10-K 1 blt2015-12x31x10k.htm 10-K 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
 FORM 10-K
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015.
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from             to             
Commission file number 001-11549
 
 BLOUNT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
63 0780521
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
4909 SE International Way, Portland, Oregon
 
97222-4679
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (503) 653-8881
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $.01 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
¨  Yes  x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    
¨  Yes  x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes  ¨    No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   ¨  Yes  x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
 
Large accelerated filer
o
 
  
Accelerated filer
  
x
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
  
Smaller reporting company
  
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   ¨  Yes  x No
At June 30, 2015, the aggregate market value of the voting and non-voting common stock held by non-affiliates, computed by reference to the last sales price $10.92 as reported by the New York Stock Exchange, was $363,191,086 (affiliates being, for these purposes only, directors, executive officers, and holders of more than 10% of the registrant’s Common Stock).
The number of shares outstanding of $0.01 par value common stock as of March 4, 2016 was 48,250,363 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.




BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
 
Table of Contents
Page
 
 
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 1B
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
 
 
Item 5
 
 
 
Item 6
 
 
 
Item 7
 
 
 
Item 7A
 
 
 
Item 8
 
 
 
Item 9
 
 
 
Item 9A
 
 
 
Item 9B
 
 
 
 
 
 
Item 10
 
 
 
Item 11
 
 
 
Item 12
 
 
 
Item 13
 
 
 
Item 14
 
 
 
 
 
 
Item 15
 
 


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PART I
ITEM 1. BUSINESS

Overview. Blount International, Inc. (“Blount” or the “Company”) is a global industrial company. The Company designs, manufactures, and markets equipment, replacement and component parts, and accessories for professionals and consumers in select end-markets under our proprietary brand names. We also manufacture and market such items to original equipment manufacturers (“OEMs”) under private label brand names. We specialize in manufacturing cutting parts and equipment used in forestry, lawn, and garden; farming, ranching, and agricultural; and construction applications. We also purchase products manufactured by other suppliers that are aligned with the markets we serve and market them, typically under one of our brands, through our global sales and distribution network. Our products are sold in more than 110 countries and approximately 51% of our 2015 sales were shipped to customers outside of the United States of America (“U.S.”). Our Company is headquartered in Portland, Oregon, and we have manufacturing operations in the U.S., Brazil, Canada, China, and France. In addition, we operate marketing, sales, and distribution centers in Europe, North America, South America, and the Asia-Pacific region.

We operate in two primary business segments: the Forestry, Lawn, and Garden (“FLAG”) segment and the Farm, Ranch, and Agriculture (“FRAG”) segment. The FLAG segment manufactures and markets cutting chain, guide bars, and drive sprockets for chain saw use, and lawnmower and other cutting blades for outdoor power equipment. In addition, the FLAG segment manufactures cutting chain, guide bars, drive sprockets, and lawnmower and other cutting blades that are marketed to OEM customers. The FLAG segment also purchases replacement parts and accessories from other manufacturers and markets them, primarily under our brands, to our FLAG customers through our global sales and distribution network.

The Company’s FRAG segment designs, manufactures, assembles and markets attachments and implements for tractors in a variety of mowing, cutting, clearing, material handling, landscaping and grounds maintenance applications, as well as log splitters, post-hole diggers, self-propelled lawnmowers, attachments for off-highway construction equipment applications, and other general purpose tractor attachments. In addition, the FRAG segment manufactures a variety of agricultural equipment cutting blade parts that are marketed primarily to OEM customers. The FRAG segment also purchases replacement parts and accessories from other manufacturers and markets them, primarily under our brands, to our FRAG customers through our sales and distribution network.

The Company also operates a concrete cutting and finishing ("CCF") equipment business that is reported within the Corporate and Other category. This business manufactures and markets diamond cutting chain, assembles and markets concrete cutting chain saws, and purchases other concrete cutting products that are marketed to the construction and water utility industries.

Forestry, Lawn, and Garden Segment

Forestry Products. These products are sold primarily under the Oregon®, Carlton®, and KOX™ brands, as well as under private label brands for certain OEM customers. Manufactured product lines include a broad range of cutting chain, chain saw guide bars, and cutting chain drive sprockets used on portable gasoline and electric chain saws and on mechanical timber harvesting equipment. We also purchase and market replacement parts and other accessories for the forestry market, including chain saw engine replacement parts, safety equipment and clothing, lubricants, maintenance tools, hand tools, and other accessories used in forestry applications. We also market a line of electric and cordless electric chain saws under the Oregon® brand.

Lawn and Garden Products. These products are sold under the Oregon® brand name, as well as private labels for certain OEM and retail customers. Manufactured product lines include lawnmower and edger cutting blades designed to fit a wide variety of machines and cutting conditions, cutting blades for grass-cutting equipment, and garden tiller tines. We also purchase and market various cutting attachments, replacement parts, and accessories for the lawn and garden market, such as cutting line for line trimmers, air filters, spark plugs, lubricants, wheels, belts, grass bags, maintenance tools, hand tools, and accessories to service the lawn and garden equipment industry. We also market a line of cordless electric tools including a string trimmer, hedge trimmer, and pole saw under the Oregon® brand name.

Our FLAG products are sold both under our own proprietary brands and under private label brands to OEM customers for use on new chain saws and lawn and garden equipment, and to professionals and consumers as replacement parts through distributors, dealers, and mass merchants. During 2015, approximately 75% of FLAG segment sales were to the replacement market, with the remainder sold to OEMs.

Industry Overview. Our competitors for FLAG products include Ariens, Briggs & Stratton, Fisher Barton, Husqvarna, Jaekel, John Deere, MTD, Northern Tool, OEM Products, Rotary, Stens, Stihl, and TriLink, among others. We work with our OEM customers to improve the design and specifications of cutting chain, guide bars, and lawnmower blades used as original

3



equipment on their products. We also supply products or components to some of our competitors. In addition, new and existing competitors in recent years have expanded capacity or contracted with suppliers in China and other low-cost manufacturing locations, which has increased competition and pricing pressure, particularly for consumer-grade cutting chain and guide bars.

We believe we are the world’s largest producer of cutting chain for chain saws. Oregon®, Carlton®, and KOX branded cutting chain and related products are used by professional loggers, farmers, arborists, and homeowners. We believe we are a leading manufacturer of guide bars and drive sprockets for chain saws. Our OEM customers include the majority of the world’s chain saw manufacturers, and we also produce replacement cutting chain and guide bars to fit virtually every chain saw sold today, and virtually all saw chain timber harvesting equipment in use today. We believe we are a leading supplier of lawnmower blades in Europe. Additionally, our lawnmower blades are used by many of the world’s leading power equipment producers, and our Oregon® branded replacement blades and lawnmower-related parts and accessories are used by commercial landscape companies and homeowners.

Weather and natural disasters can influence our FLAG sales cycle. For example, severe weather patterns and events, such as hurricanes, tornadoes, and storms, generally result in greater chain saw use and, therefore, stronger sales of cutting chain and guide bars. Temperature patterns also drive the demand for firewood, which in turn drives the demand for our cutting chain and other forestry products. Changes in home heating costs can drive the demand for firewood, which in turn affects the demand for our forestry products. Seasonal rainfall plays a role in demand for our lawnmower blades and other lawn and garden equipment products. Above-average rainfall drives greater demand for products in this category, while drought conditions tend to reduce demand for these products. Similarly, changes in housing starts can drive the demand for lumber, which also affects the demand for our forestry products. General economic conditions also drive demand in other markets for timber, including pulp and paper, packaging, lumber, and furniture.

Within the FLAG segment the largest volume raw material we purchase is cold-rolled strip steel, which we obtain from multiple intermediate steel processors, but which can also be obtained from other sources. Changes in the price of steel can have a significant effect on the manufactured cost of our products and on the gross margin we earn from the sale of these products, particularly in the short-term.

Our profitability in the FLAG segment is also affected by changes in foreign currency exchange rates, changes in economic and political conditions in the various markets in which we operate, and changes in the regulatory environment in various jurisdictions. For additional information regarding the FLAG segment, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 19 to the Consolidated Financial Statements.

Farm, Ranch, and Agriculture Segment

Equipment and Tractor Attachment Products. These products are sold under the AlitecTM, CF®, Gannon®, Oregon®, SpeeCo®, WainRoy®, and Woods® brand names, as well as under private label brands for certain of our OEM and retail customers. Product lines include attachments for tractors in a variety of mowing, cutting, clearing, material handling, landscaping and grounds maintenance applications, as well as log splitters, post-hole diggers, self-propelled lawnmowers, snow blowers, attachments for off-highway construction equipment applications, and other general purpose tractor attachments.

OEM and Aftermarket Parts. These products are sold under the SpeeCo®, TISCO®, Tru-Power®, Vintage Iron®, and WoodsCare™ brand names, as well as under private label brands for certain of our OEM and retail customers. The FRAG segment manufactures a variety of attachment cutting blade component parts sold to OEM customers for inclusion in original equipment, and as replacement parts. Additional product lines purchased from other manufacturers include tractor linkage, electrical, engine and hydraulic replacement parts, agricultural equipment replacement parts, and other accessories used in the agriculture and construction equipment markets.

Industry Overview. Competitors for our equipment and tractor attachment products include AGCO, Alamo Group, Champion, Doosan, Dover, Great Plains, John Deere, Koch Industries, Kubota, and MTD, among others. Competitors for our OEM and aftermarket parts include A&I, Herschel, Kondex, and SMA, among others. In recent years, suppliers in China and other low-cost manufacturing locations have increased productive capacity, particularly for tractor accessory parts, which has increased competition and pressure on pricing in North America.

We believe we are a leading supplier of log splitters, tractor attachments, including rotary cutters and finish mowers, 3-point linkage parts, implements, and tractor repair parts in North America. Our products are used by large commodity and livestock farmers, small farmers, rural property owners, commercial landscape and yard care maintenance operators, construction contractors, and municipalities.


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To help us compete in our markets, we have reduced costs by utilizing global sourcing for key components and products. In addition, we believe we are an industry leader in product innovation and design in certain of our product categories. We also believe our long-standing relationships with key national retailers in North America have helped us maintain, or grow, our market share for certain of our product lines.

Weather can influence our FRAG sales cycle. For example, seasonal rainfall plays a role in demand for our agricultural and grounds maintenance products. Above-average rainfall drives greater demand for products in this category, while drought conditions tend to reduce demand for these products. Extreme cold weather can influence the agricultural planting and growing cycle, which in turn can affect demand for our agricultural products. Increases in home heating fuel costs and changes in temperature patterns can also drive the demand for firewood, which in turn drives the demand for our log splitters. Finally, demand for our FRAG products is affected by housing starts, crop prices, and disposable and farm income levels for our end customers.

Increases in raw material prices, particularly for steel, can negatively affect profit margins in our FRAG business, especially in the short-term. Fluctuations in foreign currency exchange rates and transportation costs can also affect our profitability as we source a significant amount of our components from Asia and ship them to the U.S. for assembly and distribution. Our industry is highly competitive, making pricing pressure a potential threat to sustaining profit margins. For additional information regarding the FRAG segment, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 19 to the Consolidated Financial Statements.

Concrete Cutting and Finishing Products

We operate a business in the specialized concrete cutting and finishing market. These products are sold primarily under the ICS® and Pentruder(R) brands, as well as under private label brands for certain OEM customers. The principal product lines are proprietary diamond-segmented cutting chains, which are used on gasoline, hydraulic, and electric powered concrete and utility pipe cutting saws and equipment. We also market and distribute branded gasoline and hydraulic powered concrete and utility pipe cutting chain saws as well as high-performance concrete cutting systems to our customers, which include contractors, rental equipment companies, construction equipment dealers, and utilities, primarily in the U.S. and Europe. We also market circular saw blades and other concrete cutting and finishing products to our customers. The power heads for the gasoline powered saws are manufactured for us by third parties. Competition primarily comes from other manufacturers of concrete cutting saws, including Husqvarna and Stihl. We also supply diamond-segmented chain to certain of these competitors. We believe we are a market leader in diamond chain cutting products.

Corporate Operations

We maintain a centralized administrative staff at our headquarters in Portland, Oregon. This centralized administrative staff provides the executive leadership for the Company, as well as accounting, finance, human resources, information technology, and supply chain services, administration of various health and welfare plans, risk management and insurance services, supervision of the Company’s capital structure, and oversight of the regulatory, compliance, and legal functions. Operating expenses of this central administrative function are included in selling, general, and administrative expenses (“SG&A”) in the Consolidated Statements of Income (Loss). The cost of providing certain shared services is allocated to our business segments using various allocation drivers such as employee headcount, software licenses, purchase volume, shipping volume, sales revenue, square footage, and other factors.

Merger Agreement

On December 9, 2015, we entered into a definitive agreement (the "Merger Agreement") to be acquired by affiliates of American Securities LLC (“American Securities”) and P2 Capital Partners, LLC (“P2 Capital Partners”) in an all-cash transaction valued at approximately $855 million, including the assumption of debt. Under the terms of the Merger Agreement, upon the consummation of the transaction, Blount stockholders will receive $10.00 in cash, without interest, for each share of Blount common stock they hold.

The independent members of Blount’s Board of Directors (the "Board") unanimously approved the proposed transaction based upon the unanimous recommendation of a Special Committee, which was comprised of independent directors and advised by its own financial and legal advisers.

The consummation of the transaction, which is structured as a one-step merger with Blount continuing as the surviving corporation (the “Merger”) and a wholly owned subsidiary of ASP Blade Intermediate Holdings, Inc., an affiliate of American Securities ("Parent"), is expected to occur during the second quarter of fiscal year 2016, and remains subject to receipt of

5



certain required regulatory approvals, the approval of the holders of a majority of the outstanding shares of Blount common stock, and the satisfaction or waiver of other customary closing conditions. The meeting at which Blount stockholders will vote on the adoption of the Merger Agreement is currently scheduled to take place on April 7, 2016. We cannot assure you that the proposed Merger will be completed, nor can we predict the exact timing of the completion of the proposed Merger, because it is subject to the satisfaction of various conditions, many of which are outside our control. If the proposed Merger is consummated, Blount common stock will cease to be traded on the New York Stock Exchange and we will no longer be a publicly-traded company.

The Merger Agreement provides that we are required to pay a termination fee to Parent if (i) the Merger Agreement is terminated so that we can enter into an agreement with respect to a “superior proposal” (as defined in the Merger Agreement), (ii) the Merger Agreement is terminated by Parent due to a change of recommendation with respect to the Merger Agreement by the Board or the Special Committee or (iii) each of the following three events occurs:
prior to the adoption of the Merger Agreement by our stockholders, the Merger Agreement is terminated by us or Parent because the Merger has not been consummated by the termination date (June 4, 2016) or because our stockholders have not adopted the Merger Agreement;
any person has made (and has not subsequently withdrawn prior to the event giving rise to such termination) a proposal to acquire more than 75% of our common stock or assets after the date of the Merger Agreement but prior to such termination; and
within 12 months after such termination, we enter into a definitive agreement with respect to such acquisition proposal, or a transaction contemplated by such acquisition proposal is otherwise consummated within 12 months of such termination.

The termination fee payable (a) would have been in an amount equal to approximately $7.3 million if such fee had been payable in connection with the termination of the Merger Agreement due to (I) our entry into an agreement with respect to, or (II) a change of the Board’s or Special Committee’s recommendation as a result of, an acquisition proposal first received from an “excluded party” (as defined in the Merger Agreement) on or before March 9, 2016, and (b) is in an amount equal to
approximately $14.7 million if payable in accordance with the terms of the Merger Agreement other than under the circumstances described in (a) above. As described further in the definitive proxy statement relating to the Merger, which we filed with the SEC on March 9, 2016, there were no “excluded parties” under the Merger Agreement because we did not receive any acquisition proposals during the “go-shop” period provided for by the Merger Agreement. Accordingly, if a termination fee becomes payable by us in accordance with the terms of the Merger Agreement, it will be in an amount equal to approximately $14.7 million.

The Merger Agreement also provides that Parent will be required to pay us a reverse termination fee of $39.1 million (which obligation has been guaranteed by affiliates of each of American Securities and P2 Capital Partners) if the Merger Agreement is terminated by us because of Parent's uncured breach of the Merger Agreement or because Parent has not closed the Merger within two business days of the date the closing of the Merger should have occurred under the Merger Agreement despite our standing ready, willing and able to consummate the Merger during such two business day period.

We have entered into an agreement with P2 Capital Partners and certain of its affiliates, which collectively own approximately 14.99% of our outstanding shares, whereby P2 Capital Partners and such affiliates have agreed to vote their shares in accordance with the recommendation of the Board with respect to the proposed Merger. If we take action with respect to a “superior proposal” (as defined in the Merger Agreement), P2 Capital Partners and its affiliates have agreed to vote all of their shares in favor of an all-cash superior proposal and to vote their shares for or against other superior proposals in the same proportion as our stockholders (other than American Securities, P2 Capital Partners, members of our management or Board, or any of their respective affiliates).

Intellectual Property

Our proprietary brands include Alitec™, Carlton®, CF™, EuroMAX®, FORCE4®, Fusion®, Gannon™, Gator™, Gator Mulcher®, ICS®, INTENZ®, Jet-Fit®, Magnum Edger™, Oregon®, PBL™, PowerGrit®, PowerSharp®, Power-Match®, PowerNow™, PowerPro™, RentMAX™, SealPro®, SpeeCo®, SpeedHook®, Silverstreak®, Tiger®, Tisco®, Tru-Power®, Vintage Iron™, WainRoy®, Windsor®, Woods®, Woods Batwing™, Woods BrushBull™, Woods Mow'n Machine™, and WoodsCare™. All of these are registered, pending, or common trademarks of Blount and its subsidiaries in the U.S. and/or other countries.

The Company holds a number of patents, trademarks, and other intellectual property that are important to our business. From time to time we are involved in disputes, some of which lead to litigation, either in defense of our intellectual property or cases

6



where others have alleged that we have infringed on their intellectual property rights. See further discussion under Item 1A, Risk Factors, within the heading “Litigation – We may have litigation liabilities that could result in significant costs to us.”

Capacity Utilization

Based on a five-day, three-shift work week, average capacity utilization is estimated as follows:
Capacity Utilization
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Forestry, lawn, and garden
 
79
%
 
86
%
 
74
%
Farm, ranch, and agriculture
 
33
%
 
41
%
 
34
%
Concrete cutting and finishing
 
71
%
 
75
%
 
69
%

The Company expects to meet future sales demand growth by utilizing excess capacity at existing facilities. Future expansion of capacity will be made through both productivity enhancements and capital investment at existing facilities as well as potential capital investment in additional FLAG locations. We have undertaken recent facility consolidation actions to streamline operations and reduce costs. During 2013 we closed a FLAG manufacturing facility near Portland, OR and consolidated the manufacturing operations into our other facilities. During 2014 we closed a small lawnmower blade manufacturing facility in Mexico and consolidated the manufacturing operations in our Kansas City, MO location. In the third quarter of 2015, the Company took certain actions to reduce its global headcount and lower operating costs in response to weak market conditions and lower 2015 sales.

The FRAG segment facilities are normally operated on a five-day, one-shift basis, which was the case during 2013, 2014, and 2015.

Sales Order Backlog

Our sales order backlog was as follows:
Sales Order Backlog
 
As of December 31,
(Amounts in thousands)
 
2015
 
2014
 
2013
Forestry, lawn, and garden
 
$
114,493

 
$
140,063

 
$
150,850

Farm, ranch, and agriculture
 
19,539

 
28,783

 
31,355

Concrete cutting and finishing
 
401

 
273

 
434

Total sales order backlog
 
$
134,433

 
$
169,119

 
$
182,639


The total sales order backlog as of December 31, 2015 is expected to be completed and shipped within twelve months.

Employees

At December 31, 2015, we employed approximately 4,000 individuals. None of our U.S. employees belong to a labor union. The number of foreign employees who belong to labor unions is not significant. Certain of our foreign locations participate with worker councils which perform functions similar to a labor union. Certain other foreign locations participate with industry trade groups that negotiate certain policies and procedures for the general industry or with employer worker councils. We believe our relations with our employees are satisfactory, and we have not experienced any significant labor-related work stoppages in the last three years.

Environmental Matters

The Company’s operations are subject to comprehensive U.S. and foreign laws and regulations relating to the protection of the environment, including those governing discharges of pollutants into the air, ground, and water, the management and disposal of hazardous substances, and the cleanup of contaminated sites. Permits and environmental controls are required for certain of these operations, including those required to prevent or reduce air and water pollution, and our permits are subject to modification, renewal, and revocation by issuing authorities.


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On an ongoing basis, we incur capital and operating costs to comply with environmental laws and regulations, as summarized in the following table. 
Environmental Compliance Costs
 
Year Ended December 31,
(Amounts in thousands)
 
2015
 
2014
 
2013
Expenses attributed to environmental compliance
 
$
2,200

 
$
2,000

 
$
1,500

Capital expenditures attributed to environmental compliance
 
900

 
500

 
700

Total attributed to environmental compliance
 
$
3,100

 
$
2,500

 
$
2,200


We expect to spend between $2.0 million and $3.0 million per year in capital and operating costs over the next three years for environmental compliance and anticipate continued spending at a similar level in subsequent years. The actual cost to comply with environmental laws and regulations may be greater than these estimated amounts.

In the manufacture of our products, we use certain chemicals and processes, including chrome and paints applied to some of our products, and oils used on metal-working machinery. Some of our current and former manufacturing facilities are located on properties with a long history of industrial use, including the use of hazardous substances. For certain of our former facilities, we retained responsibility for past environmental matters under certain conditions and pursuant to the terms of the agreements by which we sold the properties to third party purchasers. In addition, from time to time third parties have asserted claims against us for environmental remediation at former sites despite the absence of a contractual obligation. We have identified soil and groundwater contamination from these historical activities at certain of our current and former facilities, which we are currently investigating, monitoring, and in some cases, remediating. We have recognized the estimated costs of remediation in the Consolidated Financial Statements for all known contaminations that require remediation by us. As of December 31, 2015, the total recorded liability for environmental remediation was $2.0 million. Management believes that costs incurred to investigate, monitor, and remediate known contamination at these sites will not have a material adverse effect on our business, financial condition, results of operations or cash flows. We cannot be sure, however, that we have identified all existing contamination on our current and former properties, or that our estimated costs will be adequate to fully remediate the known contamination, or that our operations will not cause contamination in the future. As a result, we could incur material future costs to clean up environmental contamination.

From time to time we may be identified as a potentially responsible party under the U.S. Comprehensive Environmental Response, Compensation and Liability Act or similar state statutes with respect to sites at which we may have disposed of wastes. The U.S. Environmental Protection Agency (or an equivalent state agency) can either (a) allow potentially-responsible parties to conduct and pay for a remedial investigation and feasibility study and remedial action or (b) conduct the remedial investigation and action on its own and then seek reimbursement from the parties. Each party can be held liable for all of the costs, but the parties can then bring contribution actions against each other or potentially responsible third parties. As a result, we may be required to expend amounts on such remedial investigations and actions, which amounts cannot be determined at the present time, but which may ultimately prove to be material to the Consolidated Financial Statements.

In recent years, climate change has been discussed in various forums throughout the world. We do not believe that climate change has had a significant impact on our business operations or results to this point, but we cannot be sure of the potential effects to our business from any future changes in regulations or laws concerning climate change. Any new regulations limiting the amount of timber that could be harvested would most likely have a negative impact on our sales of forestry products. If climate change were to result in significant shifts in crops grown in agricultural regions, or prolonged significant changes in weather patterns, it could adversely affect our agricultural product business.

For additional information regarding certain environmental matters, see Note 15 to the Consolidated Financial Statements.

Financial Information about Industry Segments and Foreign and Domestic Operations

For financial information about industry segments and foreign and domestic operations, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 19 to the Consolidated Financial Statements.

Seasonality

The Company’s operations are somewhat seasonal in nature. Year-over-year and quarter-over-quarter operating results are impacted by economic and business trends within the respective industries in which we compete, as well as by seasonal weather patterns and the occurrence of natural disasters and storms. Shipping and sales volume for some of the Company’s products vary based upon the time of year, but the overall impact of seasonality is generally not significant.

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Research and Development Activities

See Note 1 to the Consolidated Financial Statements for information about our research and development activities.

Available Information

Our website address is www.blount.com. You may obtain electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports, and other U.S. Securities and Exchange Commission (“SEC”) filings by accessing the Investor Relations section of the Company’s website under the heading “SEC Filings”. These reports are available on our Investor Relations website as soon as reasonably practicable after we electronically file them with the SEC.

Once filed with the SEC, such documents may be read and/or copied at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Blount, who file electronically with the SEC.

ITEM 1A. RISK FACTORS

Risks and Uncertainties Associated with the Proposed Merger—There are a number of risks and uncertainties associated with the proposed Merger.

On December 9, 2015, we entered into the Merger Agreement, which provides for the acquisition of Blount by affiliates of American Securities and P2 Capital Partners. The transaction is structured as a one-step merger with Blount as the surviving corporation. A number of risks and uncertainties are associated with the proposed Merger. For example, there can be no assurance that the conditions to the closing of the proposed Merger will be satisfied or, to the extent permitted, waived, including receipt of certain required regulatory approvals, the adoption of the Merger Agreement by Blount stockholders, the absence of any legal prohibitions, the accuracy of the representations and warranties of the parties under the Merger Agreement, compliance by the parties with their respective obligations under the Merger Agreement and the absence of a Company material adverse effect. Parent is also not required to consummate the proposed Merger until after the completion of a marketing period described in the Merger Agreement for the debt financing it is using to fund a portion of the merger consideration.

Other events may also occur, which could delay or result in the failure to consummate the proposed Merger, including litigation relating to the proposed Merger or the failure of Parent to obtain the necessary debt financing provided for by the commitment letters received in connection with the proposed Merger. If the proposed Merger is not consummated for any reason, Blount stockholders will not receive the consideration that Parent has agreed to pay upon the consummation of the proposed Merger, and the price of Blount common stock may decrease to the extent that its current market price reflects an assumption that the proposed Merger will be consummated. Such price decrease may be significant.

Additionally, we are currently subject to certain "no shop" provisions in the Merger Agreement that, subject to certain exceptions, limit our ability to discuss, facilitate or commit to third-party acquisition proposals to acquire all or a significant part of the Company. In addition, we will be required to pay a termination fee of approximately $14.7 million to Parent if (a) the Merger Agreement is terminated so that we can enter into an agreement with respect to a “superior proposal” (as defined in the Merger Agreement), (b) the Merger Agreement is terminated by Parent due to a change of recommendation with respect to the Merger Agreement by the Board or the Special Committee or (c) each of the following three events occurs:
prior to the adoption of the Merger Agreement by our stockholders, the Merger Agreement is terminated by us or Parent because the Merger has not been consummated by the termination date (June 4, 2016) or because our stockholders have not adopted the Merger Agreement;
any person has made (and has not subsequently withdrawn prior to the event giving rise to such termination) a proposal to acquire more than 75% of our common stock or assets after the date of the Merger Agreement but prior to such termination; and
within 12 months after such termination, we enter into a definitive agreement with respect to such acquisition proposal, or a transaction contemplated by such acquisition proposal is otherwise consummated within 12 months of such termination.


9



These provisions might discourage a third party that has an interest in acquiring all or a significant part of the Company from considering or proposing an acquisition, even if the party were prepared to pay consideration with a higher per share cash or market value than the cash value to be received in the proposed Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee.

Furthermore, pending the closing of the proposed Merger, the Merger Agreement also restricts us from engaging in certain actions without Parent's consent, which could prevent us from pursuing opportunities that may arise prior to the closing of the proposed Merger and may be beneficial to our future performance.

If the proposed Merger is completed, we will no longer exist as a public company and Blount stockholders will forego any increase in our value that might have otherwise resulted from our possible future growth.

Business Impact of the Proposed Merger—Our business could be adversely impacted as a result of uncertainty related to the proposed Merger or by the failure to consummate the proposed Merger.

The proposed Merger could cause disruptions to our business or our business relationships, which could have an adverse impact on our results of operations. For example, our employees may experience uncertainty about their future roles with us, which may adversely affect our ability to hire and retain key personnel. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties. In addition, our management team and other employees are devoting significant time and effort to activities related to the proposed Merger.

We have incurred and will continue to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable regardless of whether or not the proposed Merger is consummated. In the event the proposed Merger is not consummated for any reason, or the timing of its consummation is delayed, our operating results may be adversely affected as a result of the incurrence of these significant additional expenses and the diversion of management attention.

In addition, if the proposed Merger is not completed, we may experience negative reactions from the financial markets and from our customers, suppliers, and employees. We also could be subject to litigation related to any failure to complete the proposed Merger or to enforcement proceedings commenced against us to attempt to force us to perform our obligations under the Merger Agreement.

Interests of Certain Executive Officers and Directors—Certain of our executive officers and directors have interests in the proposed Merger that may be different from, or in addition to, the interests of Blount stockholders generally.

Certain of our executive officers and directors have interests in the proposed Merger that may be different from, or in addition to, the interests of Blount stockholders generally. The interests of our directors and executive officers in the proposed Merger are described in detail in the definitive proxy statement regarding the proposed Merger, which we filed with the SEC on March 9, 2016.

Competition—Competition may result in decreased sales, operating income, and cash flows.

The markets in which we operate are competitive. We believe that design features, product quality, product performance, customer service, delivery lead times, and price are the principal factors considered by our customers. Some of our competitors may have, or may develop, greater financial resources, lower costs, superior technology, more favorable operating conditions, or may require lower returns on capital invested than we do. For example, our competitors have expanded capacity and contracted with suppliers located in China and other low-cost manufacturing locations as a means to lower costs. Although we have also established a manufacturing facility in China, international competition from emerging economies has nevertheless been formidable and has, in some cases, negatively affected our business through the introduction of lower competitive pricing in our markets. We may not be able to compete successfully with our existing or any new competitors, and the competitive pressures we face may result in decreased sales, operating income, and cash flows. Competitors could also obtain knowledge of our proprietary manufacturing techniques and processes and reduce our competitive advantage by copying such techniques and processes. Certain of our customers also compete with us with certain products in selected markets, and they may expand their production and marketing of competing products in the future.


10



Key Customers—Loss of one or more key customers would substantially decrease our sales.

In 2015, none of our customers individually accounted for 10% or more of our total sales and our top five customers accounted for 19.1%, of our total sales. While we expect these business relationships to continue, the loss of any of these key customers, or a substantial portion of their business, would most likely significantly decrease our sales, operating income, and cash flows. Certain customers may also decide to self-manufacture various components that we currently sell to them, which would have an adverse effect on our business. For example, one of our customers, the Husqvarna Group, has announced its plan to manufacture certain cutting chain, which we have historically supplied to them, and we expect this change will result in a reduction in our sales, operating income, and cash flows.

Key Suppliers and Raw Materials Costs—The loss of a few key suppliers or increases in raw materials costs could substantially decrease our sales or increase our costs.

We purchase raw materials, components, and parts from a limited number of suppliers that meet our quality criteria. We generally do not operate under long-term written supply contracts with our suppliers. Although alternative sources of supply are available, the sudden elimination or disruption of certain suppliers could result in manufacturing delays, an increase in costs, a reduction in product quality, and a possible loss of sales in the short-term. In 2015, we purchased $13.0 million in products from our largest supplier and $46.3 million in products and raw materials from our top five suppliers.

Some raw materials, in particular cold-rolled strip steel, are subject to price volatility over periods of time. In 2015 we purchased $79.2 million of steel. In addition to steel raw material, we also purchase components and sub-assemblies that are made with steel, and prices for these items are subject to steel price volatility risk. We have entered into purchase contracts with certain suppliers to stabilize near-term pricing on a portion of our steel purchases, but we have not entered into any derivative instruments to hedge against the price volatility of any raw materials. It has been our experience that raw material price increases are sometimes difficult to recover from our customers in the short-term through increased pricing. We estimate that a 10% change in the price of steel purchased as raw material, without a corresponding increase in selling prices, would have increased 2015 loss before income taxes by $7.9 million.

Foreign Sales and Operations—We have substantial foreign sales, operations, and property, which could be adversely affected as a result of changes in local economic or political conditions, fluctuations in foreign currency exchange rates, unexpected changes in regulatory environments, or potentially adverse tax consequences.

In 2015, approximately 51% of our sales were shipped to customers outside of the U.S. International sales and operations are subject to inherent risks, including changes in local economic or political conditions, instability of government institutions, the imposition of currency exchange restrictions, unexpected changes in legal and regulatory environments, nationalization of private property, and potentially adverse tax consequences. Under some circumstances, these factors could result in significant declines in international sales or loss of assets.

Some of our sales and expenses are denominated in local currencies that are affected by fluctuations in foreign currency exchange rates in relation to the U.S. Dollar. Historically, our principal local currency exposures have been related to manufacturing costs and expenses in Brazil, Canada, and China, and local currency sales and expenses in Europe, South America, Canada, and China. From time to time, we manage some of our exposure to currency exchange rate fluctuations through derivative products. However, such derivative products merely reduce the short-term volatility of currency fluctuations, and do not eliminate their effects over the long-term. We estimate the year-over-year movement of foreign currency exchange rates from 2014 to 2015, whereby the U.S. Dollar strengthened in relation to most foreign currencies, decreased our sales by $42.0 million and increased our operating income by $0.6 million from the translation of foreign currency denominated transactions into U.S. Dollars. Any change in the exchange rates of currencies in jurisdictions into which we sell products or incur significant expenses could result in a significant decrease in reported sales and operating income. For example, we estimate that a 10% stronger Canadian Dollar in relation to the U.S. Dollar would have increased our operating loss by $5.0 million in 2015. We estimate that a 10% weaker Euro in relation to the U.S. Dollar would have reduced our sales by $9.5 million and increased our operating loss by $1.2 million in 2015.

Also, approximately 55% of our foreign sales in 2015 were denominated in U.S. Dollars. We may see a decline in sales during periods of a strengthening U.S. Dollar, which can make our prices less competitive in international markets. We attribute much of the 2015 decline in sales unit volume to the impact on competitive pricing from the stronger U.S. Dollar. Furthermore, if the U.S. Dollar strengthens against foreign currencies, it becomes more costly for foreign customers to pay their U.S. Dollar receivable balances owed to us. They may have difficulty in repaying these amounts, and in turn, our bad debt expense may increase.


11



In addition, we own substantial manufacturing facilities outside the U.S. As of December 31, 2015, 48%, or 857,555 of the total square feet of our owned facilities are located outside of the U.S., and 26% of our leased square footage is located outside the U.S. This foreign-based property, plant, and equipment ("PP&E") is subject to inherent risks for the reasons cited above. Loss of these facilities or restrictions on our ability to use them would have an adverse effect on our manufacturing and distribution capabilities and would result in reduced sales, operating income, and cash flows.

Sanctions by the U.S. government against certain companies and individuals in Russia and Ukraine may hinder our ability to conduct business with potential or existing customers and vendors in these countries.

We currently derive a portion (approximately 1.8% in 2015) of our revenue from Russia and Ukraine, and have a sales and distribution office in Russia. Recently, the U.S. government imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian and Ukrainian individuals and companies. While we believe that the executive orders currently do not preclude us from conducting business with our current customers in Russia and Ukraine, the sanctions imposed by the U.S. government may be expanded in the future and restrict our activities with them. If we are unable to conduct business with new or existing customers or pursue opportunities in Russia or Ukraine, our sales, operating income, and cash flows, could be adversely affected.

Weather—Sales of many of our products are affected by weather patterns and the occurrence of natural disasters.

Sales of many of our products are influenced by weather patterns that are clearly outside our control. For example, drought conditions tend to reduce the demand for agricultural and yard care products, such as tractor attachments and lawnmower blades, and conversely, plentiful rain conditions stimulate demand for these products. Extreme cold weather can affect the agricultural cycle and adversely affect our business. For example, during 2015, harsh winter conditions in North America delayed the spring planting season and adversely affected our FRAG agricultural attachment sales. Conversely, cold winter weather can stimulate demand for our forestry and log splitter products. Natural disasters such as hurricanes, typhoons, and ice and wind storms that knock down trees can stimulate demand for our forestry and log splitter products. Conversely, a relative lack of severe weather and natural disasters can result in reduced demand for these same products.

Financial Leverage and Debt—Due to our financial leverage, we could have difficulty operating our business and satisfying our debt obligations.

As of December 31, 2015, we have $582.7 million of total liabilities, including $379.0 million of debt. Our debt leverage is significant, and may have important consequences for us, including the following:
A significant portion of our cash flow from operations is dedicated to the payment of interest expense and required principal repayments, which reduces the funds that would otherwise be available to fund operations and future business opportunities. Cash interest and mandatory debt principal payments totaled $29.2 million during 2015.
A substantial decrease in net operating income and cash flows or a substantial increase in expenses may make it difficult for us to meet our debt service requirements or force us to modify our operations.
Our financial leverage may make us more vulnerable to economic downturns and competitive pressures.
Our ability to obtain additional or replacement financing for working capital, capital expenditures, or other purposes, may be impaired, or such financing may not be available on terms favorable to us under current market conditions for credit. Our current senior credit facilities mature on May 5, 2020.

We have available borrowing capacity under the revolving portion of our senior credit facilities of $43.9 million as of December 31, 2015. If we or any of our subsidiaries incur additional indebtedness, the risks outlined above could worsen. Our ability to make payments on our indebtedness and to fund planned capital expenditures and research and product development efforts will depend on our ability to generate cash in the future. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control.

Our historical financial results have been, and we anticipate that our future financial results will continue to be, subject to fluctuations in customer orders, sales, operating results, and cash flows. Our business may not be able to generate sufficient cash flow from our operations or future borrowings may not be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. An inability to pay our debts would require us to pursue one or more alternative capital raising strategies, such as selling assets, refinancing or restructuring our indebtedness, or selling equity capital. However, alternative strategies may not be feasible at the time or may not prove adequate, which could cause us to default on our obligations and would impair our liquidity. Also, some alternative strategies would require the prior consent of our secured lenders, which we may not be able to obtain. See also Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.


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Restrictive Covenants—The terms of our indebtedness contain a number of restrictive covenants, the breach of any of which could result in acceleration of payment of our senior credit facilities.

A breach of any of our restrictive debt covenants could result in acceleration of our obligations to repay our debt. An acceleration of our repayment obligations under our senior credit facilities could result in a payment or distribution of substantially all of our assets to our secured lenders, which would materially impair our ability to operate our business as a going concern. In addition, our senior credit facility agreement, among other things, restricts and/or limits our and certain of our subsidiaries’ ability to:
incur debt;
guarantee indebtedness of others;
pay dividends on our stock;
repurchase our stock;
pursue business acquisitions;
make certain types of investments;
use assets as security in other transactions;
sell certain assets or merge with or into other companies;
enter into sale and leaseback transactions;
enter into certain types of transactions with affiliates;
enter into certain new businesses; and
make certain payments in respect of subordinated indebtedness.

In addition, the senior credit facilities require us to maintain certain financial ratios and satisfy certain financial condition tests, which may require that we take actions to reduce debt or to act in a manner contrary to our business objectives. Our ability to meet those financial ratios and tests could be affected by events beyond our control, and there can be no assurance that we will continue to meet those ratios and tests. A breach of any of these covenants could, if uncured, constitute an event of default under the senior credit facilities. Upon the occurrence of an event of default under the senior credit facilities, the lenders could elect to declare all amounts outstanding under the senior credit facilities, together with any accrued interest and commitment fees, to be immediately due and payable. If we and certain of our subsidiaries were unable to repay those amounts, the lenders under the senior credit facilities could enforce the guarantees from the guarantors and proceed against the collateral securing the senior credit facilities. The assets of Blount, Inc., our wholly-owned subsidiary and issuer of the debt under our senior credit facilities, and the applicable guarantors could be insufficient to repay in full that indebtedness and our other indebtedness. See also Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Assets Pledged as Security on Credit Facilities—The majority of our assets and the capital stock of our wholly-owned subsidiary Blount, Inc. are pledged to secure obligations under our senior credit facilities.

The Company and all of its domestic subsidiaries other than Blount, Inc. guarantee Blount, Inc.’s obligations under the senior credit facilities. The obligations under the senior credit facilities are collateralized by a first priority security interest in substantially all of the assets of Blount, Inc. and its domestic subsidiaries, as well as a pledge of all of Blount, Inc.’s capital stock held by Blount International, Inc. and all of the stock of domestic subsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of the stock of its direct non-domestic subsidiaries as additional collateral. An event of default under our senior credit facilities could trigger our lenders’ contractual rights to enforce their security interests in these assets.

Litigation—We may have litigation liabilities that could result in significant costs to us and, in the case of stockholder litigation relating to the proposed Merger, could delay or prevent the proposed Merger.

Our historical and current business operations have experienced a number of litigation matters, including litigation involving personal injury or death, as a result of alleged design or manufacturing defects of our products, and litigation involving alleged patent infringement. Certain of these liabilities relate to our discontinued operations and were retained by us under terms of the relevant divestiture agreements. Some of the product liability claims made against us seek significant or unspecified damages for serious personal injuries for which there are retentions or deductible amounts under our insurance policies. In the future, we may face additional lawsuits, and it is difficult to predict the amount and type of litigation that we may face. Litigation, insurance, and other related costs could result in future liabilities that are significant and that could significantly reduce our operating income, cash flows, and cash balances.


13



Additionally, we and the members of our Board (including Joshua L. Collins, the chairman of our Board and our chief executive officer, and David A Willmott, our president and chief operating officer, both in their capacities as officers and members of our Board) have been named as defendants in litigation relating to the Merger Agreement and the proposed Merger. American Securities, P2 Capital Partners and certain of their respective affiliates, and Goldman, Sachs & Co., financial advisor to our Board in connection with the proposed Merger (“Goldman Sachs”), have also been named as defendants. The litigation plaintiff has alleged that (1) the individual defendants breached their fiduciary duties of care and loyalty in connection with their negotiation and approval of the Merger Agreement, (2) the individual defendants breached their fiduciary duty of disclosure by filing a preliminary proxy statement that fails to disclose and/or misrepresents material information and (3) P2 Capital Partners, one of P2 Capital Partners’ affiliates and Goldman Sachs aided and abetted such alleged breaches of fiduciary duties. The plaintiff has asked the court to, among other things, (i) preliminarily and permanently enjoin the defendants from proceeding with the proposed Merger on the current terms, and (ii) in the event that the proposed Merger is consummated, rescind the proposed Merger or grant rescissory damages. Further lawsuits may be filed in connection with the proposed Merger. The closing of the proposed Merger is subject to the satisfaction or waiver of the condition that no order, judgment, injunction, award, decree or writ of any governmental entity of competent jurisdiction has been issued and continues in effect that prohibits, restrains, enjoins or renders illegal the consummation of the proposed Merger. If any lawsuits are successful in obtaining an injunction prohibiting the parties from completing the proposed Merger on the agreed-upon terms, such injunction may prevent the completion of the proposed Merger in the expected time frame or altogether.

See also Item 3, Legal Proceedings, and Note 15 to the Consolidated Financial Statements.

Environmental Matters—We face potential exposure to environmental liabilities and costs.

We are subject to various U.S. and foreign environmental laws and regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances, and the cleanup of contaminated sites. Violations of, or liabilities incurred under, these laws and regulations could result in an assessment of significant costs to us, including civil or criminal penalties, claims by third parties for personal injury or property damage, requirements to investigate and remediate contamination, and the imposition of natural resource damages. Furthermore, under certain environmental laws, current and former owners and operators of contaminated property or parties who sent waste to a contaminated site can be held liable for cleanup, regardless of fault or the lawfulness of the disposal activity at the time it was performed. This potential exposure to environmental liabilities and costs can apply to both our current and former operating facilities, including those related to our discontinued operations.

Future events, such as the discovery of additional contamination or other information concerning releases of hazardous substances at our or other sites affected by our actions, changes in existing environmental laws or their interpretation, including changes related to climate change, and more rigorous enforcement by regulatory authorities may require additional expenditures by us to modify operations, install pollution control equipment, investigate and monitor contamination at sites, clean contaminated sites, or curtail our operations. These expenditures could significantly reduce our net income and cash flows. See also Item 1, Business-Environmental Matters, Item 3, Legal Proceedings, and Note 15 to the Consolidated Financial Statements.

General Economic Factors—We are subject to general economic factors that are largely out of our control, any of which could, among other things, result in a decrease in sales, net income, and cash flows, and an increase in our interest or other expenses.

Our business is subject to a number of general economic factors, many of which are largely out of our control, which may, among other effects, result in a decrease in sales, net income, and cash flows, and an increase in our interest or other expenses. These factors include recessionary economic cycles and downturns in customers’ business cycles, as well as downturns in the principal regional economies where our operations are located. Economic conditions may adversely affect our customers’ business levels and the amount of products that they need. Furthermore, customers encountering adverse economic conditions may have difficulty in paying for our products and actual bad debts may exceed our allowance for bad debts. World-wide economic conditions may also adversely affect our suppliers and they may not be able to provide us with the goods and services we need on a timely basis, which could adversely affect our ability to manufacture and sell our products. Our senior credit facility borrowings are at variable interest rates. Increases in market reference interest rates could increase our interest expense payable under the senior credit facilities to levels in excess of what we currently expect. We estimate that an increase in our average interest rates in 2015 of 100 basis points would have increased our interest expense by $4.6 million. In addition, fluctuations in the market values of equity and debt securities held in the Company’s pension plan assets can adversely affect the funded status of our defined benefit pension plans. The expense and funding requirements for these plans may increase in the future as a result of reduced values of the plan assets. Changes in reference interest rates can also have a significant effect on the measurement of post-employment benefit plan obligations and the related expense recognized. Furthermore, terrorist

14



activities, anti-terrorist efforts, war, or other armed conflicts involving the U.S. or its interests abroad may result in a downturn in the U.S. and global economies and exacerbate the risks to our business described in this paragraph.

Key Employees—The loss of key employees could adversely affect our manufacturing efficiency.

Many of our manufacturing processes require a high level of expertise. For example, we build our own complex dies for use in cutting and shaping steel into components for our products. The design and manufacture of such dies are highly dependent on the expertise of key employees. We have also developed numerous proprietary manufacturing techniques that rely on the expertise of key employees. Our manufacturing efficiency and cost could be adversely affected if we are unable to retain these key employees or continue to train them or their replacements. Uncertainties associated with the proposed Merger may cause a loss of management or other key employees.

Common Stock Price—The price of our common stock may fluctuate significantly, and stockholders could lose all or part of their investment.

Volatility in the market price of our common stock may prevent stockholders from being able to sell their shares at or above the price paid for the shares. The market price of our common stock could fluctuate significantly for various reasons that include:
failure to complete the proposed Merger, or a significant delay in completing the proposed Merger;
our quarterly or annual earnings or those of other companies in our industries;
the public’s reaction to events and results contained in our press releases, our other public announcements, and our filings with the SEC;
changes in earnings estimates or recommendations by research analysts who track our common stock or the stock of other comparable companies;
changes in general conditions in the U.S. and global economies, financial markets, or the industries we market our products to, including those resulting from war, incidents of terrorism, changes in technology or competition, or responses to such events;
sales of common stock by our largest stockholders, directors, or executive officers; and
the other factors described in these “Risk Factors.”

In addition, the stock market and our common stock have historically experienced price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industries. The changes in prices frequently appear to occur without regard to the operating performance of these companies. For example, over the preceding two-year period, our highest closing stock price has exceeded our lowest closing stock price by 250.0%. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our Company, and these fluctuations could materially reduce our stock price.

Common Stock Sales—Future sales of our common stock in the public market could lower our stock price.

Ownership and control of our common stock is concentrated in a relatively small number of institutional investors. As of December 31, 2015, approximately 48% of our outstanding common stock was owned or controlled by our five largest stockholders. If the proposed Merger does not close as anticipated, we may sell additional shares of common stock in subsequent public offerings. Additionally, other stockholders with significant holdings of our common stock may sell large amounts of shares they own in a secondary or open market stock offering. We may also issue additional shares of common stock to finance future transactions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition or shares sold by existing stockholders), or the perception that such sales could occur, may adversely affect the prevailing market price of our common stock.

Disruptions in Shipping—A prolonged disruption in transportation logistics could affect our ability to import critical components and to ship our products to customers.

We rely on third party vendors for a substantial portion of our shipping needs, including both obtaining raw materials and products from suppliers and delivering our products to customers, and a significant amount of our shipping is via ocean transport. A significant disruption in transportation logistics could disrupt our ability to obtain raw materials and products from suppliers, and in turn disrupt our ability to manufacture our products and sell them to our customers. Significant disruption of shipping could adversely affect our operating results and cash flows, and could increase our transportation costs.

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Computer Transaction Processing—An information technology system failure or breach of security may adversely affect our business.

We rely on information technology systems to manage our operations and transact our business. An information technology system failure due to computer viruses, internal or external security breaches, power interruptions, hardware failures, fire, natural disasters, human error, or other causes could disrupt our operations and prevent us from being able to process transactions with our customers, operate our manufacturing facilities, and properly report those transactions in a timely manner. A significant, protracted information technology system failure may result in a material adverse effect on our financial condition, results of operations, or cash flows.

In recent years we have increased the volume of sales transactions processed over the Internet. As a result, sensitive information about our customers is stored in electronic media. If unauthorized access to this information were gained, we could be subject to penalties or claims by our customers, which could have an adverse effect on our business.

Material Weaknesses—Management’s determination that material weaknesses exists in our internal controls over financial reporting could have a material adverse impact on our ability to produce timely and accurate financial statements.

The Sarbanes-Oxley Act requires that we report annually on the effectiveness of our internal controls over financial reporting. We must conduct an assessment of our internal controls to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our management concluded that material weaknesses in our internal control over financial reporting existed and that internal control over financial reporting was not effective as of December 31, 2014. As a result of these material weaknesses, management also determined that our disclosure controls and procedures were not fully effective as of December 31, 2014.

In connection with our compliance efforts during the three years ended December 31, 2015, we have incurred substantial accounting, information technology, internal audit, external audit, and other expenses, as well as significant management time and resources, to remediate these material weaknesses. As of December 31, 2015, our material weaknesses in internal control over financial reporting have been remediated. Our future assessment, or the future assessment by our independent registered public accounting firm, may reveal new material weaknesses in our internal controls. Whether new material weaknesses in internal control over financial reporting are discovered or not, we expect to continue to incur significant expenses in our compliance efforts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters occupy executive offices at 4909 SE International Way, Portland, Oregon 97222. Cutting chain, guide bar, and drive sprocket manufacturing facilities within our FLAG business segment are located in Portland, Oregon; Curitiba, Brazil; Guelph, Canada; and Fuzhou, China. Lawnmower and other cutting blade manufacturing facilities within our FLAG business segment are located in Kansas City, Missouri and Civray, France. A small lawnmower blade manufacturing facility in Queretaro, Mexico was closed in January 2014. Assembly of log splitters and post-hole diggers within our FRAG business segment occurs in leased facilities in Kansas City, Missouri. Tractor attachment, construction attachment, riding lawnmowers, and other product manufacturing plants within our FRAG business segment are located in Oregon, Illinois; Kronenwetter, Wisconsin; Sioux Falls, South Dakota; and Civray, France. Sales offices and distribution centers are located in Coppell, Texas; Curitiba, Brazil; several locations in Europe; Fuzhou, China; Guelph, Canada; Nishi-ku, Yokohama, Japan; Kansas City, Missouri; Moscow, Russia; Nashville, Tennessee; Oregon, Illinois; Portland, Oregon; Rockford, Illinois; Sparks, Nevada; and Strongsville, Ohio. The FRAG segment also leases office space in Golden, Colorado with design, engineering, sales, and marketing functions.


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In the opinion of management, all of these facilities are in relatively good condition, are currently in normal operation, and are generally suitable and adequate for the business activity conducted therein. The approximate square footage of facilities located at our principal properties as of December 31, 2015 is as follows:
Properties as of December 31, 2015
 
Area in Square Feet
 
 
Owned
 
Leased
Forestry, Lawn, and Garden segment
 
1,217,000

 
511,600

Farm, Ranch, and Agriculture segment
 
533,200

 
630,500

Corporate and Other
 
50,800

 
41,400

Total
 
1,801,000

 
1,183,500

ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings, see Note 15 to the Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


17



PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the New York Stock Exchange (ticker “BLT”). Cash dividends have not been declared for the Company’s common stock since 1999. The Company’s senior credit facility agreement limits the amount available to pay dividends or repurchase Company stock. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for further discussion. The Company had approximately 5,200 stockholders of record as of December 31, 2015. See information about the Company’s stock compensation plans in Note 18 to the Consolidated Financial Statements and also in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. See also information about the proposed Merger affecting the price of our common stock in Item 1, Business, and Item 1A, Risk Factors.

The Company has not sold any registered or unregistered securities during the three year period ended December 31, 2015.

On August 6, 2014, the Board authorized a share repurchase program of the Company's common stock up to an aggregate maximum of $75.0 million through December 31, 2016. Through December 31, 2015 the Company had repurchased 1,684,688 shares at a total cost of $24.4 million, leaving a remaining authorization of $50.6 million for future purchases. This share repurchase program does not obligate Blount to acquire any particular amount of common stock, and it may be suspended at any time at the Company's discretion. As part of the Merger Agreement, the Company has agreed to not repurchase additional shares without Parent's consent.

The Company’s highest and lowest closing stock price for each of the last eight quarters is presented in the table below.

High and Low Common Stock Price by Quarter
 
Common Stock
 
 
High
 
Low
Year Ended December 31, 2014:
 
 
 
 
First quarter
 
$
14.35

 
$
11.77

Second quarter
 
14.11

 
10.97

Third quarter
 
16.48

 
13.06

Fourth quarter
 
17.85

 
14.08

 
 
 
 
 
Year Ended December 31, 2015:
 
 
 
 
First quarter
 
$
17.09

 
$
12.74

Second quarter
 
13.71

 
10.83

Third quarter
 
10.83

 
5.54

Fourth quarter
 
9.91

 
5.10


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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
 
 
Year Ended December 31,
(In thousands, except per share data)
 
2015
 
2014
 
2013
 
2012
 
2011
Statement of Income (Loss) Data:
 
(1)
 
(2)
 
(3)
 
(4)
 
(5)
Sales
 
$
828,569

 
$
944,819

 
$
900,595

 
$
927,666

 
$
831,630

Operating income (loss)
 
(46,766
)
 
64,225

 
37,521

 
79,280

 
97,953

Interest expense, net of interest income
 
14,786

 
17,171

 
17,837

 
17,206

 
18,550

Income (loss) before income taxes
 
(58,853
)
 
51,754

 
17,564

 
61,790

 
74,950

Net income (loss)
 
(49,873
)
 
36,564

 
4,840

 
39,588

 
49,682

Basic net income (loss) per share
 
(1.02
)
 
0.74

 
0.10

 
0.81

 
1.02

Diluted net income (loss) per share
 
(1.02
)
 
0.73

 
0.10

 
0.79

 
1.01

Weighted average shares used:
 
 
 
 
 
 
 
 
 
 
Basic
 
48,759

 
49,652

 
49,478

 
49,170

 
48,701

Diluted
 
48,759

 
50,272

 
50,122

 
49,899

 
49,434

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
25,949

 
$
27,254

 
$
42,797

 
$
50,267

 
$
62,118

Working capital
 
210,239

 
219,206

 
229,306

 
256,792

 
237,853

Property, plant, and equipment, net
 
179,192

 
176,409

 
171,163

 
184,671

 
161,791

Total assets
 
693,126

 
802,093

 
824,774

 
913,714

 
892,119

Long-term debt
 
363,306

 
369,072

 
422,972

 
501,685

 
510,014

Total debt
 
379,037

 
384,203

 
437,988

 
516,757

 
530,362

Stockholders’ equity
 
110,473

 
166,083

 
162,926

 
120,008

 
77,498

 
(1)
Operating income (loss) and income (loss) before taxes in 2015 include pre-tax charges of $2.5 million for facility closure and restructuring costs, $7.7 million for acquisition costs related to the proposed Merger, a $10.2 million non-cash charge for partial settlement of pension obligation, a $78.8 million non-cash charge for impairment of acquired intangible assets, and $2.0 for debt modification.
(2)
Operating income (loss) and income (loss) before income taxes in 2014 include pre-tax charges of $2.8 million for facility closure and restructuring costs and a $21.1 million non-cash charge for impairment of acquired intangible assets.
(3)
Operating income (loss) and income (loss) before income taxes in 2013 include charges of $8.2 million for facility closure and restructuring costs and a $24.9 million non-cash charge for impairment of acquired intangible assets.
(4)
Operating income (loss) and income (loss) before income taxes in 2012 include a pre-tax charge of $7.4 million for facility closure and restructuring costs.
(5)
Operating income (loss) and income (loss) before income taxes in 2011 includes a pre-tax charge of $3.9 million for early extinguishment of debt.

19



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements included in Item 8, well as the information in Item 1, Business, and Item 6, Selected Consolidated Financial Data.

Consolidated Operating Results

Year Ended December 31, 2015 compared to year ended December 31, 2014
(Amounts in millions)
 
 
 
 
 
 
 
 
 
(Amounts may not sum due to rounding)
 
2015
 
2014
 
Change
 
 
Contributing Factor
Sales
 
$
828.6

 
$
944.8

 
$
(116.3
)
 
 
 
 
 
 
 
 
 
 
$
(74.3
)
 
Unit sales volume
 
 
 
 
 
 
 
0.1

 
Selling price and mix
 
 
 
 
 
 
 
(42.0
)
 
Foreign currency translation
Gross profit
 
225.4

 
275.1

 
(49.7
)
 
 
 
Gross margin
 
27.2
 %
 
29.1
%
 
 
(22.6
)
 
Unit sales volume
 
 
 
 
 
 
 
0.1

 
Selling price and mix
 
 
 
 
 
 
 
(25.4
)
 
Other product cost and mix
 
 
 
 
 
 
 
3.5

 
Average steel costs
 
 
 
 
 
 
 
1.8

 
Acquisition accounting effects
 
 
 
 
 
 
 
(7.1
)
 
Foreign currency translation
SG&A
 
173.0

 
187.1

 
(14.0
)
 
 
 
As a percent of sales
 
20.9
 %
 
19.8
%
 
 
 
 
 
 
 
 
 
 
 
 
(7.0
)
 
Compensation
 
 
 
 
 
 
 
(2.3
)
 
Other personnel-related
 
 
 
 
 
 
 
3.9

 
Professional services
 
 
 
 
 
 
 
(1.2
)
 
Advertising
 
 
 
 
 
 
 
0.8

 
Depreciation & amortization
 
 
 
 
 
 
 
(1.5
)
 
Employee benefits
 
 
 
 
 
 
 
(7.7
)
 
Foreign currency translation
 
 
 
 
 
 
 
1.0

 
Other, net
Operating income (loss)
 
(46.8
)
 
64.2

 
(111.0
)
 
 
 
Operating margin
 
(5.6
)%
 
6.8
%
 
 
(49.7
)
 
Decrease in gross profit
 
 
 
 
 
 
 
14.0

 
Decrease in SG&A
 
 
 
 
 
 
 
0.2

 
Decrease in facility closure and restructuring costs
 
 
 
 
 
 
 
(7.7
)
 
Acquisition costs
 
 
 
 
 
 
 
(10.2
)
 
Partial settlement of pension obligation
 
 
 
 
 
 
 
(57.7
)
 
Increase in impairment of acquired intangible assets
Net income (loss)
 
$
(49.9
)
 
$
36.6

 
$
(86.4
)
 
 
 
 
 
 
 
 
 
 
(111.0
)
 
Decrease in operating income (loss)
 
 
 
 
 
 
 
2.4

 
Decrease in net interest expense
 
 
 
 
 
 
 
(2.0
)
 
Change in other income (expense)
 
 
 
 
 
 
 
24.2

 
Change in income tax provision (benefit)

Sales decreased by $116.3 million, or 12.3%, from 2014 to 2015, due to lower unit sales volume and the adverse effects of the translation of foreign currency-denominated sales transactions. Domestic sales decreased by $27.7 million, or 6.4%, due primarily to soft market conditions in the U.S. agricultural machinery market. International sales decreased by $88.5 million, or

20



17.4%, due to soft international market conditions and the $42.0 million unfavorable currency translation effects from a relatively stronger U.S. Dollar in comparison to most foreign currencies. FLAG segment sales decreased $88.2 million, or 13.7%, FRAG segment sales decreased $30.2 million, or 11.2%, while CCF sales increased $2.1 million, or 6.8%. See further discussion of sales fluctuations below under Segment Results.

Gross profit decreased by $49.7 million, or 18.1%, from 2014 to 2015. Lower unit sales volume reduced gross profit by $22.6 million in 2015. In addition, increased product costs and mix of $25.4 million, along with net unfavorable effects of foreign currency translation of $7.1 million, further reduced gross profit year-over-year. Partially offsetting these negative factors were lower average steel costs estimated at $3.5 million and lower acquisition accounting effects of $1.8 million. The increase in product cost and mix of $25.4 million was primarily driven by lower production volumes and reduced manufacturing efficiency and fixed cost absorption. Gross margin during 2015 was 27.2%, compared to 29.1% in 2014. See further discussion of the change in gross profit under Segment Results.

SG&A was $173.0 million in 2015, compared to $187.1 million in 2014, representing a decrease of $14.0 million, or 7.5%. As a percentage of sales, SG&A increased from 19.8% in 2014 to 20.9% in 2015 due to the lower sales amount. Compensation expense decreased by $7.0 million on a comparative basis, primarily due to lower accruals for variable incentive compensation and reduced headcount, partially offset by annual merit increases implemented in the first quarter of 2015. Other personnel-related expenses decreased by $2.3 million from 2014 to 2015, primarily due to lower costs for travel, relocation and recruitment. Costs of professional services increased $3.9 million in 2015 compared to 2014, primarily due to higher internal and external audit costs and increased marketing services in conjunction with our strategic initiatives. Advertising decreased by $1.2 million in 2015, due to reduced promotional activity and cost reduction efforts. Depreciation expense increased by $0.8 million, reflecting recent purchases of information systems software. Employee benefit costs decreased by $1.5 million year over year. Fluctuations in foreign currency exchange rates reduced SG&A during 2015 by approximately $7.7 million due to the translation of international-based SG&A costs from foreign currencies into a relatively stronger U.S. Dollar.

In the third quarter of 2015, the Company took certain actions to reduce its global headcount and lower operating costs in response to weak current year market conditions and lower current year sales. Total charges recognized on this action during 2015 were $2.5 million, primarily representing severance benefits paid to employees. All amounts related to this program were paid during 2015.

On December 9, 2015, we entered into the Merger Agreement to be acquired by affiliates of American Securities and P2 Capital Partners. In conjunction with preparations for entering into the Merger Agreement and for the eventual consummation of the proposed Merger, we incurred various legal and investment banking fees and expenses which totaled $7.7 million in 2015. We expect to complete the proposed Merger in the second quarter of 2016, subject to approval by Blount's stockholders at a special stockholders' meeting currently scheduled to be held on April 7, 2016, as well as approval by certain regulatory authorities and the satisfaction or waiver of other customary closing conditions. We expect to incur additional expenses estimated at approximately $7 million in conjunction with the proposed Merger process up through the closing date. If closing of the proposed Merger is significantly delayed, or if the proposed Merger is not consummated, we may incur additional costs and expenses and other adverse consequences to our business. See Item 1, Business, and Item 1A, Risk Factors, for further detail regarding the proposed Merger and the risks attendant thereto.

We maintain defined benefit pension plans covering many of our employees and retirees in the U.S., Canada, and Europe. We also maintain post-retirement medical and other benefit plans covering many of our employees and retirees in the U.S., additional unfunded retirement plans in France and Japan, and defined contribution retirement plans covering our employees in the U.S. and Canada. The costs of these post-employment benefit plans are included in cost of goods sold and SG&A, and are determined either on an actuarial basis, or on an accrual basis. The accounting effects and funding requirements for certain of these plans are subject to actuarial estimates, actual plan experience, and the assumptions we make regarding future trends and expectations. See further discussion of these key assumptions and estimates under “Critical Accounting Policies and Estimates”. Total expense recognized for all post-employment benefit plans was $28.2 million in 2015 and $15.5 million in 2014. At December 31, 2015, we had $97.1 million of accumulated other comprehensive losses related to our pension and other post-employment benefit plans that will be recognized in expense over future years, primarily through amortization, including $9.0 million to be expensed in 2016. We expect our total expense for all post-employment benefit plans to be approximately $13 million in 2016.

Effective August 18, 2015, the Company amended its U.S. defined benefit pension plan to offer certain plan participants the option to elect a one-time lump-sum distribution. Under the amendment, plan participants who elected this option received lump-sum payments in the fourth quarter of 2015 totaling $26.5 million. In conjunction with this 2015 partial settlement, the Company recognized a reduction in benefit obligations and plan assets along with a non-cash charge of $10.2 million, which reduced the accumulated loss recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet. The partial

21



settlement also resulted in a $3.8 million reduction in non-current deferred tax assets. The U.S. defined benefit pension plan has a remaining accumulated loss, net of tax, in accumulated other comprehensive loss on the Consolidated Balance Sheet of $36.2 million as of December 31, 2015.

During 2015, the Company recognized non-cash impairment charges totaling $78.8 million on goodwill and other indefinite-lived intangible assets utilized within the FRAG segment, including $12.8 million on certain trade name intangible assets and $65.9 million on goodwill.

The impairment charges on trade names, recognized in the second and fourth quarters of 2015, were based on revised lower short-term expectations about future product sales and profitability for specific brand names, and corresponding reductions in assumed royalty rates used in the related discounted cash flow models using the relief from royalty method. Although management expects more robust long-term sales growth and profitability for products sold under these trade names, accounting for indefinite-lived intangibles assets other than goodwill under U.S. GAAP required recognition of these impairment charges during 2015. See additional discussion in Note 8 to the Consolidated Financial Statements.

Impairment charges on goodwill, recognized during 2015, were based on revised lower short-term expectations about future profitability and projected cash flows of certain goodwill reporting units within the FRAG segment. The Company estimated the fair value of these goodwill reporting units using several methods, including discounted cash flow models and multiples of earnings based on comparable industry participants and transactions. The reduced short-term future expectations for these reporting units are influenced by actual performance in 2015, which was below management expectations, as well as near-term forecasted expectations.

Operating income (loss) decreased by $111.0 million, from operating income of $64.2 million in 2014 to an operating loss of $46.8 million in 2015. This decline was primarily due to a decrease in gross profit, increased charges for impairment of acquired intangible assets, 2015 charges for the partial settlement of our U.S. Pension plan, and expenses incurred related to the proposed Merger. Partially offsetting these increased operating costs were lower SG&A expense of $14.0 million. Non-cash acquisition accounting effects, including the impairment of intangible assets, reduced our operating profit and operating margin by $90.6 million and 10.9% in 2015 and by $34.7 million and 3.7% in 2014, respectively.
Net interest expense was $14.8 million in 2015 compared to $17.2 million in 2014. The $2.4 million decrease was due to lower interest rates applicable to our senior credit facility. Other income (expense), net was income of $2.7 million in 2015 compared to income of $4.7 million in 2014. Both results reflect the accounting effects of foreign currency exchange rate movements on non-operating assets. Net loss in 2015 was $49.9 million, or $1.02 per diluted share, compared to net income of $36.6 million, or $0.73 per diluted share, in 2014.

22



Year ended December 31, 2014 compared to year ended December 31, 2013
 
(Amounts in millions)
 
 
 
 
 
 
 
 
 
(Amounts may not sum due to rounding)
 
2014
 
2013
 
Change
 
 
Contributing Factor
Sales
 
$
944.8

 
$
900.6

 
$
44.2

 
 
 
 
 
 
 
 
 
 
$
53.0

 
Unit sales volume
 
 
 
 
 
 
 
(3.4
)
 
Selling price and mix
 
 
 
 
 
 
 
(5.4
)
 
Foreign currency translation
Gross profit
 
275.1

 
242.0

 
33.2

 
 
 
Gross margin
 
29.1
%
 
26.9
%
 
 
22.9

 
Unit sales volume
 
 
 
 
 
 
 
(3.4
)
 
Selling price and mix
 
 
 
 
 
 
 
14.2

 
Product cost and mix
 
 
 
 
 
 
 
(4.1
)
 
Average steel costs
 
 
 
 
 
 
 
1.2

 
Acquisition accounting effects
 
 
 
 
 
 
 
2.4

 
Foreign currency translation
SG&A
 
187.1

 
173.5

 
13.5

 
 
 
As a percent of sales
 
19.8
%
 
19.3
%
 
 
 
 
 
 
 
 
 
 
 
 
8.9

 
Compensation
 
 
 
 
 
 
 
3.8

 
Other personnel-related
 
 
 
 
 
 
 
(2.4
)
 
Professional services
 
 
 
 
 
 
 
1.7

 
Advertising
 
 
 
 
 
 
 
1.6

 
Office expenses
 
 
 
 
 
 
 
(1.1
)
 
Foreign currency translation
 
 
 
 
 
 
 
1.0

 
Other, net
Operating income (loss)
 
64.2

 
37.5

 
26.7

 
 
 
Operating margin
 
6.8
%
 
4.2
%
 
 
33.2

 
Increase in gross profit
 
 
 
 
 
 
 
(13.5
)
 
Increase in SG&A
 
 
 
 
 
 
 
3.3

 
Decrease in facility closure and restructuring costs
 
 
 
 
 
 
 
3.8

 
Decrease in impairment of acquired intangible assets
Net income (loss)
 
$
36.6

 
$
4.8

 
$
31.7

 
 
 
 
 
 
 
 
 
 
26.7

 
Increase in operating income (loss)
 
 
 
 
 
 
 
0.7

 
Increase in net interest expense
 
 
 
 
 
 
 
6.8

 
Change in other income (expense)
 
 
 
 
 
 
 
(2.5
)
 
Change in income tax provision (benefit)

Sales increased by $44.2 million, or 4.9%, from 2013 to 2014, due to higher unit sales volume, partially offset by lower average selling prices and product mix and unfavorable effects of movements in foreign currency exchange rates. The translation of foreign currency-denominated sales transactions decreased consolidated sales by $5.4 million in 2014 compared to 2013, primarily due to the relatively stronger U.S. Dollar in comparison to the Brazilian Real, Russian Ruble, Canadian Dollar, and Japanese Yen. International sales increased by $20.0 million, or 4.1%, net of the adverse currency effects described above, while domestic sales increased by $24.2 million, or 5.9%. FLAG segment sales increased $31.7 million, or 5.2%, FRAG segment sales increased $8.9 million, or 3.4%, and sales of concrete cutting and finishing products were up $3.6 million, or 13.3%. See further discussion below under Segment Results.

Gross profit increased by $33.2 million, or 13.7%, from 2013 to 2014. Higher unit sales volume increased gross profit by $22.9 million in 2014. In addition, lower product cost and mix increased gross profit by $14.2 million, reflecting increased manufacturing efficiencies and overhead absorption due to higher production levels and capacity utilization during 2014, primarily in the FLAG segment. Gross profit was also positively affected by reduced acquisition accounting effects of $1.2 million. Partially offsetting these gross profit improvements were higher average steel costs of $4.1 million and an unfavorable

23



net change in average selling prices and product mix of $3.4 million. Gross margin in 2014 was 29.1% of sales compared to 26.9% in 2013. See further discussion of the change in gross profit under Segment Results.

Fluctuations in foreign currency exchange rates also increased our gross profit in 2014 compared to 2013 by an estimated $2.4 million. The translation of weaker foreign currencies into a stronger U.S. Dollar resulted in lower reported foreign manufacturing costs in Brazil and Canada, partially offset by the negative effects on foreign currency denominated sales previously described.

SG&A was $187.1 million in 2014, compared to $173.5 million in 2013, representing an increase of $13.5 million, or 7.8%. As a percentage of sales, SG&A increased from 19.3% in 2013 to 19.8% in 2014. Compensation expense increased by $8.9 million on a comparative basis, reflecting increased headcount, annual wage increases, and increased variable incentive compensation due to improved operating results. Travel, recruiting, relocation, and other personnel-related expenses increased by $3.8 million from 2013 to 2014, reflecting increases in these activities. Costs of professional services were $2.4 million lower in 2014 compared to 2013, primarily due to a reduction in external audit fees. Advertising expense increased by $1.7 million, reflecting increased marketing efforts by the Company. Office expenses increased by $1.6 million, primarily due to higher costs for software licenses, software implementation costs, and increased utility costs. Fluctuations in foreign currency exchange rates reduced SG&A due to the translation of weaker foreign currencies into a stronger U.S. Dollar in various foreign locations.

During 2014 the Company completed the consolidation of its two manufacturing facilities in Portland, Oregon. We incurred charges of $1.2 million on this project during 2014, consisting of asset impairment charges, accelerated depreciation, and costs to move and install equipment in other Blount facilities. As of December 31, 2014, the project was complete and no further costs were incurred. With this consolidation of manufacturing facilities, the Company expects to achieve more efficient operations and annual cost savings of between $6 million and $8 million.

During 2014, the Company completed a consolidation of its North American lawn and garden blade manufacturing into its Kansas City, Missouri plant and closed a small facility located in Queretaro, Mexico. The Company incurred expenses of $1.6 million on this project during 2014. These expenses included cash transition costs for severance, dismantling, moving, cleanup, and exit activities, and $0.5 million in non-cash charges for impairment of PP&E. As of December 31, 2014, the project was complete and no further costs were incurred. Annualized cost reductions of approximately $2 million are expected from this consolidation.

In the third and fourth quarters of 2014, the Company recognized non-cash impairment charges totaling $21.1 million for impairment of acquired intangible assets. These impairment charges reflect reduced short-term expectations of sales growth and profitability on the related product sales compared with assumptions used when the original acquisition accounting was prepared. The reduced short-term future expectations for these product lines were based on actual performance in 2014, which was below management expectations.

We maintain defined benefit pension plans covering many of our employees and retirees in the U.S., Canada, and Europe. We also maintain post-retirement medical and other benefit plans covering many of our employees and retirees in the U.S., additional unfunded retirement plans in France and Japan, and defined contribution retirement plans covering our employees in the U.S. and Canada. The costs of these post-employment benefit plans are included in cost of goods sold and SG&A, and are determined either on an actuarial basis, or on an accrual basis. Total expense recognized for all post-employment benefit plans was $15.5 million in 2014 and $19.2 million in 2013.

Operating income increased by $26.7 million from 2013 to 2014, primarily due to increased gross profit of $33.2 million and lower current year charges for plant closure and restructuring activities and impairment of acquired intangible assets. Partially offsetting these positive factors were higher SG&A expenses of $13.5 million. Our operating margin improved from 4.2% of sales in 2013 to 6.8% of sales in 2014. Non-cash acquisition accounting effects, including the impairment of intangible assets, reduced our operating profit and operating margin by $34.7 million and 3.7% in 2014 and by $39.6 million and 4.4% in 2013, respectively.

Net interest expense was $17.2 million in 2014 compared to $17.8 million in 2013. The $0.7 million decrease was due to lower average outstanding debt balances in the current period. Other income, net, was $4.7 million in 2014 compared to other expense, net, of $2.1 million in 2013. Both results reflect the accounting effects of foreign currency exchange rate movements on non-operating assets. Net income in 2014 was $36.6 million, or $0.73 per diluted share, compared to $4.8 million, or $0.10 per diluted share, in 2013.


24



Income Tax Provision

The following table summarizes our income tax provision: 
Income Tax Provision
 
Year Ended December 31,
(Amounts in thousands)
 
2015
 
2014
 
2013
Income (loss) before income taxes
 
$
(58,853
)
 
$
51,754

 
$
17,564

Provision (benefit) for income taxes
 
(8,980
)
 
15,190

 
12,724

Net income (loss)
 
(49,873
)
 
36,564

 
4,840

Effective tax rate
 
15.3
%
 
29.4
%
 
72.4
%

See Note 11 to the Consolidated Financial Statements for additional information about income taxes and a reconciliation of the U.S. federal statutory rate to the effective income tax rate recognized in each year above.

Due to the loss before income taxes, the 2015 effective tax rate was lower than the federal statutory rate primarily due to non-deductible goodwill impairment charges, foreign withholding taxes, unfavorable foreign currency translation effects, state income taxes, and other taxable permanent differences. These unfavorable factors were partially offset by the impact of foreign tax credits, the net release of previously provided income tax expense on certain indemnified uncertain tax positions related to a previous acquisition, and the benefit of deductible permanent differences, including the domestic manufacturing deduction. Excluding the effects of the foreign tax credits and the impairment charges, the effective tax rate would have been 32.8%, compared to the U.S. federal statutory rate of 35%. The effective tax rate reflects the tax benefits of having significant operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate.

The 2014 effective tax rate was lower than the federal statutory rate primarily due to the impacts of foreign tax credits, lower tax rates on the earnings of foreign subsidiaries, and deductible permanent differences, including the domestic manufacturing deduction. These decreases were partially offset by foreign withholding taxes, state income taxes, and taxable permanent differences.

The 2013 effective tax rate was higher than the federal statutory rate primarily due to non-deductible goodwill impairment charges. Excluding the effect of the goodwill impairment charges, the 2013 effective tax rate would have been 34.5%. The 2013 effective rate was further increased by foreign withholding taxes, state income taxes, deferred tax expense to establish a valuation allowance against deferred tax assets arising from certain foreign net operating loss (“NOL”) carry forwards, and the effect of a change in the estimated average state tax rate applied to U.S. deferred tax assets and liabilities. These increases were partially offset by lower tax rates on the earnings of foreign subsidiaries, deductible permanent differences, including the domestic production deduction, and the net release of previously provided income tax expense on uncertain tax positions.


Segment Results

The following table reflects results by segment: 
 Segment Results
 
Year Ended December 31,
(Amounts in thousands)
 
2015
 
2014
 
2013
Sales:
 

 

 

FLAG
 
$
556,666

 
$
644,848

 
$
613,105

FRAG
 
238,992

 
269,158

 
260,297

Corporate and other
 
32,911

 
30,813

 
27,193

Total sales
 
$
828,569

 
$
944,819

 
$
900,595

Contribution to operating income (loss):
 

 

 

FLAG
 
$
73,292

 
$
102,314

 
$
83,215

FRAG
 
(80,556
)
 
(17,457
)
 
(18,641
)
Corporate and other
 
(39,502
)
 
(20,632
)
 
(27,053
)
Total operating income (loss)
 
$
(46,766
)
 
$
64,225

 
$
37,521




25



Forestry, Lawn, and Garden Segment. The following table reflects the factors contributing to the change in sales and operating income (loss) in the FLAG segment between 2014 and 2015:
FLAG Segment Results - 2015 Compared to 2014
 
 
 
 
(Amounts in thousands)
 
Sales
 
Contribution to
Operating
Income (Loss)
Year Ended December 31, 2014
 
$
644,848

 
$
102,314

Unit sales volume
 
(46,485
)
 
(17,112
)
Selling price and mix
 
(2,256
)
 
(2,256
)
Average steel cost
 

 
2,642

Other product costs and mix
 

 
(20,068
)
SG&A expense
 

 
5,955

Acquisition accounting effects
 

 
628

Foreign currency translation
 
(39,441
)
 
1,189

Year Ended December 31, 2015
 
$
556,666

 
$
73,292


Sales in the FLAG segment decreased by $88.2 million, or 13.7%, from 2014 to 2015, due to lower unit sales volume of $46.5 million, unfavorable foreign currency exchange rate effects of $39.4 million, and net lower average selling prices of $2.3 million. The lower unit sales volume reflected decreased demand for our products in most geographic regions, especially in international markets where the Company’s customers pay in U.S. Dollars. Net lower average selling prices on a year-to-date basis reflect actions taken in certain markets where the Company lowered selling prices to ease the impact of a stronger U.S. Dollar on those customers located outside of the U.S. that pay in U.S. Dollars. These price reductions were partially offset by price increases implemented in select end markets. The unfavorable effect of foreign currency exchange rates was primarily due to the relatively stronger U.S. Dollar in relation to most foreign currencies.

FLAG sales in North America decreased by 5.0%, reflecting softer market conditions, particularly with OEM customers. FLAG sales decreased by 18.6% in Europe and Russia, reflecting soft market and economic conditions and the adverse effects of translating foreign currency denominated sales transactions into a stronger U.S. Dollar. In the Asia-Pacific region sales declined by 16.0%, driven by relatively soft market demand in that region and the adverse effects of a stronger U.S. Dollar. FLAG sales in South America decreased by 16.5% during 2015, reflecting adverse effects of movement in foreign currency exchange rates, as well as generally soft market and economic conditions. Additionally, we believe that the stronger U.S. Dollar, which makes our products relatively higher priced to our international customers that are invoiced in U.S. Dollars, has contributed to the unit sales volume decrease in 2015. Sales of forestry products were down 15.7%, while sales of lawn and garden products were down 4.6% year-over-year. FLAG sales to OEMs were down 8.4% and sales to the replacement market were down 15.7%.

Sales order backlog for the FLAG segment at December 31, 2015 was $114.5 million compared to $140.1 million at December 31, 2014. The reduction in sales order backlog reflects soft market conditions, reduced order intake, and the unfavorable effects of foreign currency fluctuations on the translation of orders denominated in foreign currencies.

Contribution to operating income (loss) from the FLAG segment decreased by $29.0 million, or 28.4%, from 2014 to 2015. Lower unit sales volume of $17.1 million, increased product cost and mix of $20.1 million, and lower net average selling prices of $2.3 million all contributed to the reduced operating results. Partially offsetting these negative factors were lower average steel costs, decreased SG&A expense, and reduced acquisition accounting effects. The increase in product cost and mix was primarily due to lower production volumes in response to lower overall customer demand, and the related reduction in manufacturing efficiency. The FLAG segment also continued to adjust plant sourcing, driving some of the production cost inefficiency. Manufacturing capacity utilization in the FLAG segment was estimated at approximately 79% during 2015, compared to approximately 86% of capacity during 2014. FLAG segment SG&A expense, exclusive of the favorable effects from foreign currency translation, was lower in 2015 primarily due to reduced variable incentive compensation accruals based on lower profitability, reduced employee benefit costs, lower personnel-related costs for travel, recruiting and relocation, and lower advertising expenses. Partially offsetting these favorable factors were increased professional services costs for marketing services to support our strategic initiatives. Fluctuations in foreign currency exchange rates and the related translation impact increased the FLAG segment contribution to operating income by $1.2 million, reflecting lower manufacturing and SG&A costs incurred at foreign locations when translated into U.S. Dollars, partially offset by the negative translation effect on reported sales.


26



Acquisition accounting effects from amortization of acquired intangible assets decreased for the FLAG segment by $0.6 million, reflecting the accelerated nature of the timing of recognition for such effects.

The following table reflects the factors contributing to the change in sales and operating income (loss) in the FLAG segment between 2013 and 2014:  
FLAG Segment Results - 2014 Compared to 2013
 
 
 
 
(Amounts in thousands)
 
Sales
 
Contribution to
Operating
Income (Loss)
Year Ended December 31, 2013
 
$
613,105

 
$
83,215

Unit sales volume
 
43,584

 
18,470

Selling price and mix
 
(6,169
)
 
(6,169
)
Average steel cost
 

 
(4,041
)
Other product costs and mix
 

 
16,427

SG&A expense
 

 
(12,812
)
Acquisition accounting effects
 

 
532

Impairment of acquired intangible assets
 

 
3,292

Foreign currency translation
 
(5,672
)
 
3,400

Year Ended December 31, 2014
 
$
644,848

 
$
102,314


Sales in the FLAG segment increased by $31.7 million, or 5.2%, from 2013 to 2014, primarily due to higher unit sales volume of $43.6 million. The higher unit sales volume reflected increased market demand for our products in most geographic regions. Changes in average selling prices, reflecting selected pricing actions taken in 2014, and changes in product mix decreased FLAG sales revenue by $6.2 million in 2014. The translation of foreign currency-denominated sales transactions decreased FLAG sales by $5.7 million, primarily due to the relatively stronger U.S. Dollar in comparison to the Brazilian Real, Russian Ruble, Canadian Dollar, and Japanese Yen.

FLAG sales increased in North America by 7.3%, reflecting improved market conditions and the growing economy. FLAG sales in Europe and Russia increased by 6.0%, reflecting improved economic and market conditions in Europe, partially offset by weak economic conditions in Russia. The unfavorable foreign currency translation effect of a stronger U.S. Dollar compared to the Brazilian Real, Russian Ruble, Canadian Dollar, and Japanese Yen partially offset the favorable volume growth. FLAG sales decreased in the Asia-Pacific region by 0.9%, driven by relatively soft market conditions in that region and the foreign currency translation effect of a relatively stronger U.S. Dollar in comparison to the Japanese Yen. FLAG sales in South America increased by 7.9% during 2014, driven by improved economic and market conditions, partially offset by the unfavorable foreign currency translation effect of a relatively stronger U.S. Dollar in comparison to the Brazilian Real. Sales to other regions increased by 7.2%, or $1.7 million, driven by improved market conditions. Sales of forestry products were up 5.3%, and sales of lawn and garden products were up 4.5% year-over-year. FLAG sales to OEMs were up 4.1% and sales to the replacement market were up 5.9%.

Sales order backlog for the FLAG segment at December 31, 2014 was $140.1 million compared to $150.9 million at December 31, 2013. The reduction in sales order backlog reflects decreased demand for forestry products compared to the prior year.

Contribution to operating income (loss) from the FLAG segment increased by $19.1 million, or 23.0%, from 2013 to 2014. Higher unit sales volume increased the FLAG contribution to operating income by $18.5 million. Improved product cost and mix increased contribution to operating income from the FLAG segment by $16.4 million, reflecting higher production volumes, higher capacity utilization, and increased overhead absorption and manufacturing efficiency during 2014 compared to 2013. FLAG production facilities during 2014 were operated at approximately 86% of capacity, compared to approximately 74% of capacity during 2013. In addition, the closure of the higher cost FLAG manufacturing plant in Milwaukie, Oregon contributed to the improved operating results. Partially offsetting the positive effects of higher unit sales volume and lower product costs were a reduction in average selling prices and mix of $6.2 million, higher average steel costs of $4.0 million, and increased SG&A of $12.8 million. The increase in FLAG segment SG&A reflects increased compensation expense due to increased headcount, annual merit increases, and increased variable incentive compensation driven by improved operating results, as well as increased costs for recruitment, relocation, travel, and training, increased advertising expenses, and increased costs for software licenses, software implementation, and utilities. Fluctuations in foreign currency exchange rates increased the

27



FLAG segment contribution to operating income by $3.4 million, reflecting lower manufacturing costs and SG&A at foreign locations, partially offset by the negative effect on reported sales.

Acquisition accounting effects from amortization of intangible assets decreased for the FLAG segment by $0.5 million, reflecting the accelerated nature of the timing of recognition for such effects. In addition, the FLAG segment did not recognize any impairment charges on acquired intangible assets during 2014, whereas in 2013 impairment charges of $3.3 million were recognized. For additional information about these impairment charges, see Critical Accounting Policies and Estimates, as well as, Note 8 to the Consolidated Financial Statements.


Farm, Ranch, and Agriculture Segment. The following table reflects the factors contributing to the change in sales and operating income (loss) in the FRAG segment between 2014 and 2015: 
FRAG Segment Results - 2015 Compared to 2014
 
 
 
 
(Amounts in thousands)
 
Sales
 
Contribution to
Operating
Income (Loss)
Year Ended December 31, 2014
 
$
269,158

 
$
(17,457
)
Unit sales volume
 
(31,092
)
 
(7,013
)
Selling price and mix
 
2,659

 
2,659

Average steel cost
 

 
883

Other product costs and mix
 

 
(5,978
)
SG&A expense
 

 
2,615

Acquisition accounting effects
 

 
1,220

Impairment of acquired intangible assets
 

 
(57,686
)
Foreign currency translation
 
(1,733
)
 
201

Year Ended December 31, 2015
 
$
238,992

 
$
(80,556
)

Sales in the FRAG segment decreased $30.2 million, or 11.2%, from 2014 to 2015, primarily due to lower unit sales volume and unfavorable foreign currency exchange rate effects, partially offset by higher net average selling price and mix. Higher average selling prices are primarily attributable to our tractor attachment product lines as a result of normal annual price increases implemented early in 2015.

FRAG sales in North America represented 95.3% of segment sales in 2015, and decreased by 10.9% from 2014, reflecting a cyclical downturn in the U.S. agricultural machinery market. FRAG sales in Europe, consisting primarily of agricultural machinery cutting parts, decreased by 28.1% due to weak cyclical market conditions as well as the unfavorable effects of the stronger U.S. Dollar compared to the Euro. Sales of whole goods decreased by 11.0%, sales of replacement parts decreased by 10.7%, and sales to OEM customers decreased by 13.3% year-over-year in the FRAG segment. Sales of tractor attachments were down 5.1%, from 2014 to 2015, due to generally weak market conditions for agricultural machinery in North America. Sales of log splitters were down 21.4% in 2015, compared to strong log splitter sales achieved in 2014, when log splitter sales were up 24.6%, as compared to 2013.

Sales order backlog for the FRAG segment at December 31, 2015 was $19.5 million compared to $28.8 million at December 31, 2014. The year-over-year decrease reflects the generally soft market conditions described above.

The contribution to operating income (loss) from the FRAG segment was a loss of $80.6 million in 2015 compared to a loss of $17.5 million in 2014. The decrease in operating results in 2015 was primarily driven by increased non-cash charges related to impairment of acquired intangible assets of $78.8 million in 2015, compared to $21.1 million in 2014. For additional information about these impairment charges, see Critical Accounting Policies and Estimates, as well as Note 8 to the Consolidated Financial Statements. Also contributing to lower operating results in 2015 were lower unit sales volume and higher product costs and mix. Higher product costs and mix were primarily driven by lower overhead absorption and reduced manufacturing efficiency from reduced production levels. Partially offsetting these negative factors were higher net average selling price and mix, reduced acquisition accounting effects, lower average steel prices, and a reduction in SG&A costs.


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The following table reflects the factors contributing to the change in sales and operating income (loss) in the FRAG segment between 2013 and 2014:
FRAG Segment Results - 2014 Compared to 2013
 
 
 
 
(Amounts in thousands)
 
Sales
 
Contribution to
Operating
Income (Loss)
Year Ended December 31, 2013
 
$
260,297

 
$
(18,641
)
Unit sales volume
 
6,056

 
2,465

Selling price and mix
 
2,508

 
2,508

Average steel cost
 

 
(90
)
Other product costs and mix
 

 
(3,786
)
SG&A expense
 

 
(1,829
)
Acquisition accounting effects
 

 
1,299

Impairment of acquired intangible assets
 

 
513

Foreign currency translation
 
297

 
104

Year Ended December 31, 2014
 
$
269,158

 
$
(17,457
)

Sales in the FRAG segment increased $8.9 million, or 3.4%, from 2013 to 2014, primarily due to higher unit sales volume and higher average selling prices. The increase in unit sales volume of $6.1 million reflects increased sales of log splitters and tractor attachments, driven by increased demand in North America. Sales of agricultural cutting parts in Europe decreased from 2013 to 2014 and aftermarket parts sales in North America were down slightly year-over-year. Improved average selling prices and mix increased sales by $2.5 million. The effects of foreign currency translation increased FRAG sales by $0.3 million. FRAG sales in North America represented 94.9% of segment sales in 2014 and increased by 4.1% over 2013. Sales of whole goods increased by 12.3%, sales of replacement parts decreased by 3.4%, and sales to OEM customers decreased by 16.6% in the FRAG segment.

Sales order backlog for the FRAG segment at December 31, 2014 was $28.8 million compared to $31.4 million at December 31, 2013.

The contribution to operating income (loss) from the FRAG segment was a loss of $17.5 million in 2014 compared to a loss of $18.6 million in 2013, both after non-cash charges related to impairment of acquired intangible assets of $21.1 million in 2014 and $21.6 million in 2013. Higher unit sales volume, higher average selling price and mix, reduced acquisition accounting effects, and a net reduction in charges for the impairment of acquired intangible assets contributed to improvement in 2014 operating results. The reduction in acquisition accounting effects reflects the accelerated nature of the timing of recognition for such effects. These improvements in 2014 operating results in the FRAG segment were partially offset by higher product costs of $3.8 million and increased SG&A expense of $1.8 million. The higher product costs in the FRAG segment were the result of reduced manufacturing efficiency, higher utility costs, higher component costs, and non-recurring startup costs associated with a new commercial agreement for the exclusive supply of certain aftermarket parts products to a customer. The increase in SG&A expenses was driven by increased costs for travel, training, and other personnel-related activities, increased advertising expenses, and increased marketing expenses.

Corporate and Other. Sales of CCF products increased $2.1 million, or 6.8%, from 2014 to 2015. North American sales of CCF products increased $3.1 million from 2014 to 2015, primarily due to improved demand for our products, partially offset by decreased sales in Europe and all other regions. Contribution to operating income (loss) from the Corporate and Other category was a loss of $39.5 million compared to a loss of $20.6 million in 2013. The decline in year-over-year results was primarily due to non-cash settlement charges of $10.2 million related to a partial settlement in our U.S. defined benefit pension plan. In addition, the 2015 period reflects $7.7 million in expenses related to the proposed Merger. Further reducing operating results in the Corporate and Other segment were increased SG&A charges primarily attributable to increased defined benefit pension plan and retiree medical plan costs in the U.S. and increased audit costs. These increased costs were partially offset by decreased variable incentive compensation expense driven by reduced operating results.

Sales of CCF products increased 13.3% from 2013 to 2014, primarily due to the acquisition of Pentruder Inc. ("Pentruder") in January 2014 and incremental sales associated with that product line. Contribution to operating income (loss) from the Corporate and Other category was a loss of $20.6 million in 2014 compared to a loss of $27.1 million in 2013. The improvement in year-over-year results was due to reduced facility closure and restructuring charges, higher CCF unit sales volume, and lower external audit fees, partially offset by increased variable incentive compensation expense driven by

29



improved 2014 operating results.

Financial Condition, Liquidity, and Capital Resources

We typically generate significant cash flows from operating activities, which are the primary source of funding for our operations and debt service requirements. Over the preceding three years, we generated average annual cash flows from operating activities of $80.1 million, however, operating activities generated $61.3 million in 2015, driven by lower profitability and increased working capital. Funding is also available from our senior credit facilities. We have amended or refinanced our senior credit facilities several times over the last few years, which has affected our borrowing capacity, borrowing rates, financial covenants, and other terms as further described in Note 10 to the Consolidated Financial Statements. Our previous senior credit facility, which was scheduled to mature on August 31, 2016, was replaced with a new senior credit facility on May 5, 2015.

Debt is summarized as follows: 
Debt
 
As of December 31,
(Amounts in thousands)
 
2015
 
2014
Revolving credit facility
 
$
82,500

 
$
135,500

Term loans
 
292,500

 
245,453

Capital lease obligations
 
4,037

 
3,250

Total debt
 
379,037

 
384,203

Less current maturities
 
(15,731
)
 
(15,131
)
Long-term debt, excluding current maturities
 
$
363,306

 
$
369,072

Weighted average interest rate at end of year
 
2.30
%
 
2.70
%

Senior Credit Facilities. The Company, through its wholly-owned subsidiary, Blount, Inc., maintained a senior secured credit facility which had been amended and restated on several occasions (the "Old Senior Credit Facility"). As of December 31, 2014, the Old Senior Credit Facility consisted of a revolving credit facility and a term loan. On May 5, 2015, the Company entered into a new senior secured credit facility (the "New Senior Credit Facility") and, upon closing, the Company repaid all amounts outstanding and terminated the Old Senior Credit Facility. The Company paid fees and expenses totaling $5.2 million on the issuance of the New Senior Credit Facility, of which $4.1 million was recorded as deferred financing costs on the Consolidated Balance Sheet and $1.1 million was expensed. The Company also recognized $0.9 million in expense of previously deferred and unamortized financing costs in conjunction with closing on the New Senior Credit Facility.

Current Terms of Senior Credit Facilities. As of December 31, 2015, the New Senior Credit Facility consisted of a $300.0 million revolving credit facility and a $292.5 million term loan. The Company also has the ability, subject to certain limitations, to increase either the term loan or revolving credit facility by up to a total of $200.0 million. The revolving credit facility provides for total available borrowings of up to $300.0 million, reduced by outstanding letters of credit, and further restricted by a specific leverage ratio. As of December 31, 2015, the Company had the ability to borrow an additional $43.9 million under the terms of the revolving credit agreement. Interest is due periodically and interest rates are variable based on a margin added to the London Interbank Offered Rate ("LIBOR Rate"), or a Base Rate, as defined in the related agreement. The margin added to these reference rates is variable depending on the Company's Consolidated Leverage Ratio, as defined in the related agreement, calculated on a trailing twelve month basis. Additional margin is added to the LIBOR or Base Rate as outlined in the table below.
Consolidated Leverage Ratio
Less than 1.25

Between
1.25 and 2.00

Between
2.00 and 2.75

Between
2.75 and 3.50

3.50 or above
LIBOR + 1.25%

LIBOR + 1.50%

LIBOR + 1.75%

LIBOR + 2.00%

LIBOR + 2.25%
Base Rate + 0.25%

Base Rate + 0.50%

Base Rate + 0.75%

Base Rate + 1.00%

Base Rate + 1.25%

As of December 31, 2015, the Company's leverage ratio was 3.81. Interest is payable on the individual maturity dates for each LIBOR-based borrowing and quarterly on Base Rate borrowings. Any outstanding principal under the revolving credit facility is due in its entirety on the maturity date of May 5, 2020.


30



Under the New Senior Credit Facility, the term loan bears interest under the same terms as the revolving credit facility and also matures on May 5, 2020. The term loan facility requires quarterly principal payments of $3.8 million, with a final payment of $225.0 million due on the maturity date. Once repaid, principal under the term loan facility cannot be re-borrowed.

The New Senior Credit Facility contains financial covenants, including the following, as of December 31, 2015:
Minimum consolidated fixed charge coverage ratio, defined as Consolidated Earnings Before Interest, Taxes, Depreciation, and Amortization, with other adjustments allowed under the New Senior Credit Facility ("EBITDA"), less consolidated maintenance capital expenditures (“Adjusted EBITDA”), divided by the sum of cash payments for interest, taxes, and scheduled debt principal payments, calculated on a trailing twelve-month basis. The minimum consolidated fixed charge coverage ratio is set at 1.25 for the term of the New Senior Credit Facility.
Maximum consolidated leverage ratio, defined as total consolidated funded indebtedness divided by EBITDA, calculated on a trailing twelve-month basis. The maximum consolidated leverage ratio, measured as of the end of each fiscal quarter, was set at 4.25 through December 31, 2015, 4.00 from March 31, 2016 through December 31, 2016, 3.75 from March 31, 2017 through December 31, 2017, and 3.50 thereafter.

The status of financial covenants was as follows:
 
 
As of December 31, 2015
Financial Covenants
 
Requirement
 
Actual
Minimum fixed charge coverage ratio
 
1.25
 
2.02
Maximum leverage ratio
 
4.25
 
3.81

In addition, there are covenants, restrictions, or limitations relating to acquisitions, investments, liens, loans and advances, indebtedness, dividends on our stock, the sale or repurchase of our stock, the sale of assets, and other categories. There are no restrictions on the ability of the Company's subsidiaries to transfer funds to the Company in the form of cash dividends, loans, or advances. In the opinion of management, the Company was in compliance with all financial covenants, under the New Senior Credit Facility, as of December 31, 2015. Non-compliance with these covenants is an event of default under the terms of the New Senior Credit Facility, and could result in severe limitations to our overall liquidity, and the term loan lenders could require immediate repayment of outstanding amounts, potentially requiring sale of a sufficient amount of our assets to repay the outstanding loans.

Amounts borrowed under the New Senior Credit Facility may be repaid at any time without penalty. There could also be additional mandatory repayment requirements related to the sale of Company assets, the issuance of new debt, or the receipt of insurance proceeds or other extraordinary receipts under certain circumstances. No such mandatory principal repayments were required during the years ended December 31, 2015 or 2014. However, under the Old Senior Credit Facility, $6.3 million in mandatory principal payments were made in the year ended December 31, 2013 due to excess cash flow generated during the year ended December 31, 2012.

Our senior credit facility debt instruments and general credit are rated by Standard & Poor’s ("S&P"). During 2015, S&P lowered the Company's rating from BB-/Stable to BB-/Negative. The New Senior Credit Facility does not contain any provisions that would require early payment due to any adverse change in our credit rating. As of December 31, 2015, the credit ratings for the Company were as follows:
Credit Ratings
 
S&P
New Senior Credit Facility
 
BB-/Negative
General credit rating
 
BB-/Negative

March 2016 Amendment of New Senior Credit Facility. Effective March 11, 2016, the Company, through its wholly-owned subsidiary, Blount, Inc., entered into the First Amendment to the New Senior Credit Facility. The amendment changed the definition of "Consolidated EBITDA" to allow for the add back of certain non-recurring cash expenses associated with the proposed Merger up to a maximum of $15.0 million in the aggregate, provided such costs are incurred between August 6, 2015 and June 30, 2016. The amendment further requires the Company to make a mandatory repayment of principal borrowed under the New Senior Credit Facility with, among other Extraordinary Receipts (as defined in the New Senior Credit Facility), any “break-up” or similar fee received in connection with the proposed Merger. Finally the amendment requires the Company to pay an amendment fee equal to 0.05% of the outstanding New Senior Credit Facility principal balances should the proposed Merger fail to close on or before July 1, 2016.

31




Capital Lease Obligations. The Company has entered into various equipment and building leases which are classified as capital leases under U.S. GAAP and have terms ending in 2019 and 2020. The weighted average implied interest rate on our capital leases is 4.4%, and the imputed interest over the remaining terms of the lease obligations is $0.5 million. The equipment lease terms include early buyouts after five and six years, at the Company's option, at the fair value of the equipment at that time. The leased assets and the lease obligation were recorded at their fair values on the Consolidated Balance Sheets at the commencement of each lease term.

We intend to fund working capital, operations, capital expenditures, acquisitions, debt service requirements, stock repurchases, and obligations under our post-retirement benefit plans for the next twelve months through cash and cash equivalents, expected cash flows generated from operating activities, and amounts available under our revolving credit agreement. We expect our financial resources will be sufficient to fund any additional increases in working capital, capital expenditures, and acquisitions; however, there can be no assurance that these resources will be sufficient to meet our needs, particularly if we make significant acquisitions. We may also consider other options available to us in connection with future liquidity needs, including, but not limited to, the postponement of discretionary contributions to post-employment benefit plans, the postponement of capital expenditures, postponement of stock repurchases, restructuring of our credit facilities, and issuance of new debt or equity securities. In addition, in connection with the consummation of the proposed Merger, the Company expects to enter into new senior credit facilities and repay all amounts outstanding under the New Senior Credit Facility.

Our interest expense may vary in the future because the revolving credit facility and term loan interest rates are variable. We have entered into interest rate swap agreements that fix the interest rate we pay on a portion of our debt. See further discussion of these agreements in Item 7A, Quantitative and Qualitative Disclosures about Market Risk. The weighted average interest rate on all debt, including the effect of the interest rate swaps, was 2.68% as of December 31, 2015 and 3.09% as of December 31, 2014.

Cash and cash equivalents at December 31, 2015 were $25.9 million, compared to $27.3 million at December 31, 2014. As of December 31, 2015, $25.9 million of our cash and cash equivalents was held at our foreign locations. The potential repatriation of foreign cash to the U.S. under current U.S. income tax law may result in the payment of significant taxes. This foreign cash is currently being used or is expected to be used to fund foreign operations and working capital requirements, additions to PP&E at foreign locations, and foreign acquisitions. However, under the terms of the Merger Agreement, immediately prior to closing, the Company would be required to repatriate a significant amount of cash and cash equivalents held at its foreign locations. As the repatriation will not occur unless the proposed Merger takes place, it remains management’s current intention for this cash to remain at our foreign locations indefinitely.

Cash provided by operating activities is summarized in the following table:
Cash Provided by Operating Activities
 
Year Ended December 31,
(Amounts in thousands)
 
2015
 
2014
 
2013
Net income (loss)
 
$
(49,873
)
 
$
36,564

 
$
4,840

Non-cash items and other adjustments
 
125,325

 
64,605


77,318

Subtotal
 
75,452

 
101,169


82,158

Changes in operating assets and liabilities, net
 
(14,202
)
 
(19,210
)
 
14,897

Net cash provided by operating activities
 
$
61,250

 
$
81,959

 
$
97,055


Non-cash items and other adjustments consist of depreciation; amortization; stock-based compensation; debt modification charges; asset impairment charges; deferred income taxes; partial settlement of pension obligation; and other non-cash charges. Net changes in assets and liabilities consist of those changes in assets and liabilities included in the cash flows from operating activities section of the Consolidated Statements of Cash Flows.

2015 net cash provided by operating activities of $61.3 million reflected the following significant items:
Net loss of $49.9 million, a decrease from 2014 of $86.4 million, reflecting reduced operating results.
Depreciation of $30.6 million, a decrease of $0.8 million from 2014, reflecting retirements of PP&E in conjunction with the consolidation of facilities.
Amortization of $12.6 million, a decrease of $2.4 million from 2014, reflecting the accelerated nature of amortization of acquired intangible assets. Amortization of these finite-lived intangible assets, in general, will continue to decline in future periods, unless we make significant new acquisitions. See Note 8 to the Consolidated Financial Statements for additional information.

32



Stock-based compensation expense of $6.0 million, compared with $4.9 million in the prior year.
A debt modification charge of $2.0 million recognized upon closing of the New Senior Credit Facility.
A non-cash charge of $10.2 million related to the partial settlement of our U.S. defined benefit post-retirement pension plan.
Non-cash impairment charges of $78.8 million on acquired intangible assets in the FRAG segment.
A net deferred tax benefit of $15.6 million, primarily due to income tax temporary differences related to the impairment of acquired intangible assets and the partial pension settlement.
A decrease in accounts receivable of $11.8 million, reflecting a $18.9 million decrease in sales in the last two months of 2015 compared with the last two months of 2014.
An increase of $8.0 million in inventories reflecting production and purchasing levels based on the Company's earlier expectations for 2015, compared to lower actual unit sales volume realized in the period.
An increase in other assets of $7.9 million, reflecting an income tax refund receivable.
A decrease of $8.1 million in accounts payable and accrued expenses, reflecting payment of 2014 year end accruals for incentive compensation programs and the U.S. defined contribution retirement plan, partially offset by amounts accrued during 2015.
A decrease in other liabilities of $2.1 million.

2014 net cash provided by operating activities of $82.0 million reflected the following significant items:
Net income of $36.6 million, an increase from 2013 of $31.7 million, reflecting improved operating results.
Depreciation of PP&E totaling $31.4 million, a decrease of $2.1 million from 2013, reflecting retirements of PP&E in conjunction with the consolidation of facilities.
Amortization of $15.1 million, a decrease of $1.0 million from 2013, reflecting the accelerated nature of acquisition accounting effects.
Stock-based compensation expense of $4.9 million, compared with $5.6 million in the prior year.
Non-cash asset impairment charges totaling $23.0 million, including charges for acquired intangible assets of $21.1 million and $1.2 million related to our facility closure and restructuring activities.
A net deferred tax benefit of $10.8 million, reflecting income tax timing differences.
An increase in accounts receivable of $16.0 million, reflecting a $15.3 million increase in sales in the fourth quarter of 2014 compared with the fourth quarter of 2013.
An increase of $9.9 million in inventories, reflecting increased production and market demand.
An increase of $16.7 million in accounts payable and accrued expenses, driven by increased inventory production and procurement levels and higher levels of accrued compensation, partially offset by lower levels of accrued external audit fees.
A decrease in other liabilities of $11.4 million, reflecting cash payments made on post-retirement benefit plan obligations.

2013 net cash provided by operating activities of $97.1 million reflected the following significant items:
Net income of $4.8 million, a decrease from 2012 of $34.7 million, reflecting reduced operating results.
Depreciation of PP&E totaling $33.5 million, an increase of $4.9 million from 2012, reflecting additions to PP&E and accelerated depreciation on certain assets related to our facility closure and restructuring activities.
Amortization of $16.0 million, a decrease of $0.5 million from 2012, reflecting the accelerated nature of acquisition accounting effects.
Stock-based compensation expense of $5.6 million.
Asset impairment charges totaling $27.4 million, including non-cash impairment charges of $22.8 million on goodwill, $2.1 million on indefinite-lived intangible assets related to trade names, and $2.5 million related to PP&E associated with our facility closure and restructuring activities.
A net deferred tax benefit of $5.7 million, primarily due to income tax timing differences.
A decrease in accounts receivable of $16.8 million, reflecting a $12.6 million decrease in sales in the fourth quarter of 2013 compared with the fourth quarter of 2012.
A decrease of $17.6 million in inventories, due to efforts to reduce inventories built up in 2012 in anticipation of higher 2013 sales and in anticipation of the transition of assembly and distribution operations from Golden, CO to Kansas City, MO.

33



An increase in other assets of $8.5 million, including an increase in income tax receivables of $3.6 million.
A decrease in accounts payable and accrued expenses of $10.0 million, reflecting lower levels of inventory and other accrued expenses, partially offset by increased accruals for external audit fees.

Cash contributions for pension and other post-employment benefit plans totaled $15.3 million in 2015, $24.2 million in 2014, and $18.2 million in 2013, including a voluntary $5.0 million contribution to our U.S. defined benefit pension plan in 2014. Funding requirements for all such post-retirement benefit plans are expected to total approximately $13 million during 2016. Funding requirements for post-retirement benefit plans can fluctuate significantly from year to year. See further discussion following under “Critical Accounting Policies and Estimates”. The Company intends to make contributions to our funded defined benefit pension plans in 2016 of approximately $1.5 million. The amount of contributions required in subsequent years will depend, in part, on future investment returns on plan assets, changes in actuarial assumptions, regulatory requirements, and market interest rates.

Cash used in investing activities is summarized as follows: 
 Cash Flows from Investing Activities
 
Year Ended December 31,
(Amounts in thousands)
 
2015
 
2014
 
2013
Purchases of property, plant, and equipment
 
$
(35,636
)
 
$
(37,317
)
 
$
(29,575
)
Proceeds from sale of assets
 
8,078

 
225

 
164

Acquisition, net of cash acquired
 

 
(2,663
)
 

Discontinued operations
 

 
100

 
3,394

Net cash used in investing activities
 
$
(27,558
)
 
$
(39,655
)
 
$
(26,017
)

Purchases of PP&E are primarily for productivity improvements, expanded manufacturing capacity, new product introductions, information system investments, and replacement of equipment and consumable tooling. Generally, about one-third of our capital spending has represented replacement of consumable tooling, dies, and existing equipment, with the remainder devoted to capacity expansion and productivity improvements. During 2015, we invested a total of $35.6 million in PP&E, compared to $37.3 million in 2014, and $29.6 million in 2013. Capital expenditures in 2015 and 2014 included significant machinery and equipment installed in our Fuzhou, China facility and in our Guelph, Ontario, Canada facility, both for capacity expansion. We expect our purchases of PP&E in 2016 to range between $30.0 million and $40.0 million, including continued investment for productivity improvements, expanded manufacturing capacity, and replacement of equipment and consumable tooling. Proceeds from sale of assets in 2015 included the sale of our former manufacturing facility in Milwaukie, OR for net cash proceeds of $7.4 million. In addition, during 2014, we used $2.7 million of cash to acquire Pentruder, net of cash acquired, and net of $0.5 million in deferred payments. In 2014 and 2013, we collected $0.1 million and $3.4 million, respectively, of proceeds held in escrow related to the 2007 sale of our Forestry Division.

Cash used in financing activities is summarized as follows: 
Cash Flows from Financing Activities
 
Year Ended December 31,
(Amounts in thousands)
 
2015
 
2014
 
2013
Net repayment under revolving credit facilities
 
$
(53,000
)
 
$
(39,500
)
 
$
(60,000
)
 
 
 
 
 
 
 
Repayment of term loan principal and capital lease obligations
 
(253,464
)
 
(15,070
)
 
(21,389
)
Proceeds from issuance of new term debt
 
300,000

 

 

Repurchase of common stock
 
(20,567
)
 
(3,864
)
 

Debt issuance costs
 
(5,169
)
 

 
(1,576
)
Stock-based compensation activity
 
(398
)
 
5,302

 
627

Net cash used in financing activities
 
$
(32,598
)
 
$
(53,132
)
 
$
(82,338
)

Significant items in 2015 included:
Proceeds borrowed under the New Senior Credit Facility, including $300.0 million under the new term loan facility.
Repayment of all amounts outstanding under the Old Senior Credit Facility.
Scheduled repayments of term loan principal under the New Senior Credit Facility and under capital lease obligations.
Repurchase of $20.6 million of Company stock under our stock repurchase program.
Debt issuance costs of $5.2 million incurred for the New Senior Credit Facility.

34




Significant items in 2014 included:
Net repayments under the revolving credit facility of $39.5 million.
Repayment of $15.1 million in term debt and capital lease obligation principal.
Repurchase of $3.9 million of Company stock under our stock repurchase program.
Net proceeds of $5.3 million from issuance of stock under stock-based compensation programs.

Significant items in 2013 included:
Net repayments under the revolving credit facility of $60.0 million.
Repayment of $21.4 million in term debt and capital lease obligation principal, including $6.3 million for 2012 excess cash flow generation as required under the Old Senior Credit Facility agreement.
Payment of $1.6 million in debt issuance costs in conjunction with an amendment of our senior credit facilities.

As of December 31, 2015, our contractual and estimated obligations are as follows:
Contractual and Estimated Obligations:
 
 
 
 
 
 
 
 
 
 
(Amounts in thousands)
 
Total
 
2016
 
2017 - 2018
 
2019 - 2020
 
Thereafter
Debt and capital lease obligations (1)
 
$
379,037

 
$
15,728

 
$
31,725

 
$
331,584

 
$

Estimated interest payments (2)
 
67,275

 
11,634

 
30,182

 
25,459

 

Operating lease obligations (3)
 
48,820

 
8,406

 
13,316

 
10,052

 
17,046

Other post-employment obligations (4)
 
12,638

 
987

 
1,975

 
1,975

 
7,701

Defined benefit pension obligations (5)
 
1,548

 
1,548

 

 

 

Purchase commitments (6)
 
6,345

 
5,900

 
445

 

 

Total contractual and estimated obligations
 
$
515,663

 
$
44,203

 
$
77,643

 
$
369,070

 
$
24,747


(1)
Scheduled minimum principal payments on debt and capital lease obligations. Additional voluntary prepayments may also be made from time to time. Additional mandatory principal payments may be required under certain circumstances. See also Note 10 to the Consolidated Financial Statements.
(2)
Estimated future interest payments based on existing debt and capital lease balances, timing of scheduled minimum principal payments, and estimated variable interest rates. See also Note 10 to the Consolidated Financial Statements.
(3)
Minimum lease payments under operating leases. See also Note 14 to the Consolidated Financial Statements.
(4)
Estimated payments for various post-employment benefit plans. The Company also has benefit payment obligations due under its post-retirement medical plan that are not required to be funded in advance, but are pay-as-you-go, and are not included herein. See also Note 13 to the Consolidated Financial Statements.
(5)
Current minimum funding requirements for defined benefit pension plans. These amounts do not include future funding requirements for defined benefit pension plans which are not yet determined. Actual funding requirements may vary significantly in the future due to actual returns on plan assets, changes in assumptions, plan modifications, regulatory changes, and actuarial gains and losses. See additional discussion of these key assumptions and estimates under “Critical Accounting Policies and Estimates” as well as Note 12 to the Consolidated Financial Statements. Additional voluntary funding payments may also be made from time to time.
(6)
Does not include amounts recorded as current liabilities on the balance sheet.

As of December 31, 2015, our recorded liability for uncertain tax positions was $11.4 million. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with uncertain tax positions, we are unable to make a reasonable estimate of the amounts and periods in which these remaining liabilities might be paid. It is reasonably possible that the estimate of uncertain tax positions could change materially in the near term.

Off Balance Sheet Arrangements

At December 31, 2015 and 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise had we engaged in such relationships.


35



Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on the Company’s Consolidated Financial Statements that have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, equity components, revenues, and expenses. We base our estimates on historical experience and various other assumptions that are believed to be reasonable and consistent with industry practice. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies are affected by our more significant judgments and estimates in the preparation of the Consolidated Financial Statements.

Sales Deductions and Marketing Programs. We record reductions to sales revenue for promotional programs as products are shipped. We record charges to cost of goods sold for the estimated cost of providing free product based on additional promotional programs. We also accrue charges to SG&A based on estimated obligations for cooperative advertising programs. These programs are based on competitive and market conditions, and specific customer contracts in some instances. Some reductions in selling prices are determined based on sales volumes or other measurements not yet finalized at the time of shipment. These reductions in selling prices are recorded at the time of shipment either through a reduction to the invoice total or the establishment of an estimated reserve or accrual for settlement at a later date. Cooperative advertising accruals are based on historical experience and communications with customers. The amount reserved or accrued may increase or decrease prior to payment due to customer performance and market conditions.

Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses against our recorded accounts receivable. Such allowance is based on an ongoing review and analysis of customer payments against terms, discussions with customers, and a review of customers’ credit ratings through monitoring services. Based on these reviews and analyses, the allowance is adjusted with a charge or release to SG&A whenever the estimated collectability of an account changes. Additional allowances may be required based on future events or as we obtain new information about our customers’ credit and financial situations.

Inventory Valuation. Specific industry market conditions can significantly increase or decrease the level of inventory on hand in any of our business units. We adjust for changes in demand by reducing or increasing production or procurement levels. We estimate required adjustments to inventory carrying values for excess or obsolete inventory by assessing inventory turnover and market selling prices on a product by product basis. These inventory adjustments are recorded as a charge to cost of goods sold. We maintain any such downward valuation adjustments until a product is sold or market conditions require an additional adjustment. We also regularly review inventory balances to ensure the balances are stated at the lower of cost or market as of the balance sheet date. We compare estimated selling prices to the carrying value of inventory and recognize a write-down to market value when necessary. These write-downs are recorded as a charge to cost of goods sold. While historical write-downs have not been material, if actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a significant impact on the value of our inventories and reported operating results.

Product Liability Costs. We incur expenses in connection with product liability claims as a result of alleged product malfunctions or defects. Under terms of the divestiture agreements, we remain contractually obligated, as between the buyer and us, to defend or settle product liability claims for products manufactured during our ownership period for certain discontinued operations. We maintain insurance for a portion of these exposures and record a liability for our estimated obligations. We estimate our product liability obligations on a case by case basis, in addition to a review of product performance trends and consideration of the potential liability for claims incurred but not yet reported or future claims on products we have previously manufactured. These estimated obligations are frequently increased or decreased as more information on specific cases becomes available or performance trends change.

Environmental Remediation Costs. We incur expenses in connection with compliance with environmental laws and regulations for investigation, monitoring and, in certain circumstances, remediation of environmental contamination at our current and certain of our former operating locations. From time to time, certain parties have alleged we contributed to environmental contamination at certain industrial sites. We record a liability for our estimated environmental remediation obligations when they become known and subject to reasonable estimation. We estimate our environmental remediation obligations on a situation by situation basis. These estimated obligations may be increased or decreased as more information on specific situations becomes available, as the results of our remediation efforts become known, or as environmental regulations and laws change over time.

Workers’ Compensation Costs. We incur expenses in connection with workers’ compensation costs covering our employees and certain former employees. Under terms of the related divestiture agreements, we remain contractually obligated, as between

36



the buyer and us, for workers’ compensation claims for injuries that occurred during our ownership period for certain discontinued operations. We maintain insurance for a portion of this exposure and record a liability for our estimated obligations. We estimate our workers’ compensation obligations on a case by case basis, in addition to consideration of the potential liability for claims incurred but not yet reported. Third party administrators assist us with estimating most of these claims. These estimated obligations are frequently increased or decreased as more information on specific cases becomes available, as performance trends change, and as new claims arise from new incidents of workplace injury.

Stock-Based Compensation. We determine the fair value of stock-based compensation awards using the Black-Scholes model. We use the simplified method described in SEC Staff Accounting Bulletin No. 107 for estimated lives of stock options and stock appreciation rights ("SARs"). Assumptions for the risk-free interest rate, expected volatility, and dividend yield are based on historical information and management estimates. These assumptions have a significant effect on the amount of recorded expense for stock-based compensation.

Goodwill. The Company performs annual impairment tests on goodwill in the fourth quarter of each fiscal year, and whenever events or changes in circumstances indicate that it is more likely than not that these assets may be impaired. The goodwill impairment test is performed in a two-step process. Step 1 involves estimating the fair values of the reporting units using a discounted cash flow analysis as well as other market indicators, such as comparison to other similar market transactions, and with market-based multiples applied to projected earnings. We believe these valuation techniques are reasonable because these are established businesses with reasonably predictable future profit and cash flow levels and because it has been our experience that these techniques are commonly used when valuing businesses in our industry. We compare the estimated fair value of each reporting unit to the recorded value of net assets in order to determine whether impairment is indicated. If this Step 1 analysis indicates potential impairment, we perform a Step 2 analysis of goodwill to measure the impairment. The Step 2 analysis involves estimating the fair value of all assets and liabilities associated with the reporting unit using a variety of techniques. If the recorded amount of any reporting unit’s goodwill exceeds the implied fair value of that goodwill based on the Step 2 analysis, an impairment loss is recognized in an amount equal to that excess.

The projection of future cash flows and valuation of the reporting units is subject to assumptions, uncertainties, and estimates, and the actual future cash flows may differ significantly from these projections. The valuation methods require the estimation of future sales, profitability, and cash flow levels for each goodwill reporting unit. Estimated growth rates for revenues are based on historical growth rates, budgeted and forecasted revenues, market and industry data, and management expectations based on knowledge of the businesses, customers, markets, and general economic conditions. Future expectations for profitability and cash flows are based on historical amounts and operating margins, budgeted and forecasted profitability, management's knowledge of market and general economic conditions, various activities and initiatives either recently implemented or planned for implementation in the future, income tax rates currently in effect in the jurisdictions where the projected cash flows are expected to be generated, and expected levels of future capital expenditures. All of these assumptions are highly judgmental in nature, as they involve predictions about future events and circumstances. For example, many of the factors described in Item 1A, “Risk Factors”, could have a material adverse effect on these businesses and their future cash flows, and therefore on the assumptions used in the discounted cash flow projections. Changes in events, circumstances, or business and market conditions may occur in the future that could create under-performance relative to projected future cash flows, which could result in the recognition of additional goodwill impairment charges in the future.

In addition, the weighted average cost of capital, used as a basis to discount projected future cash flows to their net present value, has a significant effect on the estimated fair value of each reporting unit being evaluated. The weighted average cost of capital assumption is a complex calculation that is based on identification of a set of representative companies considered to be potential market participants for each reporting unit, an assumed representative capital structure, market interest rates, a measure of the leveraged cost of equity capital, and the stock price volatility of the Company as well as other comparable companies.

During 2015, we recognized pre-tax, non-cash goodwill impairment charges totaling $65.9 million. During 2013 we recognized $22.8 million of non-cash goodwill impairment charges. No goodwill impairment charges were recognized during 2014. These goodwill impairment charges reflected reduced short-term expectations of sales, profitability, and cash flows at the related reporting units compared with assumptions used when the original acquisition accounting was prepared. The reduced short-term expectations for these reporting units was influenced by recent actual performance, which was below management expectations, and forecasted expectations of future performance. Although management believes these reporting units will earn increased profitability in the longer term, accounting for goodwill under U.S. GAAP required these impairment charges be recognized in the years indicated.


37



During 2015, we determined the estimated fair value of our goodwill reporting units in accordance with the above methodology. The following table presents a summary of the 2015 analysis of goodwill and additional information about the sensitivity of the analysis to changes in assumptions.
Goodwill Valuation Results and Sensitivity
 
Goodwill Reporting Unit
(Amounts in thousands)
 
FLAG Segment
 
FRAG Reporting Unit 1
 
FRAG Reporting Unit 2
 
Corporate and Other
Goodwill
 
$
63,857

 
$
8,319

 
$
3,822

 
$
221

Percentage by which estimated fair value exceeds recorded net asset value of reporting unit
 
115.2
%
 
19.1
%
 
9.3
 %
 
524.3
%
Resulting percentage if projected cash flows were reduced by 10%, but no other assumptions were changed
 
93.7
%
 
6.9
%
 
(1.7
)%
 
461.8
%
Resulting percentage if the discount rate was increased by 1%, but no other assumptions were changed
 
89.7
%
 
6.0
%
 
 %
 
461.0
%

As described above, the estimated fair values of goodwill reporting units are highly sensitive to changes in our assumptions. For certain reporting units, as shown in the preceding table, the percentage by which the estimated fair value exceeds the recorded net asset value is relatively low, and an adverse change in assumptions could result in a future goodwill impairment charge for that reporting unit.

Indefinite-Lived Intangible Assets Other than Goodwill. The Company performs annual impairment tests on intangible assets with indefinite lives in the fourth quarter of each fiscal year, and whenever events or changes in circumstances indicate that it is more likely than not that these assets may be impaired. The impairment tests are performed by estimating the fair values of the intangible assets using a discounted cash flow analysis. Indefinite-lived intangible assets other than goodwill primarily consist of trade names and trademarks. In measuring the fair value for these intangible assets, we utilize the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. We believe this method is an appropriate valuation technique because it has been our experience that this technique is generally used when valuing trade name intangible assets in our industry. This method requires us to estimate future revenues for the sale of products under the related trade names and trademarks, determine an appropriate royalty rate for each trade name or trademark, and develop a weighted average cost of capital and discount rate to apply to the projected hypothetical cash flows. A discounted cash flow model is prepared based on these assumptions.

The projection of future cash flows is subject to assumptions, uncertainties, and estimates. The discounted cash flow method requires the estimation of future sales levels for products sold under each trade name intangible asset. Estimated growth rates for revenues are based on historical growth rates, budgeted and forecasted revenues, industry and market data, and management expectations based on knowledge of the businesses, customers, markets, and general economic conditions. In addition, income tax rates currently in effect in the jurisdictions where the projected cash flows are expected to be generated are applied to the projected future cash flows. All of these assumptions are highly judgmental in nature, as they involve predictions about future events and circumstances. For example, many of the factors described in Item 1A, “Risk Factors”, could have a material adverse effect on these projected product sales and therefore on the assumptions used in the discounted cash flow method. Changes in events, circumstances, or business and market conditions may occur in the future that could create under-performance relative to projected future cash flows, which could result in the recognition of future impairment charges. In addition, and as discussed above, the weighted average cost of capital used to discount the projected future cash flows to their net present value has a significant effect on the estimated fair value of each intangible asset being evaluated.
 
During the years ended December 31, 2015, 2014, and 2013, we recognized pre-tax, non-cash impairment charges totaling $12.8 million, $21.1 million, and $2.1 million, respectively, on trade name intangible assets. These impairment charges reflected reduced short-term expectations for sales and profitability of products sold under these trade names compared to the projected product sales and assumed profitability used in the original valuations. The slower growth rates and reduced profitability were based on recent historical performance and market conditions. Accordingly, we reduced the assumed royalty rates for certain of these trade names and the lower assumed royalty rates were a significant factor leading to these impairment charges. Although management believes that sales and profitability for products sold under these trade names will improve in the longer term, accounting for indefinite-lived intangible assets under U.S. GAAP required these impairment charges be recognized in the periods indicated.

As of December 31, 2015, the percentage by which the estimated fair values exceed the recorded values of these indefinite-lived intangible assets ranged from a low of zero for the trade names for which fourth quarter 2015 impairment charges were

38



recognized, to a high of 109%. The weighted average excess of estimated fair value over recorded value for all indefinite-lived intangible assets following the recognition of the 2015 impairment charges was 9.7%. As described above, the estimated fair values of these indefinite-lived intangible assets are highly sensitive to changes in our assumptions. Any adverse changes in projected revenues, assumed royalty rates, discount rates, or income tax rates used in estimating the fair value of these intangible assets could result in the recognition of additional impairment charges. In addition, a change from indefinite-life to finite-life for any of these assets would most likely result in the recognition of additional impairment charges.

Post-Retirement Benefit Plan Obligations. We determine our post-retirement benefit plan obligations on an actuarial basis that requires management to make certain assumptions. These assumptions include the discount rate to be used in calculating the applicable benefit obligation, the long-term rate of return on plan assets for those plans that are funded, the assumed mortality factors to be applied, the anticipated inflation trend on future health care costs, and the assumed rate of compensation inflation. These assumptions are reviewed on an annual basis or if certain plan amendments are enacted. In evaluating these assumptions, consideration is given to market conditions, applicable market indices and benchmarks, in some cases custom developed indices, historical results, and changes in regulations.

The net post-retirement benefit plan obligation is included in employee benefit obligations on the Consolidated Balance Sheets. The total post-retirement obligations are reduced by the fair value of investment assets held in the related pension plan trusts. These pension assets consist of ownership interests in various mutual and commingled investment funds, which in turn hold investments in marketable debt and equity instruments and other investment assets, or in guaranteed insurance contracts. We determine the fair value of these assets by reference to quoted prices in active markets for identical assets and liabilities, where available (“Level 1”). Where Level 1 market prices are not available, we utilize significant observable inputs based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations for which all significant assumptions are observable (“Level 2”). Finally, if neither Level 1 nor Level 2 measurements are available, we utilize significant unobservable inputs that are supported by little or no market activity that are significant to the fair value of the assets or liabilities (“Level 3”) to determine the fair values of such pension assets.

The weighted average assumed rate of return on pension plan assets was 6.1% during 2015 and is 5.4% for 2016. This assumed rate of return on plan assets is based on long-term historical rates of return achieved on similar investments, weighted in the same proportion as our 2015 target weighting, which is 22% equity and 72% debt, and 6% cash equivalents for the U.S. plan, and 100% debt for the Canadian plan. Funding for our other pension plans is generally achieved through guaranteed insurance contracts. To validate the assumed return on assets assumption, we obtained a study of historical rates of return for similar investment categories that calculated actual returns for randomly selected 20-year periods of time over a much longer historical period. From this study, we determined the range of most likely results. We believe these assumed rates of return are reasonable given the asset composition, long-term historic trends, and current economic and financial market conditions.

A weighted average discount rate assumption of 3.7% was used to determine our plan liabilities as of December 31, 2015. We believe these discount rates are reasonable, given comparable rates for high quality corporate bonds with terms comparable to the projected cash flows for our respective plans. To validate this assumption for the U.S. plan we obtained published market indices and benchmarks for such bonds. To further help establish an appropriate discount rate, we obtained the weighted average rate of return on hypothetical customized bond portfolios that more closely match the expected cash outflows of our benefit obligations. Our assumed discount rates are consistent with these customized bond portfolio rates of return and with the relevant market indices and benchmarks for similar debt securities.

We have assumed that health care costs will increase by 6.5% in 2016, 6% in 2017, after which we assume a 0.25% per year reduction in the rate of health care cost increases until a level of 5% is reached. These assumptions are based on historical rates of inflation for health care costs and expectations for future increases in health care costs.

Assumed mortality rates can also significantly affect the projected benefit obligation and expense recognized on our post-employment benefit plans. For example, the Company adopted new mortality rate tables during 2014, which increased the projected benefit obligations of the plans by a total of $15.0 million at that time.

The funded status of our defined benefit pension plans can fluctuate widely due to changes in the interest rates used to determine the discounted benefit obligations, actual returns on invested assets, the amount of contributions made by the Company, changes in regulations concerning required funding and contributions, and changes in actuarial estimates. Due to voluntary contributions made by the Company to the U.S. pension plan and the current funded status, there was no required minimum contribution to this plan for 2015 and there is no required minimum contribution for 2016. However, required funding in future years for this and other retirement plans may increase significantly.


39



Our annual post-retirement benefit plan expenses can be significantly impacted by changes in these assumptions. For example, a 1% change in the return on assets assumption would change annual pension expense by $1.9 million in 2016. A 1% decrease in the discount rate would increase pension expense by $3.9 million in 2016, and a 1% increase in the discount rate would decrease pension expense by $2.4 million in 2016. A 1% increase in the health care cost trend assumption for 2016 and beyond would increase annual post-retirement medical costs by approximately $0.2 million per year and a 1% decrease in the health care cost trend assumption for 2016 and beyond would decrease annual post-retirement medical costs by approximately $0.2 million a year.

Facility Closure and Restructuring Costs. Facility closure and restructuring costs are recognized and recorded at fair value as incurred. Such costs include severance and other costs related to employee terminations, impairment of PP&E, moving costs to relocate machinery, equipment, and inventory, and facility exit costs. Changes in our estimates could occur, and have occurred, due to changes in estimated uses for PP&E, revised estimates of fair value of PP&E, fluctuations in foreign currency exchange rates, unanticipated voluntary departures before severance payments were required, and differences between estimated and actual costs.

Uncertain Tax Positions. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many assumptions and judgments regarding our income tax exposures. Interpretations of income tax laws and regulations and guidance surrounding them change over time. Changes in our assumptions and judgments can materially affect amounts recognized in the Consolidated Financial Statements.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Included in recorded tax liabilities are estimated amounts related to uncertain tax positions. Actual tax liabilities may differ materially from these estimates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. As of December 31, 2015, we have a deferred tax asset valuation allowance of $4.8 million, primarily related to state and foreign net operating loss carry forwards.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements for a summary of recent accounting pronouncements.

Forward Looking Statements
“Forward looking statements,” as defined by the Private Securities Litigation Reform Act of 1995, used in this report, including without limitation our “outlook,” “guidance,” “expectations,” “intent,” “beliefs,” “plans,” “indications,” “estimates,” “anticipations,” and their variants, are based upon available information and upon assumptions that the Company believes are reasonable; however, these forward looking statements involve certain risks and uncertainties, including those set forth in Item 1A, Risk Factors, and should not be considered indicative of actual results that the Company may achieve in the future. Specifically, issues concerning the consummation and potential effects of the Merger, foreign currency exchange rates, the cost to the Company of commodities in general, and of steel in particular, the anticipated level of applicable interest rates, tax rates, discount rates, rates of return, management’s intentions regarding debt repayments, capital expenditures, and contributions to post-retirement benefit plans involve estimates and assumptions. To the extent that these, or any other such assumptions, are not realized going forward, or other unforeseen factors arise, actual results for the periods subsequent to the date of this report may differ materially.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk from changes in interest rates, foreign currency exchange rates, and prices for commodities such as steel and energy. We manage our exposure to these market risks through our regular operating and financing activities, and, when deemed appropriate, through the use of derivative financial instruments. When utilized, derivatives are used as risk management tools and not for trading or speculative purposes.
Interest Rate Risk. We manage our ratio of fixed to variable rate debt with the objective of achieving a mix that management believes is appropriate. We have, on occasion, entered into interest rate swap agreements to exchange fixed and variable interest rates based on agreed upon notional amounts and we have entered into interest rate cap agreements that limit the maximum interest rate we can be charged on variable interest rate debt. As of December 31, 2015, all of our outstanding bank debt is

40



subject to variable interest rates and all of our outstanding capital lease obligation principal is subject to fixed interest rates. We executed an interest rate cap agreement covering an initial notional amount of $103.7 million of term loan principal outstanding that capped the maximum interest rate at 7.50% and matured on June 1, 2013. We entered into a series of interest rate swap contracts whereby the interest rate we pay will be fixed at between 3.30% and 4.20%. Contracts covering a notional amount of $30.0 million of term loan principal for the period from June 2013 matured in December 2014. Additional contracts covering notional amounts of $100.0 million in term loan principal will mature in August 2016.
The interest rate under our New Senior Credit Facility consists of a margin applied to either LIBOR or a defined index rate. As of December 31, 2015, a 100 basis point increase in LIBOR for the duration of one year would have increased interest expense by approximately $4.6 million in 2015. Additionally, the interest rates available in certain jurisdictions in which we hold excess cash may vary, thereby affecting the return we earn on cash equivalent short-term investments.
Foreign Currency Exchange Risk. Under selling arrangements, many of our foreign sales are denominated in U.S. Dollars. However, during 2015, approximately 22.9% of our sales and 27.2% of our operating costs and expenses were transacted in foreign currencies. As a result, fluctuations in foreign currency exchange rates impact the amount of our reported sales and operating income. Historically, our principal exposures have been related to local currency revenues, purchases, and expenses in Brazil, Canada, China, Europe, and Japan.
We make regular payments to our wholly-owned subsidiary in Canada, Blount Canada Ltd. (“Blount Canada”) for contract manufacturing services performed on behalf of our U.S. based operations. We selectively hedge a portion of the anticipated payments and underlying local currency denominated manufacturing conversion and operating costs with Blount Canada that are subject to foreign exchange exposure, using zero-cost collar option contracts to manage our exposure to Canadian Dollar exchange rates. These zero-cost collar instruments are designated as cash flow hedges and are recorded on the Consolidated Balance Sheets at fair value. The effective portion of the contracts’ gains or losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive loss and is subsequently reclassified into earnings when we settle the hedged payment to Blount Canada. We use the hypothetical derivative method to determine the hedge effectiveness of our zero-cost collar option contracts. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in Canadian Dollar exchange rates on the underlying manufacturing conversion and operating costs. As of December 31, 2015 and 2014, the total notional amount of such contracts outstanding was $32.2 million and $35.9 million, respectively. During 2015, 2014, and 2013 we recognized losses of $0.5 million, $0.2 million, and $0.5 million, respectively, from these contracts due to changes in fair value as of the maturity dates. We have not recognized any amount in earnings in the years ended December 31, 2015, 2014, or 2013 due to ineffectiveness of these Canadian Dollar hedging instruments.
We may, in the future, decide to manage additional exposures to currency exchange rate fluctuations through derivative products. The following table illustrates the estimated translation effect on our 2015 operating results of a hypothetical 10% change in major currencies, defined as the Brazilian Real, Canadian Dollar, Chinese RMB, Euro, and Japanese Yen, in which we conduct sales transactions and incur operating expenses.
Currency Exchange Rate Sensitivity
 
Effect of 10% Weaker U.S. Dollar – Increase  (Decrease)
(Amounts in thousands)
 
Sales
 
Cost of Goods Sold
 
Operating Income
Brazilian Real
 
$
2,292

 
$
2,363

 
$
(460
)
Canadian Dollar
 
1,489

 
6,247

 
(5,028
)
Chinese RMB
 
1,200

 
3,011

 
(3,680
)
Euro
 
9,488

 
5,811

 
1,227

Japanese Yen
 
1,017

 
74

 
828

Russian Ruble
 
1,267

 

 
1,094

Commodity Price Risk. We secure raw materials primarily through a centrally administered supply chain organization. We also operate an Asian sourcing office in Suzhou, China. These functions are staffed by professionals who determine the sourcing of materials by assessing quality, availability, price, and service of potential vendors. When possible, multiple vendors are utilized to ensure competitive prices and to minimize risk due to lack of availability of materials. Some of these raw materials are subject to price volatility over time. We have not entered into derivative instruments to hedge against the price volatility of any raw materials during 2015, 2014, or 2013.
Raw material price volatility has not had a significant impact on our results in recent years, with the exception of steel pricing. We purchased approximately $79.2 million of steel in 2015, which was our largest sourced commodity. A hypothetical 10% change in the price of steel would have had an estimated $7.9 million effect on pre-tax income in 2015. We utilize multiple suppliers to purchase steel. We estimate the impact to cost of goods sold in the Consolidated Statements of Income (Loss) from changes in our cost of purchased steel was a decrease of $4.9 million from 2012 to 2013, an increase of $4.1 million from 2013

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to 2014, and a decrease of $3.5 million from 2014 to 2015. From time to time, selling prices to certain of our customers have been adjusted based on changes in steel commodity costs. In addition to steel raw material, we also purchase components and sub-assemblies that are made with steel, and prices for these items are also subject to steel price volatility risk. We source many of our lawn and garden products, and our farm, ranch, and agriculture products, from Asia, in certain cases through brokers, and we anticipate expanding this practice in the future. We attempt to mitigate sourcing issues by securing multiple suppliers for products whenever practical.
Fluctuations in the cost of fuel used in transportation can affect the cost of freight we pay both for the acquisition of raw materials and for delivery of our products to our customers. In recent years, we have incurred energy surcharges from our freight vendors. We have on occasion passed a portion of these costs to our customers, but a portion of these costs have also reduced our gross profit. Our total freight cost in 2015 was $46.4 million, and a hypothetical 10% change in freight costs would have had an estimated $4.6 million effect on pre-tax income in 2015. We also use electricity and natural gas in the manufacture of our products and are subject to fluctuations in such utility costs. To date we have not undertaken any hedging activities against these energy-related exposures.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Blount International, Inc. and subsidiaries:

We have audited the accompanying consolidated balance sheets of Blount International, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Blount International, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the two‑year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Blount International, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Portland, Oregon
March 15, 2016




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The Board of Directors and Stockholders
Blount International, Inc. and subsidiaries:

We have audited Blount International, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Blount International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Blount International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Blount International, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015, and our report dated March 15, 2016 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Portland, Oregon
March 15, 2016


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To the Board of Directors and Stockholders of Blount International, Inc.

In our opinion, the accompanying consolidated statement of income, of comprehensive income, of changes in stockholders’ equity and of cash flows for the year ended December 31, 2013 present fairly, in all material respects, the results of Blount International, Inc. and its subsidiaries operations and their cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended December 31, 2013 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Portland, Oregon
April 22, 2014

45



CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Blount International, Inc. and Subsidiaries
 
 
 
Year Ended December 31,
(Amounts in thousands, except per share data)
 
2015
 
2014
 
2013
Sales
 
$
828,569

 
$
944,819

 
$
900,595

Cost of goods sold
 
603,137

 
669,703

 
658,633

Gross profit