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 September 30, 1998
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 1-7002
BLOUNT, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-0593908
(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 September 30, 1998
--------------------- ------------------
Common Stock $.01 Par Value 1,000 shares
Page 1
BLOUNT, INC. AND SUBSIDIARIES
INDEX
Page No.
------------
Part I. Financial Information
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income -
three months and nine months ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Changes
in Stockholder's Equity - three months and
nine months ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Management's Analysis of Results of Operations 10
Page 2
BLOUNT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents, including short-term
investments of $6,944 and $2,965 $ 9,574 $ 4,848
Accounts receivable, net of allowance for
doubtful accounts of $4,991 and $3,652 182,999 135,641
Inventories 127,923 132,852
Deferred income taxes 21,917 21,988
Other current assets 7,014 5,859
-------- --------
Total current assets 349,427 301,188
Property, plant and equipment, net of accumulated
depreciation of $204,240 and $188,274 184,368 188,506
Cost in excess of net assets of acquired businesses, net 115,687 116,371
Other assets 37,691 31,719
-------- --------
Total Assets $687,173 $637,784
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Notes payable and current maturities of
long-term debt $ 785 $ 1,464
Accounts payable 36,310 57,392
Accrued expenses 72,543 69,432
-------- --------
Total current liabilities 109,638 128,288
Long-term debt, exclusive of current maturities 161,689 138,837
Deferred income taxes, exclusive of current portion 15,199 15,177
Other liabilities 36,500 37,575
-------- --------
Total liabilities 323,026 319,877
-------- --------
Commitments and Contingent Liabilities
Stockholder's equity:
Common Stock: par value $.01 per share,
1,000 shares issued and outstanding - -
Capital in excess of par value of stock 27,365 27,365
Retained earnings 328,967 283,492
Accumulated other comprehensive income 7,815 7,050
-------- --------
Total stockholder's equity 364,147 317,907
-------- --------
Total Liabilities and Stockholder's Equity $687,173 $637,784
======== ========
The accompanying notes are an integral part of these statements.
Page 3
BLOUNT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
Sales $226,617 $182,106 $631,471 $512,696
Cost of sales 155,875 123,176 437,151 345,732
-------- -------- -------- --------
Gross profit 70,742 58,930 194,320 166,964
Selling, general and
administrative expenses 36,969 32,196 109,063 96,884
-------- -------- -------- --------
Income from operations 33,773 26,734 85,257 70,080
Interest expense (4,035) (2,203) (10,759) (6,663)
Interest income 893 746 1,729 1,845
Other income, net 71 103 273 358
-------- -------- -------- --------
Income before income taxes 30,702 25,380 76,500 65,620
Provision for income taxes 11,409 9,390 29,041 24,159
-------- -------- -------- --------
Income before extraordinary loss 19,293 15,990 47,459 41,461
Extraordinary loss on repurchase
of debt, net (1,984) (1,984)
-------- -------- -------- --------
Net income $ 17,309 $ 15,990 $ 45,475 $ 41,461
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
Page 4
BLOUNT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months
Ended September 30,
-----------------------
1998 1997
---------- ----------
(Unaudited)
Cash Flows From Operating Activities:
Net Income $ 45,475 $ 41,461
Extraordinary loss 1,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other
noncash charges 23,014 17,894
Deferred income taxes (182) 20
Loss (gain) on disposals of property, plant
and equipment 18 (656)
Changes in assets and liabilities, net of
effects of businesses acquired and sold:
Increase in accounts receivable (27,492) (11,329)
(Increase) decrease in inventories 6,353 (6,964)
(Increase) decrease in other assets (329) 1,799
Increase (decrease) in accounts payable (7,428) 7,358
Increase (decrease) in accrued expenses 3,966 (8,434)
Increase (decrease) in other liabilities (790) 2,019
---------- ----------
Net cash provided by operating activities 44,589 43,168
---------- ----------
Cash Flows From Investing Activities:
Proceeds from sales of property, plant
and equipment 155 906
Purchases of property, plant and equipment (14,912) (10,906)
Acquisitions of businesses (16,643) (19,227)
---------- ----------
Net cash used in investing activities (31,400) (29,227)
---------- ----------
Cash Flows From Financing Activities:
Net reduction in short-term borrowings (372) (389)
Issuance of long-term debt 149,391
Reduction of long-term debt (137,275) (6,416)
Decrease in restricted funds 402 716
Dividends paid (41,000)
Advances from (to) parent - net (20,609) 9,296
---------- ----------
Net cash used in financing activities (8,463) (37,793)
---------- ----------
Net increase (decrease) in cash and cash equivalents 4,726 (23,852)
Cash and cash equivalents at beginning of period 4,848 58,708
---------- ----------
Cash and cash equivalents at end of period $ 9,574 $ 34,856
========== ==========
The accompanying notes are an integral part of these statements.
Page 5
BLOUNT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDER'S EQUITY (Unaudited)
(In thousands)
Capital Accumulated Other
Common in Excess Retained Comprehensive
Stock of Par Earnings Income Total
------ --------- -------- ----------------- --------
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1998:
Balance, June 30, 1998 $ - $27,365 $311,658 $ 7,402 $346,425
Net income 17,309 17,309
Other comprehensive income (loss), net 413 413
--------
Comprehensive income 17,722
----- ------- -------- ------- --------
Balance, September 30, 1998 $ - $27,365 $328,967 $ 7,815 $364,147
===== ======= ======== ======= ========
Balance, December 31, 1997 $ - $27,365 $283,492 $ 7,050 $317,907
Net income 45,475 45,475
Other comprehensive income (loss), net 765 765
--------
Comprehensive income 46,240
----- ------- -------- ------- --------
Balance September 30, 1998 $ - $27,365 $328,967 $ 7,815 $364,147
===== ======= ======== ======= ========
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1997:
Balance, June 30, 1997 $ - $26,843 $268,013 $ 7,403 $302,259
Net income 15,990 15,990
Other comprehensive income (loss), net (191) (191)
--------
Comprehensive income 15,799
Dividends (19,000) (19,000)
----- ------- -------- ------- --------
Balance, September 30, 1997 $ - $26,843 $265,003 $ 7,212 $299,058
===== ======= ======== ======= ========
Balance, December 31, 1996 $ - $26,843 $264,542 $ 7,878 $299,263
Net income 41,461 41,461
Other comprehensive income (loss), net (666) (666)
--------
Comprehensive income 40,795
Dividends (41,000) (41,000)
----- ------- ------- ------- --------
Balance September 30, 1997 $ - $26,843 $265,003 $ 7,212 $299,058
===== ======= ======== ======= ========
The accompanying notes are an integral part of these statements.
Page 6
BLOUNT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 Blount, Inc. is a wholly-owned subsidiary of Blount International, Inc.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of Blount, Inc. and Subsidiaries ("the Company") contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position at September 30, 1998 and the results of
operations and cash flows for the periods ended September 30, 1998 and 1997.
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, 1997. The results of operations for the periods
ended September 30, 1998 and 1997 are not necessarily indicative of the results
to be expected for the twelve months ended December 31, 1998, due to the
seasonal nature of certain of the Company's operations.
Certain amounts in the prior year's financial statements and notes to
consolidated financial statements have been reclassified to conform with the
current year's presentation.
NOTE 2 Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Prior periods have been
reclassified to reflect the adoption of this standard. The adoption of SFAS No.
130 has no material impact on the Company's consolidated results of operations,
financial position or cash flows. Comprehensive income equals net income plus
other comprehensive income. Other comprehensive income refers to revenue,
expenses, gains and losses which are reflected in stockholders' equity but
excluded from net income. For the Company, the components of other
comprehensive income are principally foreign currency translation adjustments
and unrealized gains or losses on investments.
NOTE 3 Inventories consist of the following (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Finished goods $ 76,507 $ 78,984
Work in process 20,743 20,837
Raw materials and supplies 30,673 33,031
-------- --------
$127,923 $132,852
======== ========
NOTE 4 In June 1998, the Company issued senior notes ("the senior notes") with
a stated interest rate of 7% in the principal amount of $150 million maturing on
June 15, 2005. The senior notes are fully and unconditionally guaranteed by
Blount International, Inc. Approximately $8.3 million, reflecting the price
discount and the cost to extinguish an interest rate contract accounted for as a
hedge of future interest on the debt, will be amortized to expense over the life
of the senior notes. The senior notes are redeemable, in whole or in part, at
the option of the Company at any time. The debt indenture contains restrictions
on secured debt, sale and lease-back transactions, and the consolidation, merger
and sale of assets.
Page 7
In July 1998, the Company redeemed all its $68.8 million outstanding 9%
subordinated notes. The extraordinary loss, net of income taxes of $1.2
million, on redemption was approximately $2.0 million.
NOTE 5 Segment information is as follows (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Sales:
Outdoor Products $ 77,881 $ 81,291 $236,267 $240,403
Industrial and Power Equipment 54,644 61,462 177,916 167,986
Outdoor Sports 94,092 39,353 217,288 104,307
-------- -------- -------- --------
$226,617 $182,106 $631,471 $512,696
======== ======== ======== ========
Operating income:
Outdoor Products $ 17,431 $ 17,518 $ 50,595 $ 50,275
Industrial and Power Equipment 5,570 8,842 24,070 21,579
Outdoor Sports 14,978 5,060 24,335 11,489
-------- -------- -------- --------
Operating income from segments 37,979 31,420 99,000 83,343
Corporate office expenses (4,206) (4,686) (13,743) (13,263)
-------- -------- -------- --------
Income from operations 33,773 26,734 85,257 70,080
Interest expense (4,035) (2,203) (10,759) (6,663)
Interest income 893 746 1,729 1,845
Other income, net 71 103 273 358
-------- -------- -------- --------
Income before income taxes $ 30,702 $ 25,380 $ 76,500 $ 65,620
======== ======== ======== ========
NOTE 6 In 1989, the United States Environmental Protection Agency ("EPA")
designated a predecessor of the Company as one of four potentially responsible
parties ("PRPs") with respect to the Onalaska Municipal Landfill in Onalaska,
Wisconsin ("the Site"). The waste complained of was placed in the landfill
prior to 1981 by a corporation, some of whose assets were later purchased by a
predecessor of the Company. It is the view of management that because the
Company's predecessor corporation purchased assets rather than stock, the
Company is not liable and is not properly a PRP. Although management believes
the EPA is wrong on the successor liability issue, with other PRPs, the Company
made a good faith offer to the EPA to pay a portion of the Site clean-up costs.
The offer was rejected and the EPA and State of Wisconsin ("the State")
proceeded with the clean-up at a cost of approximately $12 million. The EPA and
the State brought suit in 1996 against the Town of Onalaska ("the Town") and a
second PRP, Metallics, Inc., to recover response costs. On December 18, 1996,
the United States District Court for the Western District of Wisconsin approved
and entered Consent Decrees pursuant to which the Town and Metallics, Inc.
settled the suit and will pay a total of $1.8 million to the EPA and the State.
The Company continues to maintain that it is not a liable party. The EPA has
not taken action against the Company, nor has the EPA accepted the Company's
position. The Company does not know the financial status of the other named and
unnamed PRPs who may have liability with respect to the Site. Management does
not expect the situation to have a material adverse effect on consolidated
financial condition or operating results.
Under the provisions of Washington State environmental laws, the Washington
State Department of Ecology ("WDOE") has notified the Company that it is one of
Page 8
many companies named as a Potentially Liable Party ("PLP"), for the Pasco
Sanitary Landfill site, Pasco, Washington ("the Site"). Although the clean-up
costs are believed to be substantial, accurate estimates will not be available
until the environmental studies have been completed at the Site. However, based
upon the total documented volume of waste sent to the Site, the Company's waste
volume compared to that total waste volume should cause the Company to be
classified as a "de minimis" PLP. In July 1992, the Company and thirty-eight
other PLPs entered into an Administrative Agreed Order with WDOE to perform a
Phase I Remedial Investigation at the Site. In October 1994, WDOE issued an
administrative Unilateral Enforcement Order to all PLPs to complete a Phase II
Remedial Investigation and Feasibility Study ("RI/FS") under the Scope of Work
established by WDOE. The results of the RI/FS investigation are expected in the
near future. The Company is unable to determine, at this time, the level of
clean-up demands that may be ultimately placed on it. Management believes that,
given the number of PLPs named with respect to the Site 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.
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.
See Note 8 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 for other
commitments and contingencies of the Company which have not changed
significantly since that date.
NOTE 7 Income taxes paid during the nine months ended September 30, 1998 and
1997 were $31.7 million and $30.8 million. Interest paid during the nine months
ended September 30, 1998 and 1997 was $15.5 million and $6.0 million.
Page 9
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
Operating Results
Sales for the three months and nine months ended September 30, 1998, were $226.6
million and $631.5 million compared to $182.1 million and $512.7 million for the
comparable periods of the prior year. Income before extraordinary loss for the
third quarter and first nine months of 1998 was $19.3 million and $47.5 million
compared to $16.0 million and $41.5 million for the same periods last year. Net
income of $17.3 million and $45.5 million for the third quarter and first nine
months of 1998 reflects a net extraordinary loss of $2.0 million on the
redemption of long-term debt. The higher sales and improved operating results
during the third quarter and first nine months of 1998 primarily reflect the
contribution by Federal Cartridge Company ("Federal") which was acquired during
the fourth quarter of 1997. Selling, general and administrative expenses were
higher during the current year principally due to the addition of Federal.
Higher interest expense during the three months and nine months ended September
30, 1998, reflects higher debt levels during the current year, principally due
to the Federal acquisition. The Company anticipates that the remainder of 1998
will be challenging, particularly for its Industrial and Power Equipment
segment. The principal reasons for these results and the status of the
Company's financial condition are set forth below and should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Sales for the Outdoor Products segment for the third quarter and first nine
months of 1998 were down to $77.9 million and $236.3 million from $81.3 million
and $240.4 million during the comparable periods of 1997. Operating income was
essentially flat at $17.4 million and $50.6 million during the third quarter and
first nine months of 1998 compared to $17.5 million and $50.3 million in the
same periods of the prior year. These results reflect lower sales and operating
income from the Oregon Cutting Systems Division ("Oregon") partially offset by
higher sales and operating income at Dixon Industries, Inc. ("Dixon"). Oregon's
sales reflect a lower volume of saw chain sales and lower sales in Southeast
Asia and the Far East due to poor economic conditions in those areas. Dixon's
sales increase reflects higher volume and more favorable weather conditions
during the current year.
Sales and operating income for the Industrial and Power Equipment segment
declined during the third quarter of 1998 but were higher for the nine-month
period ended September 30,1998. Sales were $54.6 million and $177.9 million
during the current year's third quarter and first nine months compared to $61.5
million and $168.0 million for the prior year. Operating income was $5.6
million and $24.1 million for the three months and nine months ended September
30, 1998 as compared to $8.8 million and $21.6 million during the prior year.
The results for the third quarter of 1998 reflect reduced demand for the
Company's timber harvesting equipment resulting from sharply lower pulp prices
since mid-year and higher mill inventories.
Sales for the Outdoor Sports segment were $94.1 million and $217.3 million in
the third quarter and first nine months of 1998 compared to $39.4 million and
$104.3 million in the comparable periods of 1997. Operating income was $15.0
million and $24.3 million during the third quarter and first nine months of the
current year compared to $5.1 million and $11.5 million during the same periods
of last year. The significant improvements in sales and operating income over
the prior year reflect the sales and income added by Federal which was acquired
during the fourth quarter of the prior year. Total sales and operating income
at other Outdoor Sports operations were slightly higher than the prior year.
Page 10
The Company's total backlog at September 30, 1998 was $73.8 million compared to
$117.9 million at December 31, 1997, principally reflecting the reduced demand
for timber harvesting and industrial equipment.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual and interim financial statements. It also establishes standards for
related disclosures about products and services and geographic areas. SFAS No.
131 is required to be applied beginning with the Company's 1998 annual financial
statements. Financial statement disclosures for prior periods are required to
be restated. The Company expects that the adoption of SFAS No. 131 will have no
material impact on the Company's consolidated results of operations, financial
position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities. This statement is required for all fiscal quarters of fiscal years
beginning after June 15, 1999, and is not to be applied retroactively to
financial statements of prior periods. The Company has historically entered
into futures contracts, interest rate contracts and foreign exchange contracts
which are addressed by SFAS No. 133. The impact of adoption on the Company's
consolidated operating results and financial position has not been determined.
Impact of Year 2000 Issue
The Company has been evaluating and assessing all its internal date-sensitive
systems and equipment for Year 2000 compliance. The assessment phase of the
Year 2000 project is substantially complete and included both information
technology equipment and non-information technology equipment. Based on its
assessment, the Company determined that it was necessary to modify or replace a
portion of its information systems. For its major information technology
systems, as of September 30, 1998, the Company is approximately 70% complete in
the modification or replacement of its critical software and hardware and
expects all such modifications and replacements to be completed by January 1999.
After completion of this phase, the Company plans to test and implement its
information technology systems. As of September 30, 1998, the Company has
completed testing approximately 40% of its remediated systems. Completion of
the testing and implementation of all remediated systems is expected by April
1999.
The Company believes that the above modifications and replacements should
mitigate the effect of the Year 2000 issue. However, if such modifications and
replacements are not made, or fail to correct date-sensitive problems, the Year
2000 issue could have a material impact on the Company's operations by
disrupting its ability to manufacture and ship products, process financial
transactions or engage in similar normal business activities. The Company does
not believe that the effect of the Year 2000 issue on non-information technology
systems is likely to have a material adverse impact. Finally, the Company has
reviewed its own products and believes that it has no significant Year 2000
issues for those products.
The total estimated cost of the Year 2000 project, including system upgrades, is
$5.3 million and is being funded by operating cash flows. As of September 30,
1998, costs of $2.9 million had been incurred. Of the total cost of the
project, approximately $2.9 million is attributable to new software and
equipment, which will be capitalized. The remaining costs will be expensed as
incurred.
Page 11
The Company has also communicated with key suppliers and customers to determine
their Year 2000 compliance and the extent to which the Company is vulnerable to
any third-party Year 2000 issues. This program will be ongoing and the
Company's efforts with respect to specific problems identified will depend on
its assessment of the risk. Most key suppliers and customers who have replied
to our inquiries indicated that they expect to be Year 2000 compliant on a
timely basis. There can be no assurance that there will not be an adverse
effect on the Company if third parties do not make the necessary modifications
to their systems in a timely manner. However, management believes that ongoing
communication with and assessment of these third parties will minimize these
risks.
Where needed, the Company will establish contingency plans based on actual
testing results and assessment of outside risks.
The costs of the Year 2000 issue and completion dates are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans.
Page 12
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, INC.
- ----------------------------------
Registrant
Date: October 29, 1998 /s/ Harold E. Layman
--------------------------------------
Harold E. Layman
Executive Vice President - Finance
Operations and Chief Financial Officer
Page 13