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 June 30, 1999
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 June 30, 1999
--------------------- ------------------
Class A Common Stock $.01 Par Value 25,710,821 shares
Class B Common Stock $.01 Par Value 11,387,858 shares
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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Page No.
------------
Part I. Financial Information
Condensed Consolidated Statements of Income -
three months and six months ended
June 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows -
six months ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of
Changes in Stockholders' Equity -
three months and six months ended
June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis 12
Part II. Other Information 18
Page 2
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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share data)
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1999 1998 1999 1998
- ---------------------------------- -------- -------- -------- --------
(Unaudited) (Unaudited)
Sales $183.2 $205.1 $368.3 $404.8
Cost of sales 131.4 142.0 263.3 281.2
- ---------------------------------- ------ ------ ------ ------
Gross profit 51.8 63.1 105.0 123.6
Selling, general and
administrative expenses 34.1 37.7 71.4 73.2
- ---------------------------------- ------ ------ ------ ------
Income from operations 17.7 25.4 33.6 50.4
Interest expense (3.6) (3.7) (7.1) (6.7)
Interest income 0.4 0.5 1.0 0.8
Other income (expense), net 0.2 (0.1) 0.2
- ---------------------------------- ------ ------ ------ ------
Income before income taxes 14.5 22.4 27.4 44.7
Provision for income taxes 5.6 8.6 9.7 17.2
- ---------------------------------- ------ ------ ------ ------
Net income $ 8.9 $ 13.8 $ 17.7 $ 27.5
- ---------------------------------- ====== ====== ====== ======
Earnings per share:
Basic $ .24 $ .36 $ .48 $ .73
====== ====== ====== ======
Diluted $ .24 $ .35 $ .47 $ .71
- ---------------------------------- ====== ====== ====== ======
Cash dividends declared per share:
Class A Common Stock $ .071 $ .071 $ .143 $ .143
====== ====== ====== ======
Class B Common Stock $ .067 $ .067 $ .134 $ .134
- ---------------------------------- ====== ====== ====== ======
The accompanying notes are an integral part of these statements.
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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
June 30, December 31,
1999 1998
-------- ------------
(Unaudited)
ASSETS
- ------------------------------------------------
Current assets:
Cash and cash equivalents $ 38.0 $ 45.1
Accounts receivable, net of allowance for
doubtful accounts of $3.9 and $3.9 158.6 132.3
Inventories 131.2 121.0
Deferred income taxes 22.0 22.0
Other current assets 5.5 6.7
- ------------------------------------------------ ------ ------
Total current assets 355.3 327.1
Property, plant and equipment, net of accumulated
depreciation of $221.0 and $209.9 174.7 182.9
Cost in excess of net assets of acquired businesses, net 112.8 114.7
Other assets 46.1 44.1
- ------------------------------------------------ ------ ------
Total Assets $688.9 $668.8
- ------------------------------------------------ ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------
Current liabilities:
Notes payable and current maturities of
long-term debt $ 0.9 $ 0.7
Accounts payable 39.0 30.4
Accrued expenses 59.6 63.8
- ------------------------------------------------ ------ ------
Total current liabilities 99.5 94.9
Long-term debt, exclusive of current maturities 161.9 161.6
Deferred income taxes 13.2 13.0
Other liabilities 46.8 44.7
- ------------------------------------------------ ------ ------
Total liabilities 321.4 314.2
- ------------------------------------------------ ------ ------
Commitments and Contingent Liabilities
Stockholders' equity:
Common Stock: par value $.01 per share
Class A: 27,522,122 and 27,428,105 shares issued 0.3 0.3
Class B, convertible: 11,387,858 and 11,479,471
shares issued 0.1 0.1
Capital in excess of par value of stock 38.8 38.7
Retained earnings 361.2 348.9
Accumulated other comprehensive income 7.2 7.6
Less Class A treasury stock at cost,
1,811,301 and 1,852,302 shares (40.1) (41.0)
- ------------------------------------------------ ------ ------
Total stockholders' equity 367.5 354.6
- ------------------------------------------------ ------ ------
Total Liabilities and Stockholders' Equity $688.9 $668.8
- ------------------------------------------------ ====== ======
The accompanying notes are an integral part of these statements.
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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six Months
Ended June 30,
-------------------
1999 1998
- ------------------------------------------------ -------- --------
(Unaudited)
Cash Flows From Operating Activities:
Net Income $ 17.7 $ 27.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other
noncash charges 16.3 15.0
Deferred income taxes 0.2 (0.1)
Loss (gain) on disposals of property, plant
and equipment (0.1)
Changes in assets and liabilities:
Increase in accounts receivable (26.3) (7.6)
Increase in inventories (10.2) (9.5)
(Increase) decrease in other assets 3.3 (2.1)
Increase (decrease) in accounts payable 8.6 (2.1)
Decrease in accrued expenses (4.2) (5.5)
Increase (decrease) in other liabilities 1.5 (1.2)
- ------------------------------------------------ ------ ------
Net cash provided by operating activities 6.9 14.3
- ------------------------------------------------ ------ ------
Cash Flows From Investing Activities:
Proceeds from sales of property, plant
and equipment 0.1 0.1
Purchases of property, plant and equipment (6.7) (10.7)
Acquisitions of businesses (13.6)
Other (3.3)
- ------------------------------------------------ ------ ------
Net cash used in investing activities (9.9) (24.2)
- ------------------------------------------------ ------ ------
Cash Flows From Financing Activities:
Net increase (decrease) in short-term borrowings 0.3 (0.2)
Issuance of long-term debt 149.7
Reduction of long-term debt (0.2) (65.7)
Decrease in restricted funds 0.2 0.3
Dividends paid (5.2) (5.2)
Purchase of treasury stock (1.5)
Other 0.8 2.4
- ------------------------------------------------ ------ ------
Net cash provided by (used in)
financing activities (4.1) 79.8
- ------------------------------------------------ ------ ------
Net increase (decrease) in cash and cash equivalents (7.1) 69.9
Cash and cash equivalents at beginning of period 45.1 4.8
- ------------------------------------------------ ------ ------
Cash and cash equivalents at end of period $ 38.0 $ 74.7
- ------------------------------------------------ ====== ======
The accompanying notes are an integral part of these statements.
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<TABLE>
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (Unaudited)
(In millions)
<CAPTION>
Common Stock Capital Accumulated Other
---------------- In Excess Retained Comprehensive Treasury
Class A Class B of Par Earnings Income Stock Total
------- ------- --------- -------- ----------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1999:
Balance, March 31, 1999 $ 0.3 $ 0.1 $ 38.7 $355.1 $ 7.2 $(40.9) $360.5
Net income 8.9 8.9
Other comprehensive income (loss), net 0.0
------
Comprehensive income 8.9
Dividends (2.6) (2.6)
Other 0.1 (0.2) 0.8 0.7
----- ----- ------ ------ ----- ------ ------
Balance, June 30, 1999 $ 0.3 $ 0.1 $ 38.8 $361.2 $ 7.2 $(40.1) $367.5
===== ===== ====== ====== ===== ====== ======
Balance, December 31, 1998 $ 0.3 $ 0.1 $ 38.7 $348.9 $ 7.6 $(41.0) $354.6
Net income 17.7 17.7
Other comprehensive income (loss), net (0.4) (0.4)
------
Comprehensive income 17.3
Dividends (5.2) (5.2)
Other 0.1 (0.2) 0.9 0.8
----- ----- ------ ------ ----- ------ ------
Balance June 30, 1999 $ 0.3 $ 0.1 $ 38.8 $361.2 $ 7.2 $(40.1) $367.5
===== ===== ====== ====== ===== ====== ======
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1998:
Balance, March 31, 1998 $ 0.3 $ 0.1 $ 37.7 $310.7 $ 7.0 $(27.3) $328.5
Net income 13.8 13.8
Other comprehensive income (loss), net 0.4 0.4
------
Comprehensive income 14.2
Dividends (2.7) (2.7)
Purchase of treasury stock (1.8) (1.8)
Other 0.1 (1.0) 1.9 1.0
----- ----- ------ ------ ----- ------ ------
Balance, June 30, 1998 $ 0.3 $ 0.1 $ 37.8 $320.8 $ 7.4 $(27.2) $339.2
===== ===== ====== ====== ===== ====== ======
Balance, December 31, 1997 $ 0.3 $ 0.1 $ 37.7 $300.3 $ 7.0 $(29.3) $316.1
Net income 27.5 27.5
Other comprehensive income (loss), net 0.4 0.4
------
Comprehensive income 27.9
Dividends (5.3) (5.3)
Purchase of treasury stock (1.9) (1.9)
Other 0.1 (1.7) 4.0 2.4
----- ----- ------ ------ ----- ------ ------
Balance June 30, 1998 $ 0.3 $ 0.1 $ 37.8 $320.8 $ 7.4 $(27.2) $339.2
===== ===== ====== ====== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
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<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 June 30, 1999
and the results of operations and cash flows for the periods ended June 30, 1999
and 1998. 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, 1998. The results of operations for
the periods ended June 30, 1999 and 1998 are not necessarily indicative of the
results to be expected for the twelve months ended December 31, 1999, 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.
The Company's Internet home page is http://www.blount.com.
NOTE 2 On April 19, 1999, the Company and Lehman Brothers Merchant Banking
Partners II L.P. and its affiliated co-investors ("Lehman Brothers Merchant
Banking Partnership") jointly announced the signing of a definitive merger
agreement providing for the merger of the Company with an entity wholly-owned by
Lehman Brothers Merchant Banking Partnership. Upon completion of the
transaction, Lehman Brothers Merchant Banking Partnership will be the majority
owner of the Company. The total value of the transaction, including equity and
debt, is approximately $1.35 billion.
The merger agreement provides that the Company's shareholders may elect to
receive $30 in cash for each of their shares or to retain Company common stock.
The election to retain stock is subject to proration so that, regardless of the
elections among shareholders, approximately 96 percent of the outstanding
Company shares will be exchanged for cash and approximately 4 percent will be
retained by existing shareholders.
After giving effect to the merger, Lehman Brothers Merchant Banking Partnership
and the Company's current management will own approximately 90 percent of the
Company, and the Company's pre-merger shareholders will own approximately
10 percent. In connection with the merger, the Company will be capitalized with
approximately $462 million of equity, of which approximately $417 million will
be invested by Lehman Brothers Merchant Banking Partnership and management.
Senior credit commitments and interim term loan commitments for $500 million and
$325 million respectively have been obtained from Lehman Brothers Holdings Inc.
to finance the transaction.
The Blount Holding Company, L.P., which holds shares representing approximately
63 percent of the outstanding Company stock on a voting basis, has agreed to
vote its shares in favor of the merger. The merger, which is expected to be
completed during the third quarter of 1999, is subject to customary conditions
including the completion of financing and the approval of the Company's
stockholders.
On June 30, 1999, the Company announced that its Board of Directors has set July
9, 1999, as the record date for determining shareholders entitled to vote and to
receive notice of the special meeting of shareholders, expected to be held in
the third quarter of 1999, to vote on the adoption of the merger agreement
described above. The special meeting will be held on August 18, 1999, at the
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Company's headquarters, located at 4520 Executive Park Drive, Montgomery,
Alabama 36116.
Lehman Brothers Merchant Banking Partnership is a $2.0 billion institutional
merchant banking fund focused on investments in established operating companies.
During the second quarter and first six months of 1999, the Company incurred
expenses of approximately $1.7 million and $2.3 million, respectively,
associated with this transaction.
NOTE 3 During the first quarter of 1999, the Company donated art with a book
value of $1.5 million and an appraised value of $4.7 million to The Blount
Foundation, Inc., a charitable foundation. Winton M. Blount is a director of
The Blount Foundation, Inc. On an after-tax basis, this donation had no
significant effect on net income.
NOTE 4 The Company has two Rabbi Trusts established which require the funding
of certain executive benefits upon a change in control or threatened change in
control such as the merger described in Note 2 of Notes to Condensed
Consolidated Financial Statements. During the second quarter of 1999,
approximately $10.4 million was funded under these trusts with approximately
$7.1 million coming from the proceeds of officer life insurance loans and $3.3
million from general corporate funds. At June 30, 1999, approximately $22.5
million was held in these trusts and is included in "Other assets" in the
Condensed Consolidated Balance Sheet.
The unused proceeds from industrial development revenue bonds are held in trust
and released as qualified capital expenditures are made. At June 30, 1999,
approximately $3.3 million was held in trust and is included in "Other assets"
in the Condensed Consolidated Balance Sheet.
NOTE 5 Inventories consist of the following (in millions):
June 30, December 31,
1999 1998
--------------------------------- ------------ ------------
Finished goods $ 75.2 $ 73.6
Work in process 23.6 19.3
Raw materials and supplies 32.4 28.1
--------------------------------- ------ ------
$131.2 $121.0
--------------------------------- ====== ======
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NOTE 6 Segment information is as follows (in millions):
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1999 1998 1999 1998
- ---------------------------------- -------- -------- -------- --------
Sales:
Outdoor Products $ 84.3 $ 80.9 $160.5 $158.4
Sporting Equipment 71.2 61.9 141.5 123.2
Industrial and Power Equipment 27.7 62.3 66.3 123.2
- ---------------------------------- ------ ------ ------ ------
$183.2 $205.1 $368.3 $404.8
- ---------------------------------- ====== ====== ====== ======
Operating income (loss):
Outdoor Products $ 19.6 $ 17.2 $ 35.7 $ 33.2
Sporting Equipment 9.6 5.3 15.1 9.4
Industrial and Power Equipment (5.9) 8.5 (5.0) 18.5
- ---------------------------------- ------ ------ ------ ------
Operating income from segments 23.3 31.0 45.8 61.1
Corporate office expenses (5.6) (5.6) (12.2) (10.7)
- ---------------------------------- ------ ------ ------ ------
Income from operations 17.7 25.4 33.6 50.4
Interest expense (3.6) (3.7) (7.1) (6.7)
Interest income 0.4 0.5 1.0 0.8
Other income (expense), net 0.2 (0.1) 0.2
- ---------------------------------- ------ ------ ------ ------
Income before income taxes $ 14.5 $ 22.4 $ 27.4 $ 44.7
- ---------------------------------- ====== ====== ====== ======
NOTE 7 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 over $1.8 million to the EPA and the
State. The Company continues to maintain that it is not a liable party. The
EPA has not taken action against the Company, nor has the EPA accepted the
Company's position. The Company does not know the financial status of the other
named and unnamed PRPs who may have liability with respect to the Site.
Management does not expect the situation to have a material adverse effect on
consolidated financial condition or operating results.
Under the provisions of Washington State environmental laws, the Washington
State Department of Ecology ("WDOE") has notified the Company that it is one of
many companies named as a Potentially Liable Party ("PLP"), for the Pasco
Sanitary Landfill site, Pasco, Washington ("the Site"). Although the clean-up
costs are believed to be substantial, accurate estimates will not be available
until the environmental studies have been completed at the Site. However, based
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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 7 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 for other
commitments and contingencies of the Company which have not changed
significantly since that date.
NOTE 8 Income taxes paid during the six months ended June 30, 1999 and 1998
were $11.2 million and $21.8 million. Interest paid during the six months ended
June 30, 1999 and 1998 was $6.0 million and $12.4 million.
NOTE 9 For the three months and six months ended June 30, 1999 and 1998, net
income and shares used in the earnings per share ("EPS") computations were the
following amounts:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
- ------------------------------ ---------- ---------- ---------- ----------
Net income (in millions) $ 8.9 $ 13.8 $ 17.7 $ 27.5
- ------------------------------ ========== ========== ========== ==========
Shares:
Basic EPS - weighted average
common shares outstanding 37,077,393 37,596,170 37,069,452 37,550,044
Dilutive effect of stock
options 1,097,572 1,230,178 1,047,915 1,156,905
- ------------------------------ ---------- ---------- ---------- ----------
Diluted EPS 38,174,965 38,826,348 38,117,367 38,706,949
- ------------------------------ ========== ========== ========== ==========
Options to purchase 560,600 shares were granted during the first quarter of 1999
under the 1998 Blount Long-Term Executive Stock Option Plan.
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NOTE 10 Blount, Inc. is a wholly-owned subsidiary of Blount International, Inc.
Summarized unaudited consolidated financial information for Blount, Inc. is as
follows (in millions):
June 30, December 31,
1999 1998
- ----------------------------------------------- -------- ------------
Current assets $359.4 $351.3
Noncurrent assets 333.6 341.8
- ----------------------------------------------- ------ ------
Total assets $693.0 $693.1
- ----------------------------------------------- ====== ======
Current liabilities $ 96.9 $ 92.4
Noncurrent liabilities 221.9 219.2
Stockholder's equity 374.2 381.5
- ----------------------------------------------- ------ ------
Total liabilities and stockholder's equity $693.0 $693.1
- ----------------------------------------------- ====== ======
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1999 1998 1999 1998
- ---------------------------------- -------- -------- -------- --------
Sales $183.2 $205.1 $368.3 $404.8
Gross profit 51.8 63.1 105.0 123.6
Net income 9.1 14.2 18.1 28.2
- ---------------------------------- ------ ------ ------ ------
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Results
Sales for the three months and six months ended June 30, 1999, were $183.2
million and $368.3 million compared to $205.1 million and $404.8 million for the
comparable periods of the prior year. Net income for the second quarter and
first half of 1999 was $8.9 million ($.24 per diluted share) and $17.7 million
($.47 per diluted share) compared to net income of $13.8 million ($.35 per
diluted share) and $27.5 million ($.71 per diluted share) for the comparable
periods of the prior year. These results reflect a significant reduction in
sales and operating income from the Industrial and Power Equipment segment due
to adverse market conditions and record results from the Sporting Equipment
segment and the Outdoor Products segment. Corporate expenses include expenses
of $1.7 million and $2.3 million during the second quarter and first half of
1999 associated with the possible sale of the Company and a donation of art with
a book value of $1.5 million in the first quarter (see Notes 2 and 3 of Notes to
Condensed Consolidated Financial Statements). Excluding the expenses associated
with the possible sale of the Company and the donation of art, selling, general
and administrative expenses decreased by $5.3 million and $5.6 million during
the second quarter and first half of 1999, respectively, as compared to the same
periods in the prior year. These decreases reflect cost reduction efforts at
each segment and the corporate office. The Company's effective income tax rate
was lower by 3.4% in the first six months of 1999 as a result of the donation of
art. 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, 1998.
Sales for the Outdoor Products segment for the second quarter and first six
months of 1999 were $84.3 million and $160.5 million compared to $80.9 million
and $158.4 million during the second quarter and first six months of 1998.
Operating income was $19.6 million and $35.7 million during the second quarter
and first six months of 1999 compared to $17.2 million and $33.2 million in the
comparable periods of the prior year. Sales reflect a higher volume of sales of
lawn mowers and accessories and from flat to slightly lower sales of other
product lines as indicated in the following table (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
% Increase % Increase
(Decrease) (Decrease)
1999 1998 in 1999 1999 1998 in 1999
- --------------------------- ------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Chain saw components $ 49.3 $ 49.1 0.4% $ 94.9 $ 97.7 (2.9)%
Lawn mowers and accessories 24.9 21.5 15.8 45.3 39.6 14.4
Other 10.1 10.3 (1.9) 20.3 21.1 (3.8)
- --------------------------- ------ ------ ------ ------
Total segment sales $ 84.3 $ 80.9 4.2% $160.5 $158.4 1.3 %
- --------------------------- ====== ====== ====== ======
</TABLE>
The improvement in operating income is primarily due to the higher sales of lawn
mowers and accessories, higher sales to Southeast Asia, partially offset by
lower sales to Europe and South America, and the positive effect of favorable
exchange rates of approximately $0.9 million and $1.6 million during the second
quarter and first six months of 1999, respectively.
Sales for the Sporting Equipment segment were up significantly to $71.2 million
and $141.5 million in the second quarter and first six months of 1999 from $61.9
million and $123.2 million in the prior year. Operating income increased to
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$9.6 million and $15.1 million in the current year's second quarter and first
half from $5.3 million and $9.4 million for the same periods during the prior
year. These improved results reflect a higher volume, particularly for
ammunition and related components and sports optical products, as reflected in
the following table (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
% Increase % Increase
1999 1998 in 1999 1999 1998 in 1999
- --------------------------- ------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Ammunition and related products $ 53.5 $ 49.3 8.5% $105.0 $ 93.9 11.8%
Sports optical products 8.5 4.9 73.5 16.7 13.0 28.5
Other 9.2 7.7 19.5 19.8 16.3 21.5
- --------------------------- ------ ------ ------ ------
Total segment sales $ 71.2 $ 61.9 15.0% $141.5 $123.2 14.9%
- --------------------------- ====== ====== ====== ======
</TABLE>
Additionally, in the second half of 1998, the sporting equipment segment
completed certain cost reduction activities by consolidating its raw materials
purchasing and sales and marketing organizations, transferring certain
production to lower cost facilities and eliminating certain outsourcing. The
estimated annual savings from these efforts are approximately $3.7 million,
approximately half of which was realized in operating income in the first half
of 1999.
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. A key indicator of this segment's market is the price of
Northern Bleach Softwood Kraft ("pulp") which declined 20% from an average of
$598 per ton in the fourth quarter of 1997 to an average of $480 per ton in the
first six months of 1999 ($460 per ton in the first quarter and $500 per ton in
the second quarter), resulting in the depressed market conditions characterized
by sales declines of over 50% in the Company's most important market (the
Southeastern United States) and the need to offer discounts in response to
extremely aggressive competition for available sales. Operating results for the
Industrial and Power Equipment segment were adversely affected by these poor
market conditions in the second quarter and first six months of 1999. Sales by
the segment's principal product groups were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
% Decrease % Decrease
1999 1998 in 1999 1999 1998 in 1999
- --------------------------- ------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Timber harvesting and loading
equipment $ 20.8 $ 54.8 (62.0)% $ 53.5 $108.7 (50.8)%
Gear components and rotation
bearings 6.9 7.5 (8.0) 12.8 14.5 (11.7)
- --------------------------- ------ ------ ------ ------
Total segment sales $ 27.7 $ 62.3 (55.5)% $ 66.3 $123.2 (46.2)%
- --------------------------- ====== ====== ====== ======
</TABLE>
This segment incurred an operating loss of $5.9 million and $5.0 million during
the second quarter and first six months of 1999, respectively, compared to
operating income of $8.5 million and $18.5 million during the comparable periods
of 1998, primarily due to the sharply reduced demand. In response to these
conditions, the Company has implemented a program of production consolidation
Page 13
<PAGE>
and realignments in this segment to lower costs and improve productivity.
Manpower has been reduced by 37% from a year earlier. One manufacturing
facility was closed during the first six months of 1999 with its production
shifted to other Company plants. Another small facility will be closed during
the third quarter of 1999 with its production outsourced. Costs of $1.3 million
and $1.9 million related to these plant closings were charged to operations
during the second quarter and first half of 1999, respectively, with additional
costs of about $0.3 million expected in the third quarter of 1999. Management
anticipates an annual cost savings of approximately $3.7 million as a result of
these actions beginning in the third quarter of 1999. With recent pulp price
increases, low pulp inventory levels, increased demand for pulp and pulp
products from the recovering economies of Southeast Asia and an improved order
backlog, management is cautiously optimistic of a second half improvement in
this segment, although the extent and timing of any improvement is highly
uncertain. If the current slowdown continues, it would be unlikely that this
segment could achieve historical levels of sales and profitability.
The Company's total backlog increased to $90.9 million at June 30, 1999, from
$61.3 million at December 31, 1998, and $83.4 million at June 30, 1998, as
follows (in millions):
Backlog
--------------------------------------
June 30, December 31, June 30,
1999 1998 1998
- ------------------------------------ -------- ------------ ----------
Outdoor Products $ 29.9 $ 30.2 $ 26.9
Sporting Equipment 31.2 15.1 25.3
Industrial and Power Equipment 29.8 16.0 31.2
- ------------------------------------ ------ ------ ------
$ 90.9 $ 61.3 $ 83.4
- ------------------------------------ ====== ====== ======
Management continuously reviews for potential cost reductions. In addition to
cost savings efforts commented on elsewhere within management's discussion and
analysis, studies are underway to evaluate distribution processes and
distribution facility needs. These studies are expected to be completed in late
1999. While no assurance can be given that savings could be achieved until
these studies are completed, management estimates that potential annual savings
will range from $2 million to $4 million with implementation expenses estimated
to be $1.5 million to $2.5 million. Actual results could vary significantly
from the estimate.
Financial Condition, Liquidity and Capital Resources
At June 30, 1999, the Company had no amounts outstanding under its $150 million
revolving credit agreement. The Company had senior notes outstanding in the
principal amount of $150 million which mature in 2005. The long-term debt to
equity ratio was .44 to 1 at June 30, 1999 and .46 to 1 at December 31, 1998.
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, 1998, for
the terms and conditions of the revolving credit agreement and the senior notes.
Cash balances at June 30, 1999, were $38.0 million compared to $45.1 million at
December 31, 1998. Cash provided by operating activities was $6.9 million in
the first half of 1999 compared to $14.3 million during the prior year's first
half, principally due to a net income decrease of $9.8 million. Working capital
increased to $255.8 million at June 30, 1999, compared to $232.2 million at
December 31, 1998. Accounts receivable increased by $26.3 million, inventories
by $10.2 million and accounts payable by $8.6 million. The higher inventories
Page 14
<PAGE>
reflect increases of $8.4 million at the sporting equipment segment and $1.4
million at the outdoor products segment resulting from a normal seasonal build-
up in anticipation of third quarter sales. The accounts payable increase
reflects additional raw material purchases principally related to the inventory
increase. The accounts receivable increase reflects higher sales by the outdoor
products segment as compared to the fourth quarter of 1998 and longer terms used
as a marketing tool by the sporting equipment and industrial and power equipment
segments.
Accounts receivable at June 30, 1999, and December 31, 1998, and sales by
segment for the second quarter of 1999 compared to the fourth quarter of 1998
were as follows (in millions):
June 30, December 31, Increase
1999 1998 (Decrease)
- ------------------------------------ -------- ------------ ----------
Accounts Receivable:
Outdoor Products $ 59.4 $ 56.7 $ 2.7
Sporting Equipment 68.7 41.5 27.2
Industrial and Power Equipment 29.7 33.5 (3.8)
- ------------------------------------ ------ ------ ------
Total segment receivables $157.8 $131.7 $ 26.1
- ------------------------------------ ====== ====== ======
Three Months Ended
June 30, December 31, Increase
1999 1998 (Decrease)
- ------------------------------------ -------- ------------ ----------
Sales:
Outdoor Products $ 84.3 $ 79.2 $ 5.1
Sporting Equipment 71.2 69.5 1.7
Industrial and Power Equipment 27.7 51.8 (24.1)
- ------------------------------------ ------ ------ ------
Total segment sales $183.2 $200.5 $(17.3)
- ------------------------------------ ====== ====== ======
The Company's outdoor products segment includes Oregon Cutting Systems,
Frederick Manufacturing and Dixon Industries. In order to produce and ship
products efficiently and ensure an adequate supply during the spring to summer
selling season, Dixon Industries, which produces lawn mowers, and Frederick
Manufacturing, which produces lawn mower blades and accessories, offer extended
payment terms in the fall and winter. Receivable balances as a result peak in
March and reach their low point in August. The higher sales by the outdoor
products segment are the principal reason for the increase in that segment's
receivables as compared to year-end, partially offset by a reduction in extended
term receivables of approximately $3 million. Because of the seasonal nature of
the sporting equipment business, the need to produce and ship efficiently in
order to ensure an adequate supply during peak sales periods and in response to
competitor programs, the Company offers extended payment terms within its
sporting equipment segment in advance of the fall hunting season. As a result,
receivables tend to peak in September and reach their low point in January. At
June 30, 1999, extended term receivables were $20.5 million greater than at
December 31, 1998. In addition, an unusually large payment ($4 million) due
after December 31, 1998, was received prior to December 31, 1998, from this
segment's largest customer. A similar advance payment was not received in the
second quarter of 1999. The remaining increase of approximately $2.7 million
reflects several factors, none of which is significant. In response to the
adverse market conditions described in "Operating Results," the Industrial and
Power Equipment segment began offering in the fourth quarter of 1998 payment
terms of 90, 120 and, in some cases, 180 days to certain dealers based on their
Page 15
<PAGE>
financial strength. At June 30, 1999, there were approximately $14.4 million in
receivables with extended terms compared to $14.5 million at December 31, 1998.
Extended term receivables at June 30, 1999, represent 52% of second quarter 1999
sales while extended term receivables at December 31, 1998, represent 28% of
fourth quarter 1998 sales. The use of extended terms has been the primary
reason for a decrease in receivables of only 11.3% since year-end despite a
46.5% decrease in sales.
The Company has absorbed the increased receivables resulting from extended terms
through operating cash flows and, given the historically stronger second half
operating cash flows (in 1998, first half operating cash flows were $14.3
million and second half operating cash flows were $74.6 million), the Company
expects operating cash flows will be sufficient to cover any further increases
until market conditions in the industrial and power equipment segment improve
and terms return to those normally extended. No material adverse effect on the
operations, liquidity or capital resources of the Company is expected as a
result of the extended terms.
Cash used in investing and financing activities in the first six months of 1999
was $9.9 million and $4.1 million, respectively, reflecting principally
purchases of property, plant and equipment of $6.7 million and the payment of
dividends of $5.2 million.
Immediately after the proposed merger transaction described in Note 2 to Notes
to Condensed Consolidated Financial Statements, the Company would be
substantially leveraged which may adversely affect its operations. It is
estimated that the Company would have total liabilities of $1.0 billion, total
debt of $0.9 billion and a stockholders' deficit of $0.3 billion.
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 that kind of financing may not
be on favorable terms;
2. a substantial portion of cash flows available from operations will 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.
Management believes that, subsequent to the proposed merger, cash generated from
operations, together with amounts expected to be available under the proposed
credit facilities, will be sufficient to meet the Company's working capital,
capital expenditure and other cash needs in the foreseeable future. However,
there can be no assurance that this will be the case.
Assuming the merger is completed, the Company has identified savings which will
be effected in the Company's corporate office including the elimination of the
office of the Chairman, consolidation of certain similar corporate and segment
functions, and outsourcing of certain corporate administrative functions.
Savings are estimated to be approximately $7.3 million with costs incurred to
implement these changes estimated to be $4.0 million to $5.0 million.
Page 16
<PAGE>
Impact of Year 2000 Issue
The Company has been evaluating 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 and other equipment. As of June 30, 1999, the Company
is approximately 98% complete in the modification or replacement and testing of
the critical software, hardware and equipment requiring remediation. The
Company expects to have completed all remaining internal remediation activities
by September 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
approximately $5.6 million and is being funded by operating cash flows. As of
June 30, 1999, costs of $5.0 million had been incurred. Of the total cost of
the project, approximately $2.9 million is attributable to new software and
equipment, which is being capitalized. The remaining costs are expensed as
incurred.
With respect to third parties, the Company has identified and communicated with
third parties with which its systems interface or on which it relies to
determine the extent to which those companies are addressing their Year 2000
compliance. The Company has developed a program for evaluating their readiness
and assessing the impact on the Company if they are not compliant on a timely
basis, including identification of alternate sources of materials and supplies
where appropriate. The Company initiated third party surveys in mid-1998 and of
the 50 key third parties identified, all have responded that they expect to be
compliant on a timely basis. Of the approximately 2,500 non-key third parties
surveyed, 33% have not yet responded adequately. Of those that have responded,
the majority have indicated that they are now or will be compliant by September
30, 1999. The Company expects to complete its evaluation and assessment of
third party readiness by September 30, 1999. To date, the Company is not aware
of any problems that would materially impact results of operations, liquidity or
capital resources.
Although the Company has not finalized its contingency plans for possible Year
2000 issues, it has completed initial communication with key third parties and
non-key third parties as noted above and is presently evaluating and assessing
risks including identification of alternate sources of materials and supplies
where appropriate. The Company has completed testing on all critical systems.
Where needed, the Company will establish contingency plans based on results of
its testing, its evaluation and assessment of third party responses and other
outside risks. The Company anticipates the majority of its contingency plans to
be in place by September 30,1999.
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
Page 17
<PAGE>
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.
The above statement in its entirety is designated a Year 2000 readiness
disclosure under the Year 2000 Information and Readiness Disclosure Act.
New Accounting Pronouncements
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 derivatives and hedging. It requires that all
derivatives be recognized as either assets or liabilities at fair value and
establishes specific criteria for the use of hedge accounting. The Company's
required adoption date is January 1, 2001. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods. The Company expects no
material adverse effect on consolidated results of operations, financial
position or cash flows upon adoption of SFAS No. 133, but does expect a small
reduction in stockholders' equity.
Forward Looking Statements
Forward looking statements in this report, as defined by the Private Securities
Litigation Reform Law of 1995, involve certain risks and uncertainties that may
cause actual results to differ materially from expectations as of the date of
this report.
Part II. Other Information
Item 6(b) Reports on Form 8-K
On April 20, 1999, the Company filed Form 8-K reporting Item 5 Other Events and,
on April 27, 1999, the Company filed Form 8-K/A amending the Form 8-K filed on
April 20, 1999 reporting Item 5 Other Events and Item 7(c) Exhibits, in each
case with respect to the transaction referred to herein in Note 2 to the
Condensed Consolidated Financial Statements.
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: July 20, 1999 /s/ Harold E. Layman
--------------------------------------
Harold E. Layman
Executive Vice President - Finance
Operations and Chief Financial Officer
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BLOUNT INTERNATIONAL, INC. FOR THE PERIOD ENDED
JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 38
<SECURITIES> 0
<RECEIVABLES> 162
<ALLOWANCES> 4
<INVENTORY> 131
<CURRENT-ASSETS> 355
<PP&E> 396
<DEPRECIATION> 221
<TOTAL-ASSETS> 689
<CURRENT-LIABILITIES> 99
<BONDS> 162
0
0
<COMMON> 0
<OTHER-SE> 367
<TOTAL-LIABILITY-AND-EQUITY> 689
<SALES> 368
<TOTAL-REVENUES> 368
<CGS> 263
<TOTAL-COSTS> 263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 27
<INCOME-TAX> 10
<INCOME-CONTINUING> 18
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.47
</TABLE>
