FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-11549
BLOUNT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0780521
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4520 Executive Park Drive 36116-1602
Montgomery, Alabama (Zip Code)
(Address of principal executive offices)
(334) 244-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock March 31, 2002
--------------------- ------------------
$.01 Par Value 30,795,882 shares
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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
------------
Part I. Financial Information
Condensed Consolidated Statements of Operations -
three months ended March 31, 2002 and 2001 3
Condensed Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of
Changes in Stockholders' Deficit -
three months ended March 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis 19
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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)
Three Months
Ended March 31,
-------------------
2002 2001
- ------------------------------------------------------ -------- --------
(Unaudited)
Sales $106.6 $119.1
Cost of sales 69.7 78.9
- ------------------------------------------------------ ------ ------
Gross profit 36.9 40.2
Selling, general and administrative expenses 22.4 24.0
Restructuring expenses 5.6 16.2
- ------------------------------------------------------ ------ ------
Income from operations 8.9 -
Interest expense (18.2) (25.5)
Interest income 0.3 0.3
Other income (expense) (0.3) (0.1)
- ------------------------------------------------------ ------ ------
Loss from continuing operations before income taxes (9.3) (25.3)
Benefit for income taxes (3.0) (11.1)
- ------------------------------------------------------ ------ ------
Loss from continuing operations before
extraordinary loss (6.3) (14.2)
Discontinued operations:
Net income from operations, net of taxes of
$0.0 and $0.3 0.4
- ------------------------------------------------------ ------ ------
Loss before extraordinary loss (6.3) (13.8)
Extraordinary loss, net of taxes of $0.1 (0.2)
- ------------------------------------------------------ ------ ------
Net loss $ (6.5) $(13.8)
- ------------------------------------------------------ ====== ======
Basic earnings (loss) per share:
Continuing operations $(0.20) $(0.46)
Discontinued operations 0.01
Extraordinary loss (0.01)
- ------------------------------------------------------ ------ ------
Net loss $(0.21) $(0.45)
- ------------------------------------------------------ ====== ======
Diluted earnings (loss) per share:
Continuing operations $(0.20) $(0.46)
Discontinued operations 0.01
Extraordinary loss (0.01)
- ------------------------------------------------------ ------ ------
Net loss $(0.21) $(0.45)
- ------------------------------------------------------ ====== ======
The accompanying notes are an integral part of these statements.
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<page>
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
- --------------------------------------------------- ----------- ------------
Current assets:
Cash and cash equivalents $ 17.3 $ 47.6
Accounts receivable, net of allowance for
doubtful accounts of $3.6 and $3.5 65.4 57.3
Inventories 71.1 68.1
Deferred income taxes 30.4 22.9
Other current assets 7.2 8.2
- --------------------------------------------------- -------- --------
Total current assets 191.4 204.1
Property, plant and equipment, net of accumulated
depreciation of $178.4 and $185.2 97.3 96.2
Cost in excess of net assets of acquired businesses, net 76.9 76.9
Other assets 65.7 67.6
- --------------------------------------------------- -------- --------
Total Assets $ 431.3 $ 444.8
- --------------------------------------------------- ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------- -------- --------
Current liabilities:
Notes payable and current maturities of long-term debt $ 8.4 $ 8.5
Accounts payable 18.5 19.7
Accrued expenses 82.9 93.2
- --------------------------------------------------- -------- --------
Total current liabilities 109.8 121.4
Long-term debt, exclusive of current maturities 631.8 632.5
Deferred income taxes, exclusive of current portion 2.8 2.8
Other liabilities 43.4 38.0
- --------------------------------------------------- -------- --------
Total liabilities 787.8 794.7
- --------------------------------------------------- -------- --------
Commitments and Contingent Liabilities
- --------------------------------------------------- -------- --------
Stockholders' equity (deficit):
Common stock: par value $.01 per share, 100,000,000
shares authorized, 30,795,882 outstanding 0.3 0.3
Capital in excess of par value of stock 424.3 424.3
Accumulated deficit (787.1) (780.6)
Accumulated other comprehensive income 6.0 6.1
- --------------------------------------------------- -------- --------
Total stockholders' deficit (356.5) (349.9)
- --------------------------------------------------- -------- --------
Total Liabilities and Stockholders' Equity (Deficit) $ 431.3 $ 444.8
- --------------------------------------------------- ======== ========
The accompanying notes are an integral part of these statements.
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<page>
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<table>
Three Months
Ended March 31,
----------------------
2002 2001
- --------------------------------------------------------------------------------- ---------- ----------
(Unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net loss $ (6.5) $ (13.8)
Adjustments to reconcile net loss to net cash provided by operating activities:
Income from discontinued operations (0.4)
Extraordinary loss 0.2
Depreciation, amortization and other noncash charges 5.8 6.1
Deferred income taxes (7.5) (0.4)
Loss on disposals of property, plant and equipment (0.2)
Changes in assets and liabilities, net of effects of businesses acquired and sold:
Increase in accounts receivable (8.1) (9.6)
Increase in inventories (3.0) (0.4)
(Increase) decrease in other assets 1.2 (12.2)
Decrease in accounts payable (1.2) (0.2)
Increase (decrease) in accrued expenses (7.8) 3.5
Increase in other liabilities 5.3
- --------------------------------------------------------------------------------- ------- -------
Net cash used in continuing operations (21.8) (27.4)
Net cash used in discontinued operations (17.6)
- --------------------------------------------------------------------------------- ------- -------
Net cash used in operating activities (21.8) (45.0)
- --------------------------------------------------------------------------------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 0.7
Expenses from sale of discontinued operations (2.5)
Purchases of property, plant and equipment (5.0) (1.8)
Acquisitions of businesses (1.3)
- --------------------------------------------------------------------------------- ------- -------
Net cash used in continuing operations (6.8) (3.1)
Net cash used in discontinued operations (1.3)
- --------------------------------------------------------------------------------- ------- -------
Net cash used in investing activities (6.8) (4.4)
- --------------------------------------------------------------------------------- ------- -------
Cash flows from financing activities:
Net increase in short-term borrowings 2.2
Issuance of long-term debt 41.4
Reduction of long-term debt (1.5) (0.9)
Capital contribution 7.0
Other (0.2) (1.9)
- --------------------------------------------------------------------------------- ------- -------
Net cash provided by (used in) financing activities (1.7) 47.8
- --------------------------------------------------------------------------------- ------- -------
Net decrease in cash and cash equivalents (30.3) (1.6)
- --------------------------------------------------------------------------------- ------- -------
Cash and cash equivalents at beginning of period 47.6 4.8
- --------------------------------------------------------------------------------- ------- -------
Cash and cash equivalents at end of period $ 17.3 $ 3.2
- --------------------------------------------------------------------------------- ======= =======
</table>
The accompanying notes are an integral part of the audited financial statements.
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<page>
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIT (Unaudited)
(In millions)
<table>
Accumulated
Capital Retained Other
Common In Excess Earnings Comprehensive
Stock of Par (Deficit) Income Total
------ --------- --------- ------------- ---------
<s> <c> <c> <c> <c> <c>
THREE MONTHS ENDED MARCH 31, 2002:
Balance, December 31, 2001 $ 0.3 $424.3 $(780.6) $ 6.1 $(349.9)
Net loss (6.5) (6.5)
Other comprehensive income (loss), net (0.1) (0.1)
-------
Comprehensive income (loss) (6.6)
----- ------ ------- ------ -------
Balance, March 31, 2002 $ 0.3 $424.3 $(787.1) $ 6.0 $(356.5)
===== ====== ======= ====== =======
THREE MONTHS ENDED MARCH 31, 2001:
Balance, December 31, 2000 $ 0.3 $417.3 $(737.1) $ 7.3 $(312.2)
Net loss (13.8) (13.8)
Other comprehensive income (loss), net (1.1) (1.1)
-------
Comprehensive income (loss) (14.9)
Capital contribution 7.0 7.0
----- ------ ------- ------ -------
Balance, March 31, 2001 $ 0.3 $424.3 $(750.9) $ 6.2 $(320.1)
===== ====== ======= ====== =======
</table>
The accompanying notes are an integral part of these statements.
Page 6
<page>
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Blount International, Inc. and Subsidiaries
("the Company") contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position at March 31, 2002
and the results of operations and cash flows for the periods ended March 31,
2002 and 2001. These financial statements should be read in conjunction with
the notes to the financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. The results of operations for
the periods ended March 31, 2002 and 2001 are not necessarily indicative of the
results to be expected for the twelve months ending December 31, 2002 due to the
seasonal nature of certain of the Company's operations.
Certain amounts in the prior year's financial statements have been reclassified
to conform with the current year's presentation, including the effects of the
sale of the Sporting Equipment Group ("SEG") on December 7, 2001. The results
of operations for SEG have been reclassified to discontinued operations for 2001
as presented in the condensed consolidated statement of operations.
The Company's Internet home page is http://www.blount.com.
NOTE 2 During the first quarter of 2001, the Company incurred a restructuring
expense of $16.2 million. The expense includes $0.6 million related to the
closure of a manufacturing facility in Zebulon, North Carolina. The remaining
$15.6 million in restructuring expense relates to the modification of certain
employee benefit plans and a reduction in headcount and expenses principally at
the corporate headquarters. During the first quarter of 2002, the Company
incurred a restructuring expense of $5.6 million and recognized a loss of $0.4
million anticipated on the sale of corporate assets associated with the
Company's announced closure of the corporate headquarters in Montgomery,
Alabama. The restructuring expense is primarily severance costs related to the
corporate staff. The closure and transition of activities are expected to be
completed by the end of the third quarter of 2002, with an additional $1.0
million in transition expenditures expected by that time. In conjunction with
this closure, Harold E. Layman, the Chief Executive Officer of Blount
International, Inc., will retire at the end of the third quarter of 2002. James
S. Osterman will become President and Chief Executive Officer at that time. Mr.
Layman will remain on the Board of Directors and Mr. Osterman will be nominated
as an additional director.
NOTE 3 Inventories consist of the following (in millions):
March 31, December 31,
2002 2001
--------------------------------- ------------- ------------
Finished goods $ 36.0 $ 32.1
Work in process 9.9 9.8
Raw materials and supplies 25.2 26.2
--------------------------------- ------ ------
$ 71.1 $ 68.1
--------------------------------- ====== ======
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NOTE 4 Segment information is as follows (in millions):
Three Months
Ended March 31,
-------------------
2002 2001
- ------------------------------------------------------ -------- --------
Sales:
Outdoor Products $ 80.1 $ 91.2
Industrial and Power Equipment 26.5 27.9
- ------------------------------------------------------ ------ ------
$106.6 $119.1
- ------------------------------------------------------ ====== ======
Operating income (loss):
Outdoor Products $ 16.2 $ 19.5
Industrial and Power Equipment 0.3 (1.6)
- ------------------------------------------------------ ------ ------
Operating income from segments 16.5 17.9
Corporate office expenses (2.0) (1.7)
Restructuring expenses (5.6) (16.2)
- ------------------------------------------------------ ------ ------
Income from operations 8.9 -
Interest expense (18.2) (25.5)
Interest income 0.3 0.3
Other income (expense), net (0.3) (0.1)
- ------------------------------------------------------ ------ ------
Income (loss) from continuing operations before
income taxes $ (9.3) $(25.3)
- ------------------------------------------------------ ====== ======
NOTE 5 Under the provisions of Washington State environmental laws, the
Washington State Department of Ecology ("WDOE") has notified the Company that it
is one of many companies named as a Potentially Liable Party ("PLP") for the
Pasco Sanitary Landfill site, Pasco, Washington ("the Site"). Although the
clean-up costs are believed to be substantial, accurate estimates will not be
available until the environmental studies have been completed at the Site.
However, based upon the total documented volume of waste sent to the Site, the
Company's waste volume compared to that total waste volume should result in the
Company being classified as a "de minimis" PLP. In July 1992, the Company and
thirty-eight other PLPs entered into an Administrative Agreed Order with WDOE to
perform a Phase I Remedial Investigation at the Site. In October 1994, WDOE
issued an administrative Unilateral Enforcement Order to all PLPs to complete a
Phase II Remedial Investigation and Feasibility Study ("RI/FS") under the Scope
of Work established by WDOE. Based on results of the RI/FS, WDOE has issued a
new administrative Unilateral Enforcement Order to all PLPs to perform several
years of cleanup action at the Site. The Company is unable to determine, at
this time, the level of cleanup demands that may be ultimately placed on it.
Management believes that, given the number of PLPs named with respect to the
Site and their financial condition, the Company's potential response costs
associated with the Site will not have a material adverse effect on consolidated
financial condition or operating results.
In July 2001, the Company's former Federal Cartridge Company subsidiary
("Federal") received notice from the Region 5 Office of the United States
Environmental Protection Agency ("EPA") that it intended to file an
administrative proceeding for civil penalties totaling $255,400 in connection
with alleged violations of applicable statutes, rules, and regulations or permit
conditions at Federal's Anoka, Minnesota, ammunition manufacturing site. These
include the allegedly (i) unpermitted treatment of hazardous wastes, (ii)
Page 8
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improper management of hazardous wastes, (iii) permit violations, and (iv)
improper training of certain responsible personnel. Blount retained the
liability for this notice under the terms of the sale of SEG including Federal
to Alliant Techsystems, Inc. ("ATK").
The Company plans to correct certain cited activities and pay the fines
associated with these activities. The Company is also discussing potential
indemnification with a prior owner for certain portions of the activities cited.
On March 22, 2002, EPA served an administrative complaint and compliance order
on Federal. The complaint proposes civil penalties in the amount of $258,593.
Federal has answered the complaint and has asked that the matter be submitted to
an alternate dispute resolution process ("ADR"). The administrative litigation
process may include settlement discussions, ADR or an evidentiary hearing.
Until this process is completed, the Company cannot be certain as to the final
outcome of this matter; nonetheless, at the current time the Company does not
believe payment of the civil penalties sought by the EPA and the costs to
correct the alleged violations will have a materially adverse effect on its
consolidated financial condition or operating results.
The Company is a defendant in a number of product liability lawsuits, some of
which seek significant or unspecified damages, involving serious personal
injuries for which there are retentions or deductible amounts under the
Company's insurance policies. In addition, the Company is a party to a number of
other suits arising out of the conduct of its business. While there can be no
assurance as to their ultimate outcome, management does not believe these
lawsuits will have a material adverse effect on consolidated financial condition
or operating results.
NOTE 6 During the three months ended March 31, 2002, tax payments of $3.4
million were made, while in the three months ended March 31, 2001, tax payments
of $2.0 million were made. The Company has settled its issues with the Internal
Revenue Service through the 1997 fiscal year with no material adverse effect.
The periods from fiscal 1998 through 2001 are still open for review. Interest
paid during the three months ended March 31, 2002 and 2001 was $24.3 million and
$35.1 million, respectively.
The Company's "Other Income (Expense)" includes the gains and losses on disposed
assets and realized gains and losses on securities held in two rabbi trusts (see
Note 6 of Notes to Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 for information
regarding these two trusts). In the first quarter of this year, realized losses
on securities in these trusts were $0.1 million in comparison to $0.0 million in
realized gains in the first quarter last year. In the first quarter of 2002,
the Company sold a storage warehouse in Montgomery, Alabama that resulted in a
pre-tax gain of $0.2 million and recorded an anticipated loss on sale of
corporate assets of $0.4 million in conjunction with the closure of the
corporate headquarters.
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NOTE 7 For the three months ended March 31, 2002 and 2001, net loss and shares
used in the earnings per share ("EPS") computations were the following amounts:
Three Months
Ended March 31,
----------------------
2002 2001
- ------------------------------------------------------ ---------- ----------
Net loss (in millions) $ (6.5) $ (13.8)
- ------------------------------------------------------ ========== ==========
Shares:
Basic EPS - weighted average
common shares outstanding (0.21) (0.45)
Dilutive effect of stock options
- ------------------------------------------------------ ---------- ----------
Diluted EPS $ (0.21) $ (0.45)
- ------------------------------------------------------ ========== ==========
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NOTE 8 The following consolidating financial information sets forth condensed
consolidating statements of operations, and the balance sheets and cash flows of
Blount International, Inc., Blount, Inc., the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries (in millions).
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
For The Three Months
Ended March 31, 2002
<table>
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
<s> <c> <c> <c> <c> <c> <c>
Sales $ 81.5 $ 27.2 $ 41.5 $ (43.6) $ 106.6
Cost of sales 60.3 20.4 32.3 (43.3) 69.7
------- ------- ------- ------- -------
Gross profit 21.2 6.8 9.2 (0.3) 36.9
Selling, general and administrative expenses $ 0.2 12.8 4.3 5.1 22.4
Restructuring expenses 5.6 5.6
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.2) 2.8 2.5 4.1 (0.3) 8.9
Interest expense (5.3) (17.3) (0.2) (0.1) 4.7 (18.2)
Interest income 4.9 0.1 (4.7) 0.3
Other income (expense), net (0.1) (0.2) (0.3)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income taxes (5.5) (9.7) 2.3 3.9 (0.3) (9.3)
Provision (benefit) for income taxes (1.8) (3.9) 0.9 1.8 (3.0)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before extraordinary loss (3.7) (5.8) 1.4 2.1 (0.3) (6.3)
Extraordinary loss (0.2) (0.2)
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (3.7) (6.0) 1.4 2.1 (0.3) (6.5)
Equity in earnings (losses) of
affiliated companies, net (2.8) 3.2 (0.4)
------- ------- ------- ------- ------- -------
Net income (loss) $ (6.5) $ (2.8) $ 1.4 $ 2.1 $ (0.7) $ (6.5)
======= ======= ======= ======= ======= =======
</table>
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<page>
For The Three Months
Ended March 31, 2001
<table>
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS
- -----------------------
<s> <c> <c> <c> <c> <c> <c>
Sales $ 76.4 $ 33.1 $ 42.3 $ (32.7) $ 119.1
Cost of sales 53.6 24.1 33.1 (31.9) 78.9
------- ------- ------- ------- -------
Gross profit 22.8 9.0 9.2 (0.8) 40.2
Selling, general and administrative expenses $ 0.2 12.0 6.6 5.2 24.0
Restructuring expenses 16.2 16.2
------- ------- ------- ------- ------- -------
Income (loss) from operations (0.2) (5.4) 2.4 4.0 (0.8)
Interest expense (8.9) (25.2) (0.5) (0.1) 9.2 (25.5)
Interest income 9.3 0.1 0.1 (9.2) 0.3
Other income (expense), net (0.1) (0.1)
------- ------- ------- ------- ------- -------
Income (loss) before income taxes (9.1) (21.3) 2.0 3.9 (0.8) (25.3)
Provision (benefit) for income taxes (4.0) (9.5) 0.8 1.6 (11.1)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations (5.1) (11.8) 1.2 2.3 (0.8) (14.2)
Discontinued operations:
Net income from operations 0.4 0.4
------- ------- ------- ------- ------- -------
Income (loss) before earnings (losses)
of affiliated companies (5.1) (11.4) 1.2 2.3 (0.8) (13.8)
Equity in earnings (losses) of
affiliated companies, net (8.7) 2.7 6.0
------- ------- ------- ------- ------- -------
Net income (loss) $ (13.8) $ (8.7) $ 1.2 $ 2.3 $ 5.2 $ (13.8)
======= ======= ======= ======= ======= =======
</table>
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<page>
March 31, 2002
<table>
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
<s> <c> <c> <c> <c> <c> <c>
ASSETS
Current assets:
Cash and cash equivalents $ 14.7 $ (0.9) $ 3.5 $ 17.3
Accounts receivable, net 26.9 21.0 17.5 65.4
Intercompany receivables 289.1 25.4 5.3 $(319.8)
Inventories 30.3 23.5 17.3 71.1
Deferred income taxes 30.4 30.4
Other current assets 5.6 0.3 1.3 7.2
------- ------- ------- ------- -------
Total current assets 397.0 69.3 44.9 (319.8) 191.4
Investments in affiliated companies $ (20.4) 191.8 0.2 (171.6)
Property, plant and equipment, net 43.4 26.7 27.2 97.3
Cost in excess of net assets of acquired
businesses, net 30.2 40.2 6.5 76.9
Intercompany notes receivable 5.0 (5.0)
Other assets 62.8 0.1 2.8 65.7
------- ------- ------- ------- ------- -------
Total Assets $ (20.4) $ 725.2 $ 136.3 $ 86.6 $(496.4) $ 431.3
======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 3.4 $ 5.0 $ 8.4
Accounts payable $ 0.1 9.3 $ 4.7 4.4 18.5
Intercompany payables 319.8 $(319.8)
Accrued expenses 69.8 6.6 6.5 82.9
------- ------- ------- ------- ------- -------
Total current liabilities 319.9 82.5 11.3 15.9 (319.8) 109.8
Long-term debt, exclusive of current maturities 16.2 615.6 631.8
Intercompany notes payable 5.0 (5.0)
Deferred income taxes, exclusive of
current portion 0.9 1.9 2.8
Other liabilities 41.6 1.1 0.7 43.4
------- ------- ------- ------- ------- -------
Total liabilities 336.1 745.6 12.4 18.5 (324.8) 787.8
Stockholders' equity (deficit) (356.5) (20.4) 123.9 68.1 (171.6) (356.5)
------- ------- ------- ------- ------- -------
Total Liabilities and
Stockholders' Equity (Deficit) $ (20.4) $ 725.2 $ 136.3 $ 86.6 $(496.4) $ 431.3
======= ======= ======= ======= ======= =======
</table>
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<page>
December 31, 2001
<table>
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
BALANCE SHEET
- -------------
<s> <c> <c> <c> <c> <c> <c>
ASSETS
Current assets:
Cash and cash equivalents $ 43.9 $ (1.1) $ 4.8 $ 47.6
Accounts receivable, net 26.3 14.7 16.3 57.3
Intercompany receivables 282.2 28.6 6.0 $(316.8)
Inventories 29.1 22.7 16.3 68.1
Deferred income taxes 22.9 22.9
Other current assets 6.5 0.4 1.3 8.2
------- ------- ------- ------- -------
Total current assets 410.9 65.3 44.7 (316.8) 204.1
Investments in affiliated companies $ (17.5) 186.9 0.2 (169.6)
Property, plant and equipment, net 42.0 27.4 26.8 96.2
Cost in excess of net assets of acquired
businesses, net 30.2 40.2 6.5 76.9
Intercompany notes receivable 5.0 (5.0)
Other assets 64.0 0.5 3.1 67.6
------- ------- ------- ------- ------- -------
Total Assets $ (17.5) $ 734.0 $ 133.4 $ 86.3 $(491.4) $ 444.8
======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities
of long-term debt $ 3.4 $ 5.1 $ 8.5
Accounts payable $ 0.1 10.3 $ 4.9 4.4 19.7
Intercompany payables 316.8 $(316.8)
Accrued expenses 78.5 5.9 8.8 93.2
------- ------- ------- ------- ------- -------
Total current liabilities 316.9 92.2 10.8 18.3 (316.8) 121.4
Long-term debt, exclusive of current maturities 15.5 617.0 632.5
Intercompany notes payable 5.0 (5.0)
Deferred income taxes, exclusive of
current portion 0.9 1.9 2.8
Other liabilities 36.4 0.9 0.7 38.0
------- ------- ------- ------- ------- -------
Total liabilities 332.4 751.5 11.7 20.9 (321.8) 794.7
Stockholders' equity (deficit) (349.9) (17.5) 121.7 65.4 (169.6) (349.9)
------- ------- ------- ------- ------- -------
Total Liabilities and
Stockholders' Equity (Deficit) $ (17.5) $ 734.0 $ 133.4 $ 86.3 $(491.4) $ 444.8
======= ======= ======= ======= ======= =======
</table>
Page 14
<page>
For The Three Months
Ended March 31, 2002
<table>
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
<s> <c> <c> <c> <c> <c> <c>
Net cash provided by (used in) continuing
operations $ (2.9) $ (20.0) $ 0.8 $ 3.7 $ (3.4) $ (21.8)
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment 0.7 0.7
Proceeds (expenses) from sale of discontinued
operations (2.5) (2.5)
Purchases of property, plant and equipment (3.3) (0.2) (1.5) (5.0)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities (5.1) (0.2) (1.5) (6.8)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Reduction of long-term debt (1.5) (1.5)
Dividends paid (3.4) 3.4
Advances from (to) affiliated companies 2.9 (2.5) (0.4)
Other (0.2) (0.2)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities 2.9 (4.2) (0.4) (3.4) 3.4 (1.7)
------- ------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents (29.3) 0.2 (1.2) (30.3)
Cash and cash equivalents at beginning of period 44.0 (1.1) 4.7 47.6
------- ------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 0.0 $ 14.7 $ (0.9) $ 3.5 $ 0.0 $ 17.3
======= ======= ======= ======= ======= =======
</table>
Page 15
<page>
For The Three Months
Ended March 31, 2001
<table>
Blount Non-
International, Blount, Guarantor Guarantor
Inc. Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------- ------------ ------------ ------------ ------------
STATEMENT OF CASH FLOWS
- -----------------------
<s> <c> <c> <c> <c> <c> <c>
Net cash provided by (used in) continuing
operations $ (4.8) $ (37.8) $ 17.5 $ (0.8) $ (1.5) $ (27.4)
Net cash provided by (used in) discontinued
operations (3.1) (14.5) (17.6)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities (4.8) (40.9) 3.0 (0.8) (1.5) (45.0)
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment
Purchases of property, plant and equipment (0.6) (0.3) (0.9) (1.8)
Acquisitions of businesses (1.3) (1.3)
------- ------- ------- ------- ------- -------
Net cash used in continuing operations (1.9) (0.3) (0.9) (3.1)
Net cash used in discontinued operations (0.6) (0.7) (1.3)
------- ------- ------- ------- ------- -------
Net cash used in investing activities (2.5) (1.0) (0.9) (4.4)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Net increase (reduction) in short-term
borrowings 2.2 2.2
Issuance of long-term debt 13.0 28.4 41.4
Reduction of long-term debt (0.9) (0.9)
Dividends paid (1.5) 1.5
Capital contributions 7.0 20.0 (20.0) 7.0
Advances from (to) affiliated companies (15.2) (4.2) (0.6) 20.0
Other (1.9) (1.9)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities 4.8 41.4 (0.6) 0.7 1.5 47.8
------- ------- ------- ------- ------- -------
Net decrease in cash and cash equivalents (2.0) 1.4 (1.0) (1.6)
Cash and cash equivalents at beginning of period 2.0 (0.8) 3.6 4.8
------- ------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 0.0 $ 0.0 $ 0.6 $ 2.6 $ 0.0 $ 3.2
======= ======= ======= ======= ======= =======
</table>
NOTE 9 In September 2000, the Company purchased the assets of Fabtek, Inc., a
manufacturer of timber harvesting equipment. In October 2000, the Company
purchased the assets of Windsor Forestry Tools Inc., a manufacturer of cutting
chain and guide bars for chain saws and timber harvesting equipment from Snap-on
Incorporated. In October 2000, the Company purchased all the outstanding stock
of Estate Cartridge, Inc., a manufacturer of sporting shotshell ammunition. The
aggregate purchase price of these acquisitions was $41.3 million and the
combined sales and operating loss for the last twelve months prior to
acquisition were $47.1 million and $0.6 million, respectively. Assuming these
transactions were made at January 1, 2000, the consolidated pro forma results
for 2000 would not be materially different from reported results.
Page 16
<page>
On December 7, 2001, the Company sold its Sporting Equipment Group ("SEG") to
Alliant Techsystems, Inc. ("ATK"). SEG was comprised of the then wholly-owned
subsidiaries of Federal Cartridge Company, Estate Cartridge, Inc., Simmons
Outdoor Corporation, and Ammunition Accessories, Inc. The latter was formed on
December 4, 2001 to facilitate the sale of SEG. The Company contributed certain
assets and liabilities of its then Sporting Equipment Division to Ammunition
Accessories, Inc. in exchange for all the authorized stock of Ammunition
Accessories, Inc. In exchange for the shares of these four subsidiaries, the
Company received approximately 3 million shares of ATK stock and $10,000 in cash
for the sale of SEG. The Company subsequently sold the ATK stock and received
gross proceeds of $236.7 million. Net proceeds of approximately $170.5 million
are anticipated after the payment of $10.1 million in underwriting fees to
Lehman Brothers, Inc. and CS First Boston, of which ATK reimbursed $5.0 million,
$36.1 million in other transaction related costs and income taxes and the
establishment of $25.0 million escrow amount, which is included in Other Assets,
as required by the Stock Purchase Agreement between the Company and ATK. As of
March 31, 2002, the outstanding and unpaid transaction fees included a purchase
price adjustment owed to ATK based upon the net book value of assets of SEG as
of December 7, 2001, as required by the Stock Purchase Agreement. This final
purchase price adjustment is expected to be determined by a review of an
independent accounting firm. The results of operations for SEG have been
reclassified to discontinued operations for 2001 as presented in the condensed
consolidated statement of operations. The condensed consolidated balance sheet
for the quarter ended March 31, 2002 reflects the sale of SEG on December 7,
2001.
NOTE 10 On January 31, 2001, the Company amended the terms of its credit
facilities related to $400 million in term loans. The amendment was entered
into, in part, to avoid a possible default under the covenants for the leverage
and interest coverage ratios of the credit facilities. The amendment eased the
financial covenants through March 31, 2002, increased the interest rate on
outstanding amounts under the credit facilities until more favorable financial
ratios are achieved, and required an amendment fee. The amendment also required
an infusion of $20 million in the form of equity capital or mezzanine financing.
On March 2, 2001, an affiliate of Lehman Brothers, Inc., the Company's principal
shareholder, invested $20 million in the Company in the form of a convertible
preferred equivalent security, together with warrants to acquire 1,000,000
shares of Blount common stock (or approximately 3% of the outstanding shares of
common stock of the Company) that are exercisable immediately at a price of
$0.01 a share. The security can be converted into convertible preferred stock
at the option of the holder as a result of the Company's stockholders passing an
amendment to the Certificate of Incorporation authorizing the issuance of
preferred stock at the Annual Meeting of Stockholders held on April 19, 2001.
The Company has recorded the fair value of the warrants at $7 million as a
credit to additional paid-in capital and a debt discount to the $20 million
security.
On December 7, 2001, the Company amended the terms of its credit agreement to
incorporate the sale of SEG to ATK. The amendment addressed, among other
things, the SEG sale, revisions to the consolidated leverage and interest
coverage ratios, a reduction in the revolving credit facility to $75.0 million,
and certain prepayment and amendment fees. The agreement also cured any event
of default under the credit agreement that had been communicated to the lenders
on October 31, 2001.
During 2001, the Company would not have been in compliance with certain of its
debt covenants except for the fact that, in connection with the sale of SEG, the
Company and its lenders amended the covenants; as a result, the Company was in
compliance with all debt covenants as of and for the year ended December 31,
Page 17
<page>
2001 and the first quarter ended March 31, 2002. While there can be no
assurance, management believes the Company will comply with all debt covenants
during 2002. Should the Company not comply with the covenants during 2002,
additional significant actions will be required. These actions may include,
among others, attempting to renegotiate its debt facilities, sales of assets,
additional restructurings and reductions in capital expenditures.
NOTE 11 The Company adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," effective January 1, 2002. The provisions of SFAS No. 142
prohibit the amortization of goodwill and indefinite-lived intangible assets,
require that goodwill and indefinite-lived intangible assets be tested at least
annually for impairment, require reporting units be identified for the purpose
of assessing potential future impairments of goodwill, and remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
The Company expects to complete the transitional impairment test for goodwill by
the end of the second quarter. Accordingly, the Company has not yet determined
what effect this impairment test will have on the Company's earnings and
financial position. Any impairment loss resulting from the transitional
impairment test for goodwill will be reflected as a cumulative effect of a
change in accounting principle. As a result of the non-amortization provisions
of SFAS No. 142, the Company will no longer record approximately $3.1 million of
annual amortization relating to goodwill and indefinite-lived intangibles as
adjusted for the reclassifications just mentioned. The gross carrying value of
goodwill at adoption was $111.6 million and accumulated amortization was $34.7
million. The $76.9 million of unamortized goodwill consists of $28.0 million
within the Industrial and Power Equipment segment and $48.9 million in the
Outdoor Products segment. The following table presents prior year earnings and
earnings per share as if the non-amortization provisions of SFAS No. 142 had
been applied in the prior year:
Three Months
Ended
(Amounts in millions, except per share data) March 31, 2001
- ---------------------------------------------------------------- --------------
Net income:
Reported net income from continuing operations $ (14.2)
Goodwill amortization (0.7)
- ---------------------------------------------------------------- --------
Adjusted net income from continuing operations $ (13.5)
- ---------------------------------------------------------------- ========
Basic earnings per share from continuing operations:
Reported basic earnings per share $ (0.46)
Goodwill amortization (0.02)
- ---------------------------------------------------------------- --------
Adjusted basic earnings per share from continuing operations $ (0.44)
- ---------------------------------------------------------------- ========
Diluted earnings per share from continuing operations:
Reported diluted earnings per share $ (0.46)
Goodwill amortization (0.02)
- ---------------------------------------------------------------- --------
Adjusted diluted earnings per share from continuing operations $ (0.44)
- ---------------------------------------------------------------- ========
Page 18
<page>
Upon adoption of SFAS 142, the gross carrying value of intangible assets was
$0.9 million and was fully amortized.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, and/or normal use of the asset.
The Company is required and plans to adopt the provisions of SFAS No. 143
January 1, 2003. Upon initial application of the provisions of SFAS No. 143,
entities are required to recognize a liability for any existing asset retirement
obligations adjusted for cumulative accretion to the date of adoption of this
Statement, an asset retirement cost capitalized as an increase to the carrying
amount of the associated long-lived asset, and accumulated deprecation on that
capitalized cost. The cumulative effect, if any, of initially applying this
Statement will be recognized as a change in accounting principle. The Company
has not yet assessed the impact of this statement on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for assets to be disposed
of and broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of this Statement, which were adopted by
the Company January 1, 2002, have not had a material impact on its financial
condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement, which updates, clarifies and simplifies existing accounting
pronouncements, addresses the reporting of debt extinguishments and accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Company is required and plans to adopt the
provisions of SFAS No. 145 by January 1, 2003. The Company has not yet assessed
the impact of this Statement on its financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Results
Sales for the first quarter ended March 31, 2002 were $106.6 million compared to
$119.1 million for the same period last year. Net loss in the first quarter of
2002 was $2.5 million ($0.08 per share) before accounting for $4.0 million
($0.13 per share) in after-tax restructuring cots. These costs were principally
severance costs related to the closure of the Company's corporate office
building and staff restructuring. This compares to a net loss from continuing
operations of $5.1 million ($0.16 per share) in 2001 before accounting for
after-tax restructuring costs of $9.1 million ($0.30 per share) that were
related to a plant closure, a reduction in headcount within the Company, and the
modification of certain employee benefit plans. The 2001 results include $0.7
million ($0.02 per share) of goodwill amortization that was not incurred in 2002
due to the Company's adoption of SFAS 142, "Goodwill and Other Intangible
Assets," as of January 1, 2002. The decline in sales revenue from last year is
due to weaker demand for chain products and lawn mowers. The decline in net
loss from continuing operations exclusive of extraordinary loss and
restructuring costs is due to improved operating results within the Industrial
and Power Equipment segment and lower interest expense due to lower debt levels,
partially offset by lower operating income within the Outdoor Products segment
Page 19
<page>
and higher corporate office expenses due in part to $0.6 million in costs
related to a curtailed refinancing proposal. Total selling, general and
administrative costs were $22.4 million in the first quarter of 2002 compared to
$24.0 million in 2001, excluding the restructuring costs. Interest expense
declined to $18.2 million in 2002 compared to $25.5 million last year, primarily
due to reduced debt levels. The Company's effective tax rate in the first
quarter of 2002 was 32.2% compared to 43.9% last year. The decrease in tax rate
is the result of a higher ratio of non-deductible expenses to pre-tax loss in
2002 compared to such ratio in 2001.
Sales for the Outdoor Products segment for the first quarter of 2002 were $80.1
million compared to $91.2 million for the same period in 2001. Operating income
declined to $16.2 million in 2002 compared to $19.5 million in 2001. The
results are due to a decrease in chain saw components and lawn mower unit sales,
as indicated in the following table:
Three Months
Ended March 31,
--------------------------------
% Increase
(Decrease)
2002 2001 in 2002
- ------------------------------------------ ------ ------ ----------
Chain saw components $ 50.6 $ 61.3 (17.5)%
Lawn mowers and accessories 18.0 18.9 (4.8)
Other 11.5 11.0 4.5
- ------------------------------------------ ------ ------
Total segment sales $ 80.1 $ 91.2 (12.2)%
- ------------------------------------------ ====== ======
The decrease in chain saw components is in part due to weaker demand from
original equipment manufacturers (OEMs) resulting from a reduction in
inventories from year-ago levels and selective competitive price discounting in
response to the continuing strength in the United States dollar. Lawn mower
unit sales continue to be impacted by economic and weather factors, although
replacement part sales grew modestly in the quarter. Other sales increased
primarily through the successful introduction of a new gas saw for our
Industrial Cutting Systems ("ICS") business.
The overall reduced sales level was the primary reason for the reduced segment
operating income. The reduced sales were partially offset by the favorable
impact of $0.4 million from the adoption of SFAS 142 and reduced selling,
general and administrative expenses of $0.9 million.
The Company's Industrial and Power Equipment segment is a cyclical, capital
goods business whose results are closely linked to the strength of the forestry
industry in general, particularly in the Company's most important market (the
Southeastern United States). Throughout 2001 and in 2002, the forestry industry
continued to operate in a cyclical downturn environment which resulted in weak
demand for new equipment sales. Sales of gear components and rotation bearings
also reflect a continuing weakness in demand, particularly in the utility and
construction markets, that the segment serves. Sales by the segment's principal
product groups were as follows (in millions):
Page 20
<page>
Three Months
Ended March 31,
--------------------------------
% Decrease
2002 2001 in 2002
- ------------------------------------------ ------ ------ ----------
Timber harvesting and loading equipment $ 22.5 $ 22.9 (1.7)%
Gear components and rotation bearings 4.0 5.0 (20.0)
- ------------------------------------------ ------ ------
Total segment sales $ 26.5 $ 27.9 (5.0)%
- ------------------------------------------ ====== ======
The segment's operating income in the first quarter of 2002 was $0.3 million
compared to a loss of $1.6 million in the first quarter of 2001. The
improvement in year-over-year profitability reflects the actions implemented in
2001 to reduce costs. These actions included the permanent closure of a
production facility and a significant reduction in segment headcount. The 2001
first quarter segment's operating income included $0.3 million of goodwill
amortization.
The Company's total backlog decreased to $45.4 million at March 31, 2002 from
$48.8 million at December 31, 2001 and from $63.3 million at March 31, 2001 as
follows (in millions):
Backlog
------------------------------------------
March 31, December 31, March 31,
2002 2001 2001
- ------------------------------------ ------------- ------------ -------------
Outdoor Products $ 30.3 $ 36.0 $ 47.7
Industrial and Power Equipment 15.1 12.9 15.6
- ------------------------------------ ------ ------ ------
$ 45.4 $ 48.9 $ 63.3
- ------------------------------------ ====== ====== ======
The backlog at Outdoor Products is lower than March 31, 2001 which included the
carryover effect of storm activity in Europe. A more normal comparison of
backlog in this segment would be March 1999 when backlog stood at $24.0 million.
Net income from discontinued operations in the first quarter of 2001 was $0.4
million. These were the results of the Company's Sporting Equipment segment
that was sold in 2001. Corresponding sales for this segment were $55.5 million.
Financial Condition, Liquidity and Capital Resources
On August 19, 1999, Blount International, Inc. merged with Red Dog Acquisition,
Corp., a wholly-owned subsidiary of Lehman Brothers Partners II, L.P. The
merger was completed pursuant to an Agreement and Plan of Merger and
Recapitalization dated as of April 19, 1999. At March 31, 2002, as a result of
the merger and recapitalization transactions, the Company had significant
amounts of debt, with interest payments on outstanding notes and interest and
principal payments under a secured credit agreement representing significant
obligations for the Company. The notes require semi-annual interest payments
and the term loan facilities under the new credit facilities require payments of
principal of $3.4 million annually through 2004 and $136.0 million in 2005.
Interest on the term loan facilities and amounts outstanding under the revolving
credit facility are payable in arrears according to varying interest periods.
The Company's remaining liquidity needs relate to working capital needs, capital
expenditures, and potential acquisitions.
Page 21
<page>
The Company intends to fund working capital, capital expenditures, debt service
requirements, and the payment of transaction expenses related to the sale of the
Sporting Equipment Group through cash flows generated from operations, the
revolving credit facility and cash on hand. At March 31, 2002, the Company had
no outstanding borrowings under its revolving credit facility which has $75.0
million in availability. The Company also had $17.3 million in cash on hand at
the end of the first quarter which will be utilized primarily for the payment of
SEG sale expenses. Payment of certain of these expenses will be made after the
expected completion of a review of the SEG balance sheet by an independent
accounting firm. Letters of credit issued under the revolving credit facility
that reduce the amount available under the facility totaled $11.3 million at
March 31, 2002. The revolving credit facility matures August 19, 2004.
Certain customers of the Company's Outdoor Products and Industrial and Power
Equipment segments finance their purchases through third party finance
companies. Under the terms of these financing arrangements, the Company may be
required to repurchase certain equipment from the finance companies. The
aggregate repurchase amount included in the agreements outstanding as of March
31, 2002 is $3.2 million. These arrangements have not had a material adverse
effect on the Company's operating results in the past. The Company does not
expect to incur any material charges related to these agreements in future
periods, since any repurchase of equipment will likely be resold.
The impact on earnings of the continued downturn in the forestry equipment
markets raised questions as to whether the Company would meet the covenants for
leverage and interest coverage ratios of the Credit Agreement for December 31,
2000 and for subsequent quarters. As a result, the Company sought and received
(see Note 12 of Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000) from
its lenders an amendment to its credit agreement. In connection with the
amendment, the Company's principal shareholder, through an affiliate of Lehman
Brothers Merchant Banking Partners II, L.P., invested $20 million in the form of
a preferred equivalent security on March 2, 2001 (see Note 10 of Notes to
Consolidated Financial Statements).
On October 30, 2001, the Company notified the administrative agent for the
Company's $500 million senior credit facility that it failed to meet certain
financial covenants for the third quarter. Failure to meet these covenants is
considered an event of default under the terms of the credit agreement. The
Company entered into an agreement with its creditors through January 31, 2002
that allowed the Company to complete the sale of its Sporting Equipment Group
and during the agreement term the lenders agreed to forbear from exercising
their rights and remedies arising from the event of default. The Company
completed the sale of SEG on December 7, 2001. In conjunction with this sale,
the Company and its lenders amended the terms of the senior credit facility.
Among other things, the amendment adjusted the financial coverage ratio
covenants to reflect the sale of SEG and cured any event of default under the
credit agreement that had been communicated to the lenders on October 30, 2001.
As of March 31, 2002, the Company is in compliance with all covenants or other
requirements set forth in its credit agreement or indentures. Further, the
Company does not have any rating triggers that would accelerate repayment of
outstanding debt.
Management believes that cash generated from operations, together with amounts
available under the revolving credit facility and amounts available following
the sale of the Sporting Equipment Group, will be sufficient to meet the
Company's working capital, capital expenditure and other cash needs in the
foreseeable future. There can be no assurance, however, that this will be the
case. The Company may also consider other options available to it in connection
with future liquidity needs.
Page 22
<page>
The Company has senior notes outstanding in the principal amount of $150 million
which mature in 2005. The Company also has senior subordinated notes
outstanding in the principal amount of $325 million which mature in 2009 and
senior term loans outstanding in the principal amount of $144.7 million which
mature at various dates through 2005. See Note 3 of Notes to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001 for the terms and conditions of the senior
notes, senior subordinated notes, and senior term loans.
Cash balances at March 31, 2002 were $17.3 million compared to $47.6 million on
December 31, 2001. Cash used in operating activities for the first three months
of 2002 was $21.8 million in comparison to $45.0 million for the same period
last year. The decrease in cash used in the first quarter is due in part to the
sale of the Sporting Equipment Group in December 2001. The Sporting Equipment
Group used $17.6 million of cash in the first quarter of 2001. Additionally,
the lower debt levels in the first quarter of 2002, due to the reduction in debt
from the proceeds of the SEG, resulted in $10.8 million in lower cash interest
payments from the prior year quarter. These decreases in cash usage were
partially offset by lower continuing operations segment income of $1.4 million.
Working capital excluding cash and equivalents increased to $64.3 million in the
first quarter from $35.1 million at December 31, 2001. The increase in working
capital is due to a $8.6 million decrease in interest payables, an increase in
deferred taxes of $7.5 million, the payment of SEG transaction expenses of $2.5
million, increased inventory of $3.0 million, and higher accounts receivable of
$8.1 million. Lower than anticipated demand within the Outdoor Products segment
was the primary cause of the inventory increase.
Accounts receivable at March 31, 2002 and December 31, 2001 and sales by segment
for the first quarter of 2002 compared to the fourth quarter of 2001 were as
follows (in millions):
March 31, December 31, Increase
2002 2001 (Decrease)
- ------------------------------------ ------------- ------------ ------------
Accounts Receivable:
Outdoor Products $ 49.4 $ 39.2 $ 10.2
Industrial and Power Equipment 14.5 16.6 (2.1)
- ------------------------------------ ------ ------ ------
Total segment receivables $ 63.9 $ 55.8 $ 8.1
- ------------------------------------ ====== ====== ======
Three Months Ended
March 31, December 31, Increase
2002 2001 (Decrease)
- ------------------------------------ ------------- ------------ ------------
Sales:
Outdoor Products $ 80.1 $ 85.7 $ (5.6)
Industrial and Power Equipment 26.5 33.3 (6.8)
- ------------------------------------ ------ ------ ------
Total segment sales $106.6 $119.0 $(12.4)
- ------------------------------------ ====== ====== ======
The Company's Outdoor Product's segment includes Oregon Cutting Systems,
Frederick Manufacturing, and Dixon Industries. Seasonal promotions resulting in
higher sales of Frederick Manufacturing products led to the increase in
receivables during the quarter despite a decline in overall segment sales.
Page 23
<page>
Net cash used for investing activities for the first three months is $6.8
million. Included in this amount is $2.5 million related to the payment of SEG
transaction expenses. Purchases for property, plant and equipment in the
current year are $5.0 million. Included in this amount was the purchase of
certain equipment from a company that was exiting one of its businesses. In the
first quarter of this year, the Company generated $0.7 million from the sale of
assets, including the sale of a storage warehouse.
Cash used in financing activities for the first three months of 2002 was $1.7
million, which was primarily due to a scheduled debt repayment. The Company
expects the cash flows from operations, which historically are strongest in the
fourth quarter, and amounts available under its revolving credit agreements will
be sufficient to cover any additional increases in working capital until market
conditions improve in the Industrial and Power Equipment segment.
The Company is substantially leveraged which may adversely affect its
operations.
This substantial leverage could have important consequences for the Company,
including the following:
1. the ability to obtain additional financing for working capital, capital
expenditures or other purposes may be impaired or any such financing may not be
available on favorable terms;
2. a substantial portion of cash flows available from operations are required
to be dedicated to the payment of principal and interest expense, which will
reduce the funds that would otherwise be available for operations and future
business opportunities;
3. a substantial decrease in net income and cash flows or an increase in
expenses may make it difficult to meet debt service requirements or force the
Company to modify operations; and
4. substantial leverage may make the Company more vulnerable to economic
downturns and competitive pressure.
Forward Looking Statements
Forward-looking statements in this release, including without limitation the
Company's "expectations," "beliefs," "indications," "estimates," and their
variants, as defined by the Private Securities Litigation Reform Law of 1995,
involve certain risks and actual results subsequent to the date of this
announcement may differ materially.
Page 24
<page>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLOUNT INTERNATIONAL, INC.
- ----------------------------------
Registrant
Date: May 14, 2002 /s/ Rodney W. Blankenship
---------------------------------------
Rodney W. Blankenship
Senior Vice President and
Chief Financial Officer
Page 25