retirement benefit obligations | 4,843 | (3,992 | ) | |||||
NOTE 13: COMMITMENTS
The Company leases office space and equipment under operating leases expiring in one to 15 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 non-cancelable lease terms in excess of one year as of December 31, 2012, are as follows:
(Amounts in thousands) | Future Minimum Operating Lease Commitments | ||
2013 | $ | 7,920 | |
2014 | 6,664 | ||
2015 | 4,761 | ||
2016 | 4,034 | ||
2017 | 3,917 | ||
2018 – beyond | 22,352 | ||
Total operating lease commitments | $ | 49,648 | |
Rentals charged to costs and expenses for continuing operations under cancelable and non-cancelable lease arrangements were as follows:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Rental charges | $ | 6,076 | $ | 5,101 | $ | 3,573 | ||||||
As of December 31, 2012 the Company did not have any material capital leases. See also Note 9.
Guarantees and other commercial commitments include the following:
(Amounts in thousands) | December 31, 2012 | ||
Product warranty reserves | $ | 1,914 | |
Letters of credit outstanding | 5,424 | ||
Other financial guarantees | 3,192 | ||
Total | $ | 10,530 | |
In addition to these amounts, the Company also guarantees certain debt of its subsidiaries. See also Note 9.
Changes in the warranty reserve were as follows:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Balance at beginning of period | $ | 1,539 | $ | 616 | $ | 125 | ||||||
Warranty reserve of acquired businesses | — | 785 | 421 | |||||||||
Warranty reserve related to discontinued operations | — | — | (40 | ) | ||||||||
Accrued warranty expense | 3,215 | 631 | 1,495 | |||||||||
Payments made (in cash or in-kind) | (2,840 | ) | (493 | ) | (1,385 | ) | ||||||
Balance at end of period | $ | 1,914 | $ | 1,539 | $ | 616 | ||||||
The warranty reserve related to our discontinued operations, Gear Products, was assumed by the buyer under the terms of the stock purchase agreement. See also Note 20.
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Other guarantees and claims arise during the ordinary course of business from relationships with suppliers and customers when we undertake an obligation to guarantee the performance of others if specified triggering events occur. Nonperformance of a contract could trigger an obligation of the Company. In addition, certain guarantees relate to contractual indemnification provisions in connection with transactions involving the purchase or sale of stock or assets. These claims include actions based upon intellectual property, environmental, product liability, and other indemnification matters. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the occurrence or, if triggered, final outcome of these claims. However, while the ultimate liabilities resulting from such claims may be potentially significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company’s consolidated financial position or liquidity. See also Note 14.
NOTE 14: CONTINGENT LIABILITIES
The Company reserves for product liability, environmental remediation, and other legal matters as management becomes aware of such matters. A portion of these claims or lawsuits may be covered by insurance policies that generally contain both deductible and coverage limits. Management monitors the progress of each legal matter to ensure that the appropriate reserve for its obligation has been recognized and disclosed in the financial statements. Management also monitors trends in case types to determine if there are any specific issues that relate to the Company that may result in additional future exposure on an aggregate basis. As of December 31, 2012 and 2011, management believes the Company has appropriately recorded and disclosed all material costs for its obligations in regard to known matters. Management believes that the recoverability of the costs of claims from insurance companies will continue in the future. Management periodically assesses these insurance companies to monitor their ability to pay such claims.
The Company was named a potentially liable person (“PLP”) by the Washington State Department of Ecology (“WDOE”) in connection with the Pasco Sanitary Landfill Site (“Site”). This Site has been monitored by WDOE since 1988. From available records, the Company believes that it sent 26 drums of chromic hydroxide sludge in a non-toxic, trivalent state to the Site. The Company further believes that the Site contains more than 50,000 drums in total and millions of gallons of additional wastes, some potentially highly toxic in nature. Accordingly, based both on volume and on the nature of the waste, the Company believes that it is a de minimis contributor.
The current on-site monitoring program and required deliverables under various orders are being conducted and funded by certain PLPs, excluding the Company and several other PLPs, under the supervision of WDOE. The Company may or may not be required, in the future, to contribute to the costs of required deliverables or remediation activities. The Company is unable to estimate such costs, or the likelihood of being assessed any portion thereof. The Company incurred no costs during the years ended December 31, 2012, 2011, and 2010 in connection with the remediation efforts at the Site.
In March 2010, the Company received an offer from Region 9 of the Environmental Protection Agency of the U.S. (the “EPA”) to resolve its potential liability regarding the Operating Industries, Inc. Superfund Site in Monterey Park, California, involving a subsidiary of the former Omark Industries, Inc., which merged with the Company in 1985. The Company submitted its consent to enter into an administrative settlement agreement for the Company’s pro rata share of the site’s clean-up costs as a de minimis participant. Accordingly, the Company recognized a charge of $0.1 million in the first quarter of 2010 in settlement of this matter. In February 2011, the Company received notice from the EPA that the de minimis settlement agreement has been accepted by a sufficient number of parties and payment of $0.1 million was made to the EPA on March 1, 2011. In May 2011 the EPA notified the Company that the administrative order embodying the settlement was in full effect with respect to the Company.
With respect to certain proceedings involving Carlton, which the Company acquired on May 2, 2008, the Company has determined that in 1989 contamination of soil and groundwater by trichloroethylene (“TCE”) and other volatile organic compounds (“VOCs”) was discovered at Carlton’s facility located in Milwaukie, Oregon (the “Carlton Site”) in connection with the removal of two underground storage tanks. On November 19, 1990, Carlton entered into a Consent Order with the Oregon Department of Environmental Quality (“DEQ”), which was amended in 1996, 1997, and 2000, pursuant to which the Company continues to investigate, remediate, and monitor the contamination under the supervision of the DEQ. The Company recognized an initial reserve of $3.4 million at the time of its acquisition of Carlton, representing the estimated costs to remediate this site. Although there can be no assurance that the currently estimated cost and scope of remediation will not change in the future due to the imposition of additional remediation obligations by the DEQ, the detection of additional contamination in the future or other later discovered facts, the Company does not believe that any remediation will have a material adverse effect on its consolidated financial position, operating results or cash flows. In addition, beginning October 2010 and continuing through November 2012, the Company received insurance proceeds to reimburse certain of the expenditures for this remediation effort. The Company does not expect to receive additional insurance proceeds in this matter.
The Company is a defendant in a number of product liability lawsuits, some of which seek significant or unspecified damages involving serious personal injuries, for which there are retentions or deductible amounts under the Company’s insurance
35
policies. Some of these lawsuits arise out of the Company’s duty to indemnify certain purchasers of the Company’s discontinued operations for lawsuits involving products manufactured prior to the sale of certain of these businesses. In addition, the Company is a party to a number of other suits arising out of the normal course of its business, including suits concerning commercial contracts, employee matters, and intellectual property rights. In some instances the Company has been the plaintiff, and has sought recovery of damages. In others, the Company is a defendant against whom damages are sought. While there can be no assurance as to their ultimate outcome, management does not believe these lawsuits will have a material adverse effect on the Company’s consolidated financial position, operating results or cash flows in the future.
The Company accrues, by a charge to income, an amount representing management’s best estimate of the undiscounted probable loss related to any matter deemed by management and its counsel as a reasonably probable loss contingency in light of all of the then known circumstances.
NOTE 15: EARNINGS PER SHARE DATA
Shares used in the denominators of the basic and diluted earnings per share computations were as follows:
Year Ended December 31, | ||||||||||||
(Shares in thousands) | 2012 | 2011 | 2010 | |||||||||
Actual weighted average shares outstanding | 49,170 | 48,701 | 47,917 | |||||||||
Dilutive effect of common stock equivalents | 729 | 733 | 591 | |||||||||
Diluted weighted average common shares outstanding | 49,899 | 49,434 | 48,508 | |||||||||
Options and SARs excluded from computation as anti-dilutive because they are out-of-the-money | 1,783 | 1,337 | 961 | |||||||||
Unvested restricted stock and restricted stock units (“RSUs”) considered to be participating securities | 147 | 124 | 121 | |||||||||
Effect of allocation of undistributed earnings to participating securities under the two class method: | ||||||||||||
Basic earnings per share | $ | (0.01 | ) | $ | — | $ | (0.01 | ) | ||||
Diluted earnings per share | $ | — | $ | (0.01 | ) | $ | — | |||||
No adjustment was required to reported amounts for inclusion in the numerators of the per share computations.
NOTE 16: STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with ASC 718. All share-based compensation to employees, directors, and others who perform services for the Company is valued at estimated fair value on the date of grant and expensed over the applicable service period.
On April 25, 2006, the Company’s stockholders approved the Blount International, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan provides for a variety of stock-based award instruments and terms. The maximum number of shares that may be awarded under the 2006 Plan was initially set at 4,236,919, of which 736,919 represented shares that remained unused under the Company’s previous plans that were transferred to the 2006 Plan. The maximum number of incentive stock options that may be issued under the 2006 Plan is 1,750,000. Recently issued stock awards generally vest over a three-year period and stock options and stock appreciation rights (“SARS”) generally carry a ten-year expiration term.
The fair values of options and stock-settled SARs were estimated on their respective grant dates using the Black-Scholes option valuation model. The estimated average life of SARs granted in 2012, 2011, and 2010 was derived from the “simplified” method, meaning one half the term of the instrument plus one additional year. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with the remaining term equal to the average life. The expected volatility factors used are based on the historical volatility of the Company’s stock. The expected dividend yield is based on historical information and management estimate. The Company generally applies an estimated average forfeiture rate on its broad-based stock awards granted to a diverse population of employees, which reduces the expense recognized. The estimated forfeiture rate is based on the historical forfeiture rate, and is adjusted to the actual forfeiture rate over the life of the stock awards.
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The following table summarizes the assumptions used and estimated fair value of SARs granted:
Year Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Estimated average lives | 6 years | 6 years | 6 years | |||||||||
Risk-free interest rate | 1.2 | % | 2.4 | % | 2.8 | % | ||||||
Expected volatility | 49.3% - 49.6% | 48.4% - 49.5% | 49.7 | % | ||||||||
Weighted average volatility | 49.6 | % | 47.5 | % | 49.7 | % | ||||||
Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Estimated forfeiture rate | 3.2 | % | 5.5 | % | 5.0 | % | ||||||
Weighted average exercise price | $ | 16.68 | $ | 15.10 | $ | 11.82 | ||||||
Weighted average grant date fair value | $ | 7.93 | $ | 7.36 | $ | 5.94 | ||||||
A summary of stock option and stock-settled SARs activity is presented in the following tables:
Year Ended December 31, 2012 | ||||||||||||||
Shares (in 000’s) | Weighted Average Exercise Price | Weighted Average Contractual Life (in years) | Aggregate Intrinsic Value (in 000’s) | |||||||||||
Outstanding options and SARs at beginning of period | 3,659 | $ | 11.78 | |||||||||||
SARs granted | 577 | 16.68 | ||||||||||||
Options exercised | (311 | ) | 3.69 | |||||||||||
SARs exercised | (78 | ) | 11.87 | |||||||||||
Options forfeited or expired | — | — | ||||||||||||
SARs forfeited or expired | (37 | ) | 15.42 | |||||||||||
Outstanding options and SARs at end of period | 3,810 | $ | 13.15 | 5.8 | $ | 11,456 | ||||||||
Outstanding options at end of period | 1,432 | $ | 10.82 | 4.7 | $ | 7,492 | ||||||||
Outstanding SARs at end of period | 2,378 | 14.55 | 6.5 | 3,964 | ||||||||||
Options exercisable at end of period | 1,432 | 10.82 | 4.7 | 7,492 | ||||||||||
SARs exercisable at end of period | 892 | 14.39 | 3.9 | 1,704 | ||||||||||
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Intrinsic value of options exercised | $ | 3,522 | $ | 2,655 | $ | 3,512 | ||||||
Estimated fair value of options and SARs that vested | 3,993 | 3,747 | 2,890 | |||||||||
Stock-based compensation cost recognized in income | 5,592 | 4,441 | 3,290 | |||||||||
Total tax benefit on share-based compensation recognized | 1,917 | 1,560 | 1,016 | |||||||||
Total amount of cash received from exercises | 1,152 | 1,041 | 2,398 | |||||||||
Tax (expense) benefit realized from exercises | 1,187 | 877 | 1,340 | |||||||||
Cash used to settle equity instruments | — | — | — | |||||||||
As of December 31, 2012, the total compensation cost related to awards not yet recognized was $6.7 million. The weighted average period over which this expense is expected to be recognized is two years. The Company’s policy upon the exercise of options or SARs has been to issue new shares into the market place.
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Restricted Stock Awards. The following activity occurred in the periods indicated:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
RSUs awarded | 117 | 112 | 119 | |||||||||
Total fair value of RSUs awarded | $ | 1,957 | $ | 1,695 | $ | 1,413 | ||||||
Total expense recognized for RSUs | 1,389 | 920 | 639 | |||||||||
Tax Benefits. The Company has elected to use the transition short-cut method to determine its pool of windfall tax benefits in accordance with ASC 718. Tax attributes are determined under the tax law ordering method.
NOTE 17: SEGMENT INFORMATION
We are a global industrial company that designs, manufactures, purchases, and markets equipment, replacement and component parts, and accessories to professionals and consumers in select end-markets and to OEMs for use on original equipment. Our products are sold in over 115 countries and approximately 56% of our 2012 sales were shipped to customers outside of the U.S.
The Company identifies operating segments primarily based on organizational structure, reporting structure, and the evaluation of the Chief Operating Decision Maker (Chief Executive Officer). Our organizational structure reflects our view of the end-user market segments we serve, and we currently operate in two primary business segments. The Forestry, Lawn, and Garden or FLAG segment, manufactures and markets cutting chain, guide bars, and drive sprockets for chain saw use, and lawnmower and edger blades for outdoor power equipment. The FLAG segment also purchases branded replacement parts and accessories from other manufacturers and markets them to our FLAG customers through our global sales and distribution network. The FLAG segment includes the operations of the Company that have historically served the FLAG markets, as well as KOX, and a portion of the PBL business. The FLAG segment represented 70.1% of our consolidated sales for the year ended December 31, 2012.
The Company’s Farm, Ranch, and Agriculture or FRAG segment manufactures and markets attachments for tractors in a variety of mowing, cutting, clearing, material handling, landscaping and grounds maintenance applications, as well as log splitters, post-hole diggers, self-propelled lawnmowers, attachments for off-highway construction equipment applications, and other general purpose tractor attachments. In addition, the FRAG segment manufactures a variety of attachment cutting blade component parts. The FRAG segment also purchases replacement parts and accessories from other manufacturers that we market to our FRAG customers through our sales and distribution network. The FRAG segment includes the operations of SpeeCo, Woods/TISCO, and a portion of the PBL business. The FRAG segment represented 27.0% of our consolidated sales for the year ended December 31, 2012.
The Company also operates a concrete cutting and finishing equipment business that represented 2.8% of consolidated sales for the year ended December 31, 2012, and is reported within the Corporate and Other category. This business manufactures and markets diamond cutting chain and assembles and markets concrete cutting chain saws and accessories for the construction equipment market.
The Corporate and Other category also includes the costs of providing certain centralized administrative functions including accounting, banking, our continuous improvement program, credit management, executive management, finance, information systems, insurance, legal, our mergers and acquisitions program, treasury, and other functions. Costs of centrally provided shared services are allocated to business units based on various drivers, such as revenues, purchases, headcount, computer software licenses, and other relevant measures of the use of such services. We also include the facility closure and restructuring costs recognized in 2012 within this Corporate and Other category, because we do not consider such events to be ongoing aspects of our business segments’ activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
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The following table reflects selected financial information by segment and sales by geographic region.
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Sales: | ||||||||||||
FLAG | $ | 650,480 | $ | 659,883 | $ | 554,053 | ||||||
FRAG | 250,845 | 147,475 | 34,200 | |||||||||
Corporate and other | 26,341 | 24,272 | 23,227 | |||||||||
Total sales | $ | 927,666 | $ | 831,630 | $ | 611,480 | ||||||
Operating income (expense): | ||||||||||||
FLAG | $ | 108,255 | $ | 115,597 | $ | 104,113 | ||||||
FRAG | (7,495 | ) | 4,474 | 1,671 | ||||||||
Corporate and other | (21,480 | ) | (22,118 | ) | (20,229 | ) | ||||||
Total operating income | $ | 79,280 | $ | 97,953 | $ | 85,555 | ||||||
Depreciation and amortization: | ||||||||||||
FLAG | $ | 26,574 | $ | 24,663 | $ | 21,898 | ||||||
FRAG | 16,341 | 9,941 | 3,135 | |||||||||
Corporate and other | 2,203 | 1,203 | 2,566 | |||||||||
Total depreciation and amortization | $ | 45,118 | $ | 35,807 | $ | 27,599 | ||||||
Capital expenditures: | ||||||||||||
FLAG | $ | 45,050 | $ | 38,767 | $ | 19,693 | ||||||
FRAG | 6,717 | 1,600 | 83 | |||||||||
Corporate and other | 158 | 6 | 226 | |||||||||
Total capital expenditures | $ | 51,925 | $ | 40,373 | $ | 20,002 | ||||||
Sales by geographic region: | ||||||||||||
United States | $ | 407,967 | $ | 308,593 | $ | 194,416 | ||||||
Europe | 241,884 | 229,103 | 166,960 | |||||||||
China | 44,412 | 45,134 | 38,967 | |||||||||
Brazil | 36,561 | 33,242 | 29,402 | |||||||||
Canada | 30,232 | 25,285 | 18,853 | |||||||||
Russian Federation | 26,040 | 23,375 | 23,669 | |||||||||
All others, individually insignificant | 140,570 | 166,898 | 139,213 | |||||||||
Total sales | $ | 927,666 | $ | 831,630 | $ | 611,480 | ||||||
The geographic sales information is by country of destination. No customer accounted for 10% or more of sales in 2012 or 2011. One customer, Husqvarna AB, accounted for approximately 12% of sales in 2010.
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Balance Sheet Information by Segment | As of December 31, | |||||||
(Amounts in thousands) | 2012 | 2011 | ||||||
Assets: | ||||||||
FLAG | $ | 468,121 | $ | 472,881 | ||||
FRAG | 374,856 | 370,057 | ||||||
Corporate and other | 62,314 | 41,269 | ||||||
Total assets | $ | 905,291 | $ | 884,207 | ||||
Goodwill: | ||||||||
FLAG | $ | 66,297 | $ | 66,223 | ||||
FRAG | 98,865 | 98,848 | ||||||
Corporate and other | 13 | 13 | ||||||
Total goodwill | $ | 165,175 | $ | 165,084 | ||||
Property, plant, and equipment, net: | ||||||||
United States | $ | 91,446 | $ | 86,677 | ||||
China | 41,610 | 22,706 | ||||||
Canada | 20,473 | 18,572 | ||||||
European Union | 12,154 | 14,461 | ||||||
Brazil | 11,532 | 12,837 | ||||||
All other | 487 | 619 | ||||||
Total property, plant, and equipment, net | $ | 177,702 | $ | 155,872 | ||||
Property, plant, and equipment is shown net of accumulated depreciation. Each of our business units purchases certain important materials from a limited number of suppliers that 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.
(Amounts in thousands) | FLAG | FRAG | Corporate and Other | Total | ||||||||||||
Goodwill: | ||||||||||||||||
December 31, 2011 | $ | 66,223 | $ | 98,848 | $ | 13 | $ | 165,084 | ||||||||
Effect of changes in foreign currency translation rates | 74 | 17 | — | 91 | ||||||||||||
December 31, 2012 | $ | 66,297 | $ | 98,865 | $ | 13 | $ | 165,175 | ||||||||
NOTE 18: SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Interest paid | $ | 16,574 | $ | 16,961 | $ | 30,007 | ||||||
Income taxes paid, net | 24,672 | 24,827 | 14,858 | |||||||||
NOTE 19: CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2012, approximately 47% of accounts receivable were from customers outside the U.S. One customer accounted for 7.3% and 4.8% at December 31, 2012 and 2011, respectively, of the total accounts receivable balance. No other customer accounted for more than 3% of accounts receivable at December 31, 2012 or 2011. Accounts receivable are principally from dealers, distributors, mass merchants, chain saw manufacturers, and other OEMs. The majority of accounts receivable are not collateralized.
The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments. The carrying amount of accounts receivable approximates fair value because the maturity period is short and the Company has reduced the carrying amount to the estimated net realizable value with an allowance for doubtful accounts. The fair value of the senior credit facility principal outstanding is determined by reference to prices of recent transactions for similar debt. Derivative financial instruments are carried on the Consolidated Balance Sheets at fair value, as determined by reference to quoted terms for similar instruments. The carrying amount of other financial instruments approximates fair value because of the short-term maturity periods and variable interest rates associated with the instruments.
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The estimated fair values of the senior credit facility loans at December 31, 2012 and 2011 are presented below. See also Note 9.
December 31, 2012 | December 31, 2011 | |||||||||||||||
(Amounts in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Senior credit facility debt | $ | 516,250 | $ | 513,669 | $ | 524,450 | $ | 521,828 | ||||||||
Derivative Financial Instruments and Foreign Currency Hedging. The Company has manufacturing and/or distribution operations in Brazil, Canada, China, Europe, Japan, Mexico, Russia, and the U.S. Foreign currency exchange rate movements create a degree of risk by affecting the U.S. Dollar value of certain balance sheet positions denominated in foreign currencies, and by affecting the translated amounts of revenues and expenses. Additionally, the interest rates available in certain jurisdictions in which the Company holds cash may vary, thereby affecting the return on cash equivalent investments. The Company makes regular cash payments to its foreign subsidiaries and is exposed to changes in exchange rates from these transactions, which may adversely affect its results of operations and financial position. Certain other foreign subsidiaries make regular cash payments to the Company and changes in exchange rates from these transactions can also expose the Company, which may adversely affect its results of operations and financial position.
The Company manages a portion of its foreign currency exchange rate exposures with derivative financial instruments. These instruments are designated as cash flow hedges and are recorded on the Consolidated Balance Sheets at fair value. The Company’s objective in executing these hedging instruments is to minimize earnings volatility resulting from conversion and the re-measurement of foreign currency denominated transactions. The effective portion of the gains or losses on these contracts due to changes in fair value is initially recorded as a component of accumulated other comprehensive loss and is subsequently reclassified into net earnings when the contracts mature and the Company settles the hedged payment. The classification of effective hedge results is the same in the Consolidated Statements of Income as that of the underlying exposure. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates.
The cumulative unrealized pre-tax loss on these derivative contracts included in accumulated other comprehensive loss on the Consolidated Balance Sheets was $28 thousand as of December 31, 2012 and $0.5 million as of December 31, 2011. The unrealized pre-tax loss included in accumulated other comprehensive loss is expected to be recognized in the Consolidated Statement of Income during the next twelve months.
Amounts recognized in cost of sales in the Consolidated Statements of Income at the maturity of the related derivative financial instruments were as follows.
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Gain (loss) on foreign currency derivative financial instruments | $ | (75 | ) | $ | 788 | $ | 2,353 | |||||
Gains and losses on these foreign currency derivative financial instruments are offset in net earnings by the effects of currency exchange rate changes on the underlying transactions. Through December 31, 2012, the Company has not recognized any amount from these contracts in earnings due to ineffectiveness. The aggregate notional amount of these foreign currency contracts outstanding was $45.5 million at December 31, 2012 and $37.5 million at December 31, 2011.
Derivative Financial Instruments and Interest Rates. The senior credit facility agreement terms include a requirement to cover 35% of the outstanding principal on our term loan with fixed or capped interest rates. In the first six months of 2011, we entered into interest rate cap agreements covering 35% of the outstanding principal on our term loans A and B that capped the maximum LIBOR used to determine the interest rate we pay at 5.00% through February 28, 2013. During the third quarter of 2011, following the Fourth Amendment and Restatement of our senior credit facilities, we terminated these interest rate cap contracts with a charge to expense of $0.1 million. In October 2011, we entered into an interest rate cap agreement covering an initial notional amount of $103.7 million of term loan principal outstanding that caps the maximum interest rate at 7.50%. In October and November 2011, we also entered into a series of interest rate swap contracts whereby the interest rate we pay will be fixed between 3.30% and 4.20% on $130.0 million of term loan principal for the period of June 2013 through varying maturity dates between December 2014 and August 2016. These interest rate swap and cap agreements are designated as cash flow hedges and are recorded on the Consolidated Balance Sheets at fair value. Through December 31, 2012, the Company has not recognized any amount from these contracts in earnings due to ineffectiveness.
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Derivatives held by the Company are summarized as follows:
Carrying Value on Consolidated Balance | Assets (Liabilities) Measured at Fair Value | |||||||||||||||
(Amounts in thousands) | Sheets | Level 1 | Level 2 | Level 3 | ||||||||||||
December 31, 2012: | ||||||||||||||||
Interest rate hedge agreements | $ | (3,960 | ) | $ | — | $ | (3,960 | ) | $ | — | ||||||
Foreign currency hedge agreements | (28 | ) | — | (28 | ) | — | ||||||||||
December 31, 2011: | ||||||||||||||||
Interest rate hedge agreements | $ | (1,303 | ) | $ | — | $ | (1,303 | ) | $ | — | ||||||
Foreign currency hedge agreements | (505 | ) | — | (505 | ) | — | ||||||||||
See Note 11 for a description of the framework for measuring fair value and Levels 1, 2, and 3. In accordance with ASC 820, the Company evaluates nonperformance risk of its counterparties in calculating fair value adjustments. As of December 31, 2012 and 2011, all outstanding derivative instruments were fully collateralized; therefore, the nonperformance risk is considered remote. The carrying values as of December 31, 2012 are included in accrued expenses on the Consolidated Balance Sheet.
NOTE 20: DISCONTINUED OPERATIONS
On September 30, 2010, we sold our indirect wholly-owned subsidiary Gear Products to Tulsa Winch, Inc., an operating unit of Dover Industrial Products, Inc., for net cash proceeds of $24.8 million. Under terms of the stock purchase agreement, the parties agreed to treat the stock sale as if it were an asset sale for income tax purposes, which resulted in an increase in income tax expense we recognized on the sale. Gear Products results up to the date of the sale are reported as discontinued operations for all periods presented, and are summarized below:
Year Ended December 31, | ||||||||||||
(Amounts in thousands) | 2012 | 2011 | 2010 | |||||||||
Sales | $ | — | $ | — | $ | 12,297 | ||||||
Operating income | $ | — | $ | — | $ | 1,031 | ||||||
Gain on sale of subsidiary | — | — | 11,941 | |||||||||
Income before income taxes | — | — | 12,972 | |||||||||
Income tax provision | — | — | 7,174 | |||||||||
Income from discontinued operations | $ | — | $ | — | $ | 5,798 | ||||||
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SUPPLEMENTARY DATA
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
The following tables set forth a summary of the unaudited quarterly results of operations for 2012 and 2011.
Year Ended December 31, 2012 | ||||||||||||||||||||
(Amounts in thousands, except per share data) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |||||||||||||||
(Amounts may not sum due to rounding) | ||||||||||||||||||||
Sales | $ | 226,309 | $ | 239,059 | $ | 232,736 | $ | 229,562 | $ | 927,666 | ||||||||||
Gross profit | 62,665 | 68,078 | 62,928 | 62,543 | 256,215 | |||||||||||||||
Net income | 5,881 | 13,101 | 11,622 | 8,984 | 39,588 | |||||||||||||||
Net income per share: | ||||||||||||||||||||
Basic | $ | 0.12 | $ | 0.27 | $ | 0.24 | $ | 0.18 | $ | 0.81 | ||||||||||
Diluted | 0.12 | 0.26 | 0.23 | 0.18 | 0.79 | |||||||||||||||
Year Ended December 31, 2011 | ||||||||||||||||||||
(Amounts in thousands, except per share data) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |||||||||||||||
(Amounts may not sum due to rounding) | ||||||||||||||||||||
Sales | $ | 180,874 | $ | 201,337 | $ | 212,904 | $ | 236,515 | $ | 831,630 | ||||||||||
Gross profit | 60,048 | 64,188 | 65,560 | 66,013 | 255,809 | |||||||||||||||
Net income | 15,622 | 13,752 | 10,805 | 9,502 | 49,682 | |||||||||||||||
Net income per share: | ||||||||||||||||||||
Basic | $ | 0.32 | $ | 0.28 | $ | 0.22 | $ | 0.19 | $ | 1.02 | ||||||||||
Diluted | 0.31 | 0.28 | 0.22 | 0.19 | 1.01 | |||||||||||||||
Acquisition accounting effects included in the above quarterly results for 2012 totaled $4.4 million in the first quarter, $4.3 million in the second quarter, $3.7 million in the third quarter, and $3.7 million in the fourth quarter. Facility closure and restructuring costs during 2012 totaled $4.9 million in the first quarter, $1.7 million in the second quarter, and $0.8 million in the third quarter.
Results in all four quarters of 2011 reflect the acquisition of KOX in March. Results for the third and fourth quarters of 2011 also include the acquisitions of PBL and Woods/TISCO. Acquisition accounting effects included in the above quarterly results for 2011 totaled $2.1 million in the first quarter, $2.6 million in the second quarter, $4.2 million in the third quarter, and $6.7 million in the fourth quarter of 2011. In addition, net income in the third quarter of 2011 reflects a pretax charge of $3.9 million for the early extinguishment of debt.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain DCP that are designed with the objective of providing reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO (principal executive officer) and CFO (principal financial officer), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our DCP, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures.
At the time that our Annual Report on Form 10-K for the year ended December 31, 2012 was filed on March 8, 2013, the Company's CEO and CFO had concluded that our DCP were effective at a reasonable assurance level as of December 31, 2012. Subsequently, the Company’s management, under the supervision and with the participation of our CEO and CFO, re-evaluated the effectiveness of the design and operation of our DCP, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Annual Report, and our CEO and CFO, concluded that our DCP were not effective as of December 31, 2012 because of the material weaknesses in our ICFR as described below.
Restated Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate ICFR, as such term is defined in Exchange Act Rules 13a -15(f). Under the supervision and with the participation of our CEO and CFO, our management conducted an assessment of the effectiveness of our ICFR based upon the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) as of December 31, 2012. Based on those criteria, management identified material weaknesses in ICFR as of December 31, 2012, as described below.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of their inherent limitations. ICFR is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. ICFR also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by ICFR. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Material weaknesses in internal control over financial reporting
A material weakness is a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following control deficiencies that constitute material weaknesses in our ICFR as of December 31, 2012:
1. | The Company did not design and maintain effective internal control over the accounting for goodwill. Specifically, the Company did not design and maintain effective controls related to the identification of reporting units, the review of assumptions, data and calculations used in the annual impairment test, and the identification of changes in events and circumstances that indicate it is more likely than not that a goodwill impairment has occurred between annual impairment tests. |
2. | The Company did not design and maintain effective internal control over the accounting for intangible assets other than goodwill. Specifically, the Company did not design and maintain effective controls to test indefinite-lived intangible assets, separate from goodwill, for impairment at least annually, to evaluate the remaining useful life of definite-lived intangible assets each reporting period to determine whether events or circumstances warrant a revision to the remaining period of amortization, and to identify changes in events and circumstances that would indicate intangible assets may be impaired. |
3. | The Company did not design and maintain effective information technology general controls at our Woods/TISCO subsidiary. Specifically, the Company did not design and maintain effective controls with respect to segregation of duties, restricted access to programs and data, and change management activities. Consequently, controls that were dependent on the effective operation of information technology were not effectively designed to include adequate review of system generated data used in the operation of the controls and were determined not to be operating |
44
effectively. Accordingly, the Company did not maintain effective internal controls over the journal entries, inventory, revenue and receivables, purchasing and payables, payroll, and fixed asset processes at our Woods/TISCO subsidiary.
4. | The Company did not design and maintain effective controls over restricted access and segregation of duties within the SAP system as certain personnel have administrator access to execute certain conflicting transactions. Further, certain personnel have the ability to prepare and post journal entries without an independent review required by someone other than the preparer. Specifically, our internal controls were not designed or operating effectively to provide reasonable assurance that transactions were appropriately recorded or were properly reviewed for validity, accuracy, and completeness. |
These control deficiencies did not result in a material misstatement to the Company’s consolidated financial statements for the year ended December 31, 2012. However, these control deficiencies could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that these control deficiencies constitute material weaknesses and that therefore our ICFR was not effective as of December 31, 2012.
In Management’s Report on Internal Control Over Financial Reporting included in our original Annual Report on Form 10-K for the year-ended December 31, 2012, our management, including our CEO and CFO, concluded that we maintained effective ICFR as of December 31, 2012. Management has subsequently concluded that the material weaknesses described above existed as of December 31, 2012. As a result, we have concluded that we did not maintain effective ICFR as of December 31, 2012, based on the criteria in Internal Control-Integrated Framework issued by the COSO. Accordingly, management has restated its report on ICFR.
The effectiveness of the Company's ICFR as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Part II, Item 8 of this Annual Report.
In light of the material weaknesses in ICFR described above, the Company performed additional analyses and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. , Following those additional analyses and procedures, management concluded that no changes were required to the financial statements previously filed and that the financial statements included in this Annual Report on Form 10-K/A present fairly, in all material respects, our financial condition, results of operations, and cash flows for the periods presented.
Plan for Remediation of Material Weaknesses
Management is actively engaged in the planning for, and implementation of, remediation efforts to address the material weaknesses identified above. Management has or intends to take the following actions to address the material weaknesses:
1. | Management is in the process of re-designing its processes and controls relating to the accounting for goodwill, including the identification of reporting units, the review of assumptions, data and calculations used in the annual goodwill impairment test, and implementing a periodic review process to evaluate potential events and changes in circumstances that could indicate an impairment of goodwill at an interim date. |
2. | Management is in the process of re-designing its processes and controls, including the implementation of new controls, relating to the accounting for intangible assets other than goodwill, including the performance of a separate annual impairment test of indefinite-lived intangible assets other than goodwill, the evaluation of the remaining useful lives of definite-lived intangible assets, and periodic review of potential changes in events and circumstances that could indicate an impairment at an interim date. |
3. | Management is in the process of implementing changes in information technology general controls at our Woods/TISCO subsidiary, in order to improve controls over segregation of duties, restricted access to programs and data, and change management activities. |
4. | Management is in the process of implementing changes in controls over restricted access and segregation of duties within the SAP system. |
Management believes the measures described above and others that will be implemented will remediate the material weaknesses that we have identified. As management continues to evaluate and improve ICFR, we may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.
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Changes in Internal Control Over Financial Reporting
There was no change in our ICFR during our fiscal quarter ended December 31, 2012 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Chief Executive Officer and Chief Financial Officer Certifications
The certifications of our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page Reference | |
(A) Certain documents filed as part of Form 10-K | |
(1) Financial Statements and Supplementary Data | |
Report of Independent Registered Public Accounting Firm | |
Consolidated Statements of Income for the years ended December 31, 2012, 2011, and 2010 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011, and 2010 | |
Consolidated Balance Sheets as of December 31, 2012 and 2011 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010 | |
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2012, 2011, and 2010 | |
Notes to Consolidated Financial Statements | |
Supplementary Data | |
(2) Financial Statement Schedules | |
Schedule II - Consolidated Schedule of Valuation and Qualifying Accounts for the years ended December 31, 2012, 2011, and 2010 | |
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) Exhibits required by Item 601 of Regulation S-K:
*3(a) Restated Certificate of Incorporation of Blount International, Inc. (included as Exhibit A to the Agreement and Plan of Merger and Recapitalization which is Exhibit 2.1) filed as part of the Proxy Statement-Prospectus which forms a part of the Registration Statement on Form S-4 filed by Blount International, Inc. on July 15, 1999 (Reg. No. 333-82973). |
*3(b) By-laws of Blount International, Inc. filed as Exhibit 3.1 to Form 8-K filed by Blount International, Inc. on January 25, 2011 (Commission File No. 001-11549). |
*4(a) Form of Stock Certificate of New Blount Common Stock filed as part of the Proxy Statement-Prospectus which forms a part of the Registration Statement on Form S-4 filed by Blount International, Inc. on July 15, 1999 (Reg. No. 333-82973). |
*4(b) Fourth Amended and Restated Credit Agreement, dated as of June 13, 2011, by and among Blount Inc., a Delaware corporation, Omark Properties, Inc., an Oregon corporation, Windsor Forestry Tools LLC, the other Credit Parties signatory thereto; General Electric Capital Corporation, in its capacity as Agent for the Lenders; and the other Lenders party thereto filed as Exhibit 10.1 to the Quarterly Report of Blount International, Inc. on Form 10-Q for the period ended June 30, 2011 (Commission File No. 001-11549). |
*4(c) First Amendment to Fourth Amended and Restated Credit Agreement dated August 3, 2012, by and among Blount Inc., a Delaware corporation, Omark Properties, Inc., an Oregon corporation, Windsor Forestry Tools LLC, the other Credit Parties signatory thereto; General Electric Capital Corporation, in its capacity as Agent for the Lenders; and the other Lenders party thereto filed as Exhibit 99.2 to the Current Report of Blount International, Inc. on Form 8-K dated August 7, 2012 (Commission File No. 001-11549). |
*10(a) 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(b) 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). |
47
*10(c) Blount, Inc. Executive Benefit Plans Trust Agreement and Amendment to and Assumption of Blount, Inc. Executive Benefit Plans Trust 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(d) Blount, Inc. Benefits Protection Trust Agreement and Amendment To And Assumption of Blount, Inc. Benefits Protection Trust 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(e) The Blount Deferred Compensation Plan which was filed as Exhibit 10(cc) to the Annual Report of Blount International, Inc. on Form 10-K for the year ended December 31, 1998 (Commission File No. 001-11549). |
*10(f) Blount International, Inc. 2006 Equity Incentive Plan, effective as of February 15, 2006, filed as Exhibit B to the Proxy Statement of Blount, International, Inc. for the Annual Meeting of Stockholders held April 25, 2006 (Commission File No. 001-11549), and the Amendment to the Blount International, Inc. 2006 Equity Incentive Plan dated February 23, 2007, filed as Exhibit 10.2 to the Registration Statement on Form S-8 file by Blount International, Inc., which became effective on March 7, 2008 (Reg. No. 333-149584). |
*10(g) Employment Agreement by and between Blount International, Inc. and Andrew W. York dated as of February 13, 2012, filed as Exhibit 10(h) to Form 10-K filed by Blount International, Inc. on March 13, 2012 Commission File No. 001-11549). |
*10(h) Employment Agreement by and between Blount International, Inc. and Joshua L. Collins dated September 28, 2009, filed as Exhibit 10.1 to Form 8-K filed by Blount International, Inc. on October 1, 2009 (Commission File No. 001-11549). |
*10(i) Consulting Agreement by and between Blount International, Inc. and Russell L. German, dated as of July 2, 2010 filed as Exhibit 10(k) to the Annual Report of Blount International, Inc. on Form 10-K for the year ended December 31, 2010 (Commission File No. 001-11549). |
*10(j) Amended and Restated Employment Agreement by and between Blount International, Inc. and Calvin E. Jenness dated as of December 30, 2010 filed as Exhibit 10(l) to the Annual Report of Blount International, Inc. on Form 10-K for the year ended December 31, 2010 (Commission File No. 001-11549). |
*10(k) Amended and Restated Employment Agreement by and between Blount International, Inc. and Kenneth Owen Saito dated as of December 30, 2010 filed as Exhibit 10(m) to the Annual Report of Blount International, Inc. on Form 10-K for the year ended December 31, 2010 (Commission File No. 001-11549). |
*10(l) Amended and Restated Employment Agreement by and between Blount International, Inc. and Cyrille Benoit Michel dated as of December 30, 2010 filed as Exhibit 10(o) to the Annual Report of Blount International, Inc. on Form 10-K for the year ended December 31, 2010 (Commission File No. 001-11549). |
*10(m) Employment Agreement by and between Blount International, Inc. and David A. Willmott dated December 14, 2009, filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2010 (Commission File No. 001-11549). |
**10(n) Employment Agreement by and between Blount International, Inc. and Paul A. Valas dated October 10, 2012 and filed electronically herewith. |
*10(o) Stock Purchase Agreement by and between Blount, Inc. and SpeeCo Companies L.L.C. dated as of August 9, 2010, filed as Exhibit 2.1 to Form 8-K filed by Blount International, Inc. on August 11, 2010 (Commission File No. 001-11549). |
*10(p) Stock Purchase Agreement by and among Tulsa Winch, Inc., Blount, Inc. and Dover Industrial Products, Inc. dated as of September 30, 2010, filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2010 (Commission File No. 001-11549). |
*10(q) Agreement and Plan of Merger dated as of August 15, 2011, by and among SP Companies, Inc., Grenade LLC, Blount, Inc., and GenWoods HoldCo, LLC, filed as Exhibit 99.4 to Form 8-K/A filed by Blount International, Inc. on November 7, 2011 (Commission File No. 001-11549). |
*14 Blount International Code of Ethics as amended, dated October 17, 2013 filed as Exhibit 99.2 to Form 8-K dated October 22, 2013 (Commission File No. 001-11549). |
**21 A list of the significant subsidiaries of Blount International, Inc. |
**23 Consent of Independent Registered Public Accounting Firm. |
**31.1 Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by Joshua L. Collins, Chairman and Chief Executive Officer. |
**31.2 Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice President and Chief Financial Officer. |
**32.1 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Joshua L. Collins, Chairman and Chief Executive Officer. |
48
**32.2 Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice President and Chief Financial Officer. |
***101.INS XBRL Instance Document |
***101.SCH XBRL Taxonomy Extension Schema Document |
***101.CAL XBRL Taxonomy Extension Calculation Linkbase Document |
***101.DEF XBRL Taxonomy Extension Definition Linkbase Document |
***101.LAB XBRL Taxonomy Extension Label Linkbase Document |
***101.PRE XBRL Taxonomy Extension Presentation Linkbase Document |
* | Incorporated by reference |
** | Filed electronically herewith. Copies of such exhibits may be obtained upon written request to: |
Blount International, Inc.
P.O. Box 22127
Portland, Oregon 97269-2127
*** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections. |
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the duly authorized undersigned.
BLOUNT INTERNATIONAL, INC. |
Registrant |
Dated: November 22, 2013 | ||||
/s/ Calvin E. Jenness | /s/ Mark V. Allred | |||
Calvin E. Jenness | Mark V. Allred | |||
Senior Vice President and | Vice President and Corporate Controller | |||
Chief Financial Officer | (Principal Accounting Officer) | |||
(Principal Financial Officer) | ||||
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: November 22, 2013
/s/ Robert E. Beasley, Jr. | /s/ Ronald Cami | |||
Robert E. Beasley, Jr. | Ronald Cami | |||
Director | Director | |||
/s/ Andrew C. Clarke | /s/ Joshua L. Collins | |||
Andrew C. Clarke | Joshua L. Collins | |||
Director | Chairman and Chief Executive Officer | |||
Director | ||||
/s/ Nelda J. Connors | /s/ Thomas J. Fruechtel | |||
Nelda J. Connors | Thomas J. Fruechtel | |||
Director | Director | |||
/s/ E. Daniel James | /s/ Harold E. Layman | |||
E. Daniel James | Harold E. Layman | |||
Director | Director | |||
/s/ David A. Willmott | ||||
David A. Willmott | ||||
President and Chief Operating Officer | ||||
Director | ||||
50
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands) | ||||||||||||||||||||
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Additions (Reductions) | ||||||||||||||||||||
Description | Balance at Beginning of Period | Charged (Credited) to Cost and Expenses | Business Acquisitions (Dispositions), Net | (Deductions) Recoveries | Balance at End of Period | |||||||||||||||
Year Ended December 31, 2012: | ||||||||||||||||||||
Allowance for doubtful accounts receivable | $ | 3,142 | $ | 98 | $ | — | $ | (124 | ) | $ | 3,116 | |||||||||
Inventory reserves | 9,899 | 8,281 | — | (6,454 | ) | 11,726 | ||||||||||||||
Valuation allowance for deferred tax assets | 603 | 1,949 | — | — | 2,552 | |||||||||||||||
Year Ended December 31, 2011: | ||||||||||||||||||||
Allowance for doubtful accounts receivable | 1,490 | 608 | 1,097 | (53 | ) | 3,142 | ||||||||||||||
Inventory reserves | 5,108 | 4,326 | 3,428 | (2,963 | ) | 9,899 | ||||||||||||||
Valuation allowance for deferred tax assets | 2,314 | (1,711 | ) | — | — | 603 | ||||||||||||||
Year Ended December 31, 2010: | ||||||||||||||||||||
Allowance for doubtful accounts receivable | 3,339 | 120 | 169 | (2,138 | ) | $ | 1,490 | |||||||||||||
Inventory reserves | 3,706 | 2,449 | 704 | (1,751 | ) | 5,108 | ||||||||||||||
Valuation allowance for deferred tax assets | 2,366 | (52 | ) | — | — | 2,314 | ||||||||||||||
51