10-K 1 d444813d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

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, 2012.

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from             to             

Commission file number 001-11549

 

 

BLOUNT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   63 0780521
(State of Incorporation)   (I.R.S. Employer Identification No.)
4909 SE International Way, Portland, Oregon   97222-4679
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (503) 653-8881

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Common Stock, $.01 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

At June 30, 2012, the aggregate market value of the voting and non-voting common stock held by non-affiliates, computed by reference to the last sales price 14.65 as reported by the New York Stock Exchange, was $465,683,740 (affiliates being, for these purposes only, directors, executive officers, and holders of more than 10% of the registrant’s Common Stock).

The number of shares outstanding of $0.01 par value common stock as of February 26, 2013 was 49,146,484 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2013 are incorporated by reference in Part III.

 

 

 


Table of Contents

BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES

Table of Contents

 

             
          Page  

Part I

  

Item 1

  

Business

     3   

Item 1A

  

Risk Factors

     9   

Item 1B

  

Unresolved Staff Comments

     15   

Item 2

  

Properties

     15   

Item 3

  

Legal Proceedings

     15   

Item 4

  

Mine Safety Disclosures

     15   

Part II

  

Item 5

  

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

     16   

Item 6

  

Selected Consolidated Financial Data

     17   

Item 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 7A

  

Quantitative and Qualitative Disclosures about Market Risk

     38   

Item 8

  

Financial Statements and Supplementary Data

     40   

Item 9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     80   

Item 9A

  

Controls and Procedures

     80   

Item 9B

  

Other Information

     80   

Part III

  

Item 10

  

Directors, Executive Officers, and Corporate Governance of the Registrant

     80   

Item 11

  

Executive Compensation

     81   

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     81   

Item 13

  

Certain Relationships and Related Transactions and Director Independence

     81   

Item 14

  

Principal Accountant Fees and Services

     81   

Part IV

  

Item 15

  

Exhibits and Financial Statement Schedules

     81   

Signatures

     85   

 

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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 115 countries and approximately 56% of our 2012 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, France, and Mexico. In addition, we operate marketing, sales, and distribution centers in Europe, North America, South America, and the Asia-Pacific region.

Our Company has undergone significant changes in recent years as we have disposed of certain business units and acquired others. On August 10, 2010, we acquired SP Companies, Inc. and SpeeCo, Inc. (collectively, “SpeeCo”), a manufacturer and supplier of log splitters, post-hole diggers, tractor three-point linkage parts and equipment, and farm, ranch, and agriculture accessories located in Golden, Colorado. On September 30, 2010, we sold our wholly-owned subsidiary Gear Products, Inc. (“Gear Products”), a manufacturer of mechanical power transmission components for original equipment manufacturers, located in Tulsa, Oklahoma.

On March 1, 2011, we acquired KOX GmbH and related companies (collectively “KOX”), a Germany-based direct-to-customer distributor of forestry-related replacement parts and accessories, primarily serving professional loggers and consumers in Europe. On August 5, 2011, we acquired Finalame SA, which included PBL SA and related companies (collectively “PBL”). PBL is a manufacturer of lawnmower blades and agricultural cutting blade component parts based in Civray, France, with a second manufacturing facility in Queretaro, Mexico. On September 7, 2011, we acquired GenWoods HoldCo, LLC and its wholly-owned subsidiary, Woods Equipment Company (collectively “Woods/TISCO”). Woods/TISCO, with operations primarily in the Midwestern U.S., is a manufacturer and marketer of tractor attachments, implements, and replacement parts, primarily for the agriculture, grounds maintenance, and construction end markets.

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 edger blades for outdoor power equipment. 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 FLAG segment currently includes the operations of the Company that have historically served the forestry, lawn, and garden markets, as well as KOX and a portion of the PBL business.

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 attachment cutting blade parts. The FRAG segment also purchases replacement parts and accessories from other manufacturers that we market to our FRAG customers through our sales and distribution network. The FRAG segment currently includes the operations of SpeeCo, Woods/TISCO, and a portion of the PBL business.

The Company also operates a concrete cutting and finishing equipment business that is reported within the Corporate and Other category. This business manufactures and markets diamond cutting chain and assembles and markets concrete cutting chain saws for the construction and utility markets.

 

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Forestry, Lawn, and Garden Segment

Forestry Products. These products are sold under the Oregon®, Carlton®, KOX™, and Tiger™ brands, as well as under private labels for certain of our 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. Beginning in 2011, we also began marketing a line of cordless electric chain saws under the Oregon® brand.

Lawn and Garden Products. These products are sold under the Oregon® and PBL™ brand names, as well as private labels for certain of our OEM 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.

Our FLAG products are sold under both our own proprietary brands and private labels to OEMs for use on new chain saws and lawn and garden equipment, and to professionals and consumers as replacement parts through distributors, dealers, direct sales companies, and mass merchants. During 2012, approximately 23% of the FLAG segment’s sales were to OEMs, with the remainder sold into the replacement market.

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. 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 also supply products or components to some of our competitors in select limited markets.

Due to the high level of technical expertise and capital investment required to manufacture cutting chain and guide bars, we believe that we are able to produce durable, high quality cutting chain and guide bars more efficiently than most of our competitors. With the acquisition of PBL, we also believe we are able to produce consumer grade lawnmower and edger blades at prices comparable to our competitors. We also work with our OEM customers to improve the design and specifications of cutting chain, guide bars, and lawnmower blades used as original equipment on their products.

We believe we are the world’s largest producer of cutting chain for chain saws. Oregon® and Carlton® 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 currently sold today. We believe we are a leading supplier of lawnmower cutting 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. 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. Temperature patterns also drive the demand for firewood, which in turn drives the demand for our cutting chain and other forestry products.

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.

 

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Our profitability in the FLAG segment is also affected by changes in 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 17 of Notes to Consolidated Financial Statements.

Farm, Ranch, and Agriculture Segment

Equipment and Tractor Attachment Products. These products are sold under the Alitec®, CF®, Gannon®, Oregon®, PowerPro®, SpeeCo®, WainRoy®, and Woods® brand names, as well as under private labels for some 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 PBL™, SpeeCo®, TISCO®, Tru-Power®, Vintage Iron®, and WoodsCare™ brand names, as well as under private labels for some of our OEM 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. The FRAG segment also markets replacement parts and accessories purchased from other manufacturers, including tractor linkage, electrical, engine and hydraulic replacement parts, and other accessories used in the agriculture and construction equipment markets.

Industry Overview. Competitors for our equipment and tractor attachment products include 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, SMA, and Sparex, among others. In recent years, suppliers in China and other low-cost manufacturing locations have increased product availability, 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.

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 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.

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. For example, recent widespread drought conditions in North America reduced demand for our products during 2012. 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 forestry products and log splitters. Finally, demand for our products is affected by housing starts, crop prices, and disposable and farm income levels for our end consumers.

Increases in raw material prices, particularly for steel, can negatively affect profit margins in our FRAG business. Fluctuations in foreign exchange rates and transportation costs can also affect our profitability as we source a significant amount of our components from China and ship them to the U.S. for assembly and distribution. For example, during 2012, certain of these foreign suppliers were unable to provide us with critical components on a timely basis and the long lead times for delivery of such products caused us to incur additional freight and logistics costs in an attempt to meet current customer demand. We also lost sales in 2012 from our inability to obtain certain products to meet current customer demand. 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 17 of Notes to Consolidated Financial Statements.

 

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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® brand. The principal product is a proprietary diamond-segmented chain, which is used on gasoline and hydraulic powered concrete cutting saws and equipment. We also market and distribute branded gasoline and hydraulic powered concrete cutting chain saws to our customers, which include contactors, rental equipment companies, and construction equipment dealers, primarily in the U.S. and Europe. The power heads for these saws are manufactured by third parties. Competition primarily comes from manufacturers of traditional circular 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, information technology, and supply chain services, administering various health and welfare plans, providing risk management and insurance services, supervising the Company’s capital structure, and overseeing 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. The cost of providing certain shared services is allocated to our business segments using various allocation drivers such as headcount, software licenses, purchase volume, shipping volume, sales revenue, square footage, and other factors.

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®, Tiger®, Tisco®, Tru-Power®, Vintage Farm™,WainRoy®, Windsor®, Woods™, and WoodsCare™. All of these are registered, pending, or common trademarks of Blount and its subsidiaries in the U.S. and/or other countries. Some forms of Windsor® are used under license from affiliates of Snap-On, Inc.

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 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.”

Discontinued Operations - Gear Products

On September 30, 2010, we sold Gear Products to Tulsa Winch, Inc., an operating unit of Dover Industrial Products, Inc., for net cash proceeds of $24.8 million. Gear Products was a manufacturer of mechanical power transmission components for OEMs, serving the utility, construction, forestry, marine, and mining markets. Under terms of the stock purchase agreement, the parties agreed to treat the stock sale as if it were an asset sale for income tax purposes, which resulted in an increase in the income tax expense we recognized on the sale. Gear Products results are reported as discontinued operations for all periods presented.

 

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Capacity Utilization

Based on a five-day, three-shift work week, average capacity utilization is estimated as follows:

 

     Year Ended December 31,  
     2012     2011  

Forestry, lawn, and garden

     82     93

Farm, ranch, and agriculture

     40     40

Concrete cutting and finishing

     60     60

Historically, the Company has operated its FLAG segment facilities at high capacity utilization levels. Capacity for our forestry products has been expanded in recent years with the establishment of our manufacturing plant in Fuzhou, China in 2005, the purchase of Carlton Holdings, Inc. and its subsidiaries (“Carlton”), a manufacturer of cutting chain for chain saws located near Portland, Oregon in 2008, and a significant expansion of our facility in Fuzhou, China beginning in 2011. The Company expects to meet future sales demand by expanding capacity at existing facilities through both productivity enhancements and capital investment. We are also evaluating a potential new manufacturing facility, to be located in Eastern Europe over the next several years, in order to meet anticipated future demand for our forestry and other products. We have also increased manufacturing capacity for FLAG lawn and garden products with the acquisition of PBL in 2011. The FRAG segment facilities were generally operated on a five-day, one-shift basis during 2012. During 2012, we consolidated our FRAG assembly operations formerly located in Golden, Colorado into a new larger facility in Kansas City, Missouri. We are currently expanding manufacturing capacity in our FRAG segment by investing in productivity enhancements and through capital investment.

Backlog

Our sales order backlog was as follows:

 

     As of December 31,  

(Amounts in thousands)

   2012      2011      2010  

Forestry, lawn, and garden

   $ 167,875       $ 182,414       $ 125,987   

Farm, ranch, and agriculture

     31,480         30,756         6,671   

Concrete cutting and finishing

     443         562         1,059   
  

 

 

    

 

 

    

 

 

 

Total sales order backlog

   $ 199,798       $ 213,732       $ 133,717   
  

 

 

    

 

 

    

 

 

 

The total backlog as of December 31, 2012 is expected to be completed and shipped within twelve months.

Employees

At December 31, 2012, we employed approximately 4,700 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. 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.

 

     Year Ended December 31,  

(Amounts in thousands)

   2012      2011      2010  

Expenses attributed to environmental compliance

   $ 2,200       $ 2,300       $ 2,200   

Capital expenditures attributed to environmental compliance

     500         600         200   
  

 

 

    

 

 

    

 

 

 

Total attributed to environmental compliance

   $ 2,700       $ 2,900       $ 2,400   
  

 

 

    

 

 

    

 

 

 

We expect to spend approximately $2.5 million to $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, 2012, the total recorded liability for environmental remediation was $3.5 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 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 political and other 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 14 of Notes to Consolidated Financial Statements.

 

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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 17 of Notes to 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.

Research and Development Activities

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

Available Information

Our website address is www.blount.com. You may obtain free 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, N.E., 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

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

The markets in which we operate are competitive. We believe that design features, product quality, 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, or more favorable operating conditions than we do. For example, our competitors are expanding capacity or contracting 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. 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.

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

In 2012, none of our customers accounted for 10% or more of our total sales and our top three customers accounted for $147.3 million, or 15.9%, of our total sales. Aside from our top three customers, no other customer individually accounted for more than 2.0% of our total sales in 2012. 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 manufacture various components themselves that we currently sell to them, which would have an adverse effect on our business.

 

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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 important materials 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 2012, we purchased $26.5 million in products from our largest supplier and $75.6 million in products and raw materials from our top five suppliers. During 2012, we experienced difficulty in obtaining certain component parts on a timely basis from one of our key suppliers in the FRAG segment, and these supply disruptions in turn resulted in delayed and ultimately lost sales of some of our FRAG products, as well as higher costs to expedite delivery and service customer demand.

Some of these raw materials, in particular cold-rolled strip steel, are subject to price volatility over periods of time. In 2012 we purchased $97.8 million of steel. In addition to steel raw material, we also purchase components and subassemblies that are made with steel, and prices for these items are also subject to steel price volatility risk. We have not hedged 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 reduced 2012 income from continuing operations before taxes by $9.8 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 currency exchange rates, unexpected changes in regulatory environments, or potentially adverse tax consequences.

In 2012, approximately 56% 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.

Some of our sales and expenses are denominated in local currencies that are affected by fluctuations in 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 Canada, and local currency sales and expenses in Europe. 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. Any change in the exchange rates of currencies in jurisdictions into which we sell products or incur 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 reduced our operating income by $6.1 million. We estimate that a 10% weaker Euro in relation to the U.S. Dollar would have reduced our sales by $11.2 million and operating income by $0.9 million in 2012. We estimate that the year-over-year movement of foreign exchange rates from 2011 to 2012, whereby the U.S. Dollar strengthened in relation to the Canadian Dollar and the Euro, decreased our sales by $13.8 million and decreased our operating income by $3.9 million.

Also, approximately 58% of our foreign sales in 2012 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. Furthermore, if the U.S. Dollar strengthens against foreign currencies, it becomes more costly for foreign customers to pay their U.S. Dollar balances owed. They may have difficulty in repaying these amounts, and in turn, our bad debt expense may increase.

In addition, we own substantial manufacturing facilities outside the U.S. As of December 31, 2012, 857,555, or 43%, of the total square feet of our owned facilities are located outside of the U.S., and 28% of our leased square footage is located outside the U.S. This foreign-based property, plant, and equipment 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.

 

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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. During 2012, continuing drought conditions in North America resulted in lower sales of certain of our FRAG and lawn and garden 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—Due to our financial leverage, we could have difficulty operating our business and satisfying our debt obligations.

As of December 31, 2012, we have $793.8 million of total liabilities, including $516.8 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 $31.6 million during 2012.

 

   

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 substantial 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.

We have available borrowing capacity under the revolving portion of our senior credit facilities of $61.8 million as of December 31, 2012. Our term loan facility does not allow the borrowing of additional principal amounts. 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 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 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 strategic 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.

Our historical and current business operations have resulted in 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 relating to certain of our discontinued operations were retained by us under terms of the relevant divestiture agreements. Some of these product liability suits 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. See also Item 3, Legal Proceedings, and Note 14 to the Consolidated Financial Statements.

 

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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 past 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 14 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 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 2012 of 100 basis points would have increased our interest expense by $5.4 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 funding 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. Furthermore, terrorist 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.

 

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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:

 

   

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, and 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 45%. 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, 2012, approximately 44% of our outstanding common stock was owned or controlled by our five largest stockholders. We may sell additional shares of common stock in subsequent public offerings, or other stockholders with significant holdings of our common stock may also 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.

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

We rely on information technology systems to 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.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters occupy executive offices at 4909 SE International Way, Portland, Oregon 97222-4679. Cutting chain, guide bar, and drive sprocket manufacturing facilities within our FLAG business segment are located in Portland, Oregon; Milwaukie, Oregon; Curitiba, Brazil; Guelph, Canada; and Fuzhou, China. Lawnmower blade manufacturing facilities within our FLAG business segment are located in Kansas City, Missouri; Civray, France; and Queretaro, Mexico. Assembly of log splitters and post-hole diggers within our FRAG business segment occurred 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; and Sioux Falls, South Dakota. 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. SpeeCo is headquartered in Golden, Colorado with design, engineering, sales, and marketing functions located in that facility. SpeeCo also operated an assembly, warehouse, and distribution center in Golden, Colorado through the end of 2011, but those operations were moved to Kansas City, Missouri in early 2012.

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, 2012 is as follows:

 

     Area in Square Feet  
     Owned      Leased  

Forestry, lawn, and garden segment

     1,419,300         479,100   

Farm, ranch, and agriculture segment

     531,000         689,500   

Corporate and other

     50,700         34,400   
  

 

 

    

 

 

 

Total

     2,001,000         1,203,000   
  

 

 

    

 

 

 

We currently lease 95,000 feet in Golden, Colorado that is presently idle and unoccupied and this leased property is not included in the preceding table.

ITEM 3. LEGAL PROCEEDINGS

For information regarding legal proceedings see Note 14 of Notes to Consolidated Financial Statements.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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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”). The following table presents the quarterly high and low closing prices for the Company’s common stock for the last two years. 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 5,400 stockholders of record as of December 31, 2012. See information about the Company’s stock compensation plans in Note 16 to the Consolidated Financial Statements and also in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The Company has not sold any registered or unregistered securities, or repurchased any shares of its common stock, during the three year period ended December 31, 2012.

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

 

     Common Stock  
     High      Low  

Year Ended December 31, 2012:

     

First quarter

   $ 17.50       $ 14.61   

Second quarter

     17.11         13.00   

Third quarter

     15.04         12.71   

Fourth quarter

     15.82         12.87   

Year Ended December 31, 2011:

     

First quarter

   $ 16.46       $ 14.45   

Second quarter

     17.47         15.36   

Third quarter

     18.37         12.98   

Fourth quarter

     16.29         13.02   

 

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

 

     Year Ended December 31,  

(In thousands, except per share data)

   2012     2011     2010     2009     2008  

Statement of Income Data:

     (1)        (2)        (3)        (4)     

Sales

   $ 927,666      $ 831,630      $ 611,480      $ 487,366      $ 565,557   

Operating income

     79,280        97,953        85,555        54,526        84,386   

Interest expense, net of interest income

     17,206        18,550        25,517        24,501        25,705   

Income from continuing operations before income taxes

     61,790        74,950        52,611        30,266        60,485   

Income from continuing operations

     39,588        49,682        41,402        21,945        36,932   

Income from discontinued operations

     —          —          5,798        1,048        1,667   

Net income

     39,588        49,682        47,200        22,993        38,599   

Earnings per share:

          

Basic income per share:

          

Continuing operations

     0.81        1.02        0.86        0.46        0.78   

Discontinued operations

     —          —          0.13        0.02        0.03   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     0.81        1.02        0.99        0.48        0.81   

Diluted income per share:

          

Continuing operations

     0.79        1.01        0.85        0.46        0.77   

Discontinued operations

     —          —          0.12        0.02        0.03   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     0.79        1.01        0.97        0.48        0.80   

Weighted average shares used:

          

Basic

     49,170        48,701        47,917        47,758        47,510   

Diluted

     49,899        49,434        48,508        48,274        48,130   
     As of December 31,  

(In thousands)

   2012     2011     2010     2009     2008  

Balance Sheet Data:

          

Cash and cash equivalents

   $ 50,267      $ 62,118      $ 80,708      $ 55,070      $ 58,275   

Working capital

     252,190        235,860        187,547        149,547        127,986   

Property, plant, and equipment, net

     177,702        155,872        108,348        114,470        119,749   

Total assets

     905,291        884,207        580,887        483,566        499,684   

Long-term debt

     501,685        510,014        339,750        280,852        293,539   

Total debt

     516,757        530,362        350,000        285,865        325,520   

Stockholders’ equity (deficit)

     111,482        69,465        42,398        (6,740     (43,520

The table above gives effect to the sale of Gear Products on September 30, 2010 and treatment of this business unit as discontinued operations for all periods presented. In addition, the table reflects the acquisitions of Carlton on May 2, 2008, SpeeCo on August 10, 2010, KOX on March 1, 2011, PBL on August 5, 2011, and Woods/TISCO on September 7, 2011, and inclusion of their operations from their acquisition dates forward. The results above also reflect the related acquisition accounting effects of these acquisitions, as further described below in Item 7, Management’s Discussion and Analysis of Financial Condition and Operating Results.

 

(1) Income from continuing operations in 2012 includes a pre-tax charge of $7.4 million for facility closure and restructuring charges.
(2) Income from continuing operations in 2011 includes a pre-tax charge of $3.9 million for the early extinguishment of debt.
(3) Income from continuing operations in 2010 include a pre-tax charge of $7.0 million for the early extinguishment of debt.
(4) Operating income and income from continuing operations in 2009 include a pre-tax charge of $8.6 million for settlement of a litigation matter, fees associated with refinancing activities and costs associated with the transition of the Company’s CEO position; a pre-tax charge of $7.2 million for plant closure and severance costs; and a pre-tax gain of $2.7 million on the sale of land and building in Europe.

 

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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 our Consolidated Financial Statements included elsewhere in this report, as well as the information in Item 1, Business, and Item 6, Selected Consolidated Financial Data. See Item 1, Business, for an overview of the Company’s business, operating segments, the industries in which we compete, and general factors affecting our results. Our business has changed significantly over the past three years as a result of acquisitions and dispositions of several business units. See Item 1, Business, and Note 2 to the Consolidated Financial Statements for descriptions of these transactions.

Consolidated Operating Results

Year ended December 31, 2012 compared to year ended December 31, 2011

 

(Amounts in millions)

                            
(Amounts may not sum due to rounding)    2012     2011     Change          

Contributing Factor

Sales

   $ 927.7      $ 831.6      $ 96.0       
         $ (42.6   Sales volume, excluding acquisitions
           139.3      Acquired sales volume
           13.1      Selling price and mix
           (13.8   Foreign currency translation

Gross profit

     256.2        255.8        0.4       

Gross margin

     27.6     30.8       17.0      Sales volume, including acquisitions
           13.1      Selling price and mix
           (18.4   Product cost and mix
           0.6      Average steel costs
           (6.6   Incremental logistics costs
           (1.0   Facility closure costs
           (0.4   Acquisition accounting effects
           (3.9   Foreign currency translation

SG&A

     170.5        157.9        12.7       

As a percent of sales

     18.4     19.0      
           18.6      Incremental SG&A of acquisitions
           2.3      Compensation expense
           (7.3   Professional services
           2.4      Employee benefits
           1.1      Travel and personnel-related
           (3.5   Foreign currency translation
           (0.9   Other, net

Facility closure and restructuring costs

     6.4        —          6.4       

Operating income

     79.3        98.0        (18.7    

Operating margin

     8.5     11.8       0.4      Increase in gross profit
           (12.7   Increase in SG&A
           (6.4   Facility closure and restructuring costs

Net income

   $ 39.6      $ 49.7      $ (10.1    
           (18.7   Decrease in operating income
           1.3      Decrease in net interest expense
           4.2      Change in other income (expense)
           3.1      Decrease in income tax provision

 

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Sales increased by $96.0 million, or 11.5%, from 2011 to 2012, primarily due to incremental sales volume of $139.3 million from the companies we acquired during 2011. We report all incremental sales attributable to recent acquisitions as unit volume increase, up through the one year anniversary of the acquisition date. Excluding the effect of the incremental sales from these acquisitions, unit sales volume decreased by $42.6 million, or 5.1%. Changes in average selling prices and product mix increased sales revenue by $13.1 million on a year-over-year basis, excluding acquisitions. The translation of foreign currency-denominated sales transactions decreased consolidated sales by $13.8 million in 2012 compared to 2011, excluding acquisitions, given the relatively stronger U.S. Dollar in comparison to most foreign currencies. International sales decreased by $29.4 million, or 5.6%, including the adverse currency effect of $13.8 million, while domestic sales decreased by $13.8 million, or 4.5%, exclusive of sales from recent acquisitions.

Gross profit increased by $0.4 million, or 0.2%, from 2011 to 2012. Higher unit sales volume, including incremental volume from recent acquisitions, added $17.0 million of gross profit in 2012. In addition, the $13.1 million effect of higher average selling prices and product mix further increased gross profit. Partially offsetting these increases was $18.4 million in higher product cost and mix, reflecting reduced manufacturing efficiencies and overhead absorption due to lower production levels during 2012. Steel costs were an estimated $0.6 million lower on average in 2012 compared with 2011. Gross profit was also negatively affected by $6.6 million in incremental logistics costs, including $5.3 million of above normal freight costs, incurred in the FRAG segment, $1.0 million in facility closure and restructuring costs related to the consolidation of our former assembly and distribution center operations located in Golden, Colorado to our new facility in Kansas City, Missouri, and a slight increase in acquisition accounting effects of $0.4 million. Fluctuations in currency exchange rates decreased our gross profit in 2012 compared to 2011 by $3.9 million as the translation of weaker foreign currencies into a stronger U.S. Dollar resulted in lower reported foreign sales, only partially offset by lower reported foreign manufacturing costs.

Gross margin in 2012 was 27.6% of sales compared to 30.8% in 2011. Our gross margin has decreased over the last two and a half years as a result of the businesses we acquired in 2010 and 2011, which have lower gross margins than the gross margins of our historical businesses. The impact of acquisition accounting effects has further lowered our gross margins. Excluding the results of the companies acquired in 2010 and 2011, our gross margin would have been 35.2% in 2012 and 35.3% in 2011. Our strategies to improve gross margins are to leverage our recent acquisitions through cross selling opportunities to increase sales volume and manufacturing efficiencies, apply continuous improvement initiatives to their manufacturing and other processes, invest in automation and productivity improvements, and to utilize our global supply chain to drive down sourcing costs. In addition, the acquisition accounting effects for these business units will gradually diminish over time with a resulting improvement to the gross margins of these acquisitions. However, there can be no assurance that we will be able to achieve our objective of improving gross margins in the future.

SG&A was $170.5 million in 2012, compared to $157.9 million in 2011, representing an increase of $12.7 million, or 8.0%. As a percentage of sales, SG&A decreased from 19.0% in 2011 to 18.4% in 2012, primarily due to the effect of the acquisitions, which operate with a lower level of SG&A expenses. Incremental SG&A expense incurred at our recent acquisitions added $18.6 million of SG&A in 2012, prior to the one year anniversary date of each acquisition, representing 13.3% as a percentage of incremental sales. Compensation expense increased by $2.3 million on a comparative basis, reflecting annual wage increases, increased headcount, and higher non-cash stock-based compensation expense, partially offset by a reduction in accruals for incentive compensation plans. Costs for professional services were $7.3 million lower in 2012 compared to 2011 primarily because our level of acquisition due diligence and refinancing activity has significantly decreased. Costs of employee benefit programs reported in SG&A increased by $2.4 million, primarily due to increased amortization of actuarial losses caused by the decrease in discount rates used to measure our accumulated benefit obligations at the end of 2011. Travel and other personnel-related expenses increased by $1.1 million on a year-over-year basis. International operating expenses decreased by $3.5 million from the prior year due to the favorable movement in foreign currency exchange rates.

During 2012, we completed certain actions to consolidate our operations in the U.S. In Kansas City, Missouri, we moved into a new, larger North American distribution center, and closed our previous distribution center in that city. In Golden, Colorado, we closed our assembly, warehouse, and distribution operations and consolidated those functions into the new North American distribution center in Kansas City. During 2012, we recognized direct costs of $7.4 million associated with these two actions. These costs consisted of lease exit costs, charges to expense the book value of certain assets located in Golden and in the previous distribution center in Kansas City that will not be

 

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utilized in the new distribution center, temporary labor costs associated with moving inventory items and stabilizing distribution center operations, third party costs to move inventory and equipment, and rent expense on duplicate facilities during the transition period. Of these total costs, $1.0 million are reported in cost of sales in the Consolidated Statement of Income for the twelve months ended December 31, 2012. We do not expect to incur significant direct costs from these transitions in future periods.

We maintain defined benefit pension plans covering many of our employees and retirees in the U.S., Belgium, Canada, and France. We also maintain post-retirement medical and other benefit plans covering many of our employees and retirees in the U.S, and defined contribution retirement plans covering most of 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-retirement benefit plans was $18.6 million in 2012 and $15.5 million in 2011. At December 31, 2012, we had $126.8 million of accumulated other comprehensive losses related to our pension and other post-employment benefit plans that will be amortized to expense over future years, including $7.7 million to be expensed in 2013. We expect our total expense for all post-retirement plans to be between $23 million and $24 million in 2013.

Operating income decreased by $18.7 million from 2011 to 2012. The decrease was due to increased SG&A expenses and the costs of the facility closure and restructuring activities, partially offset by slightly higher gross profit. Our operating margin decreased from 11.8% of sales in 2011 to 8.5% of sales in 2012. Non-cash acquisition accounting effects reduced our operating profit and operating margin by $16.0 million and 1.7% in 2012 and by $15.9 million and 1.9% in 2011, respectively.

Interest expense was $17.4 million in 2012 compared to $18.7 million in 2011. The $1.4 million decrease was due to lower average interest rates on our debt, partially offset by higher average outstanding debt balances in the comparable periods. The variable interest rates on our term loans decreased significantly when we amended and restated our senior credit facilities in June 2011, but our average borrowing level increased significantly in September 2011 with the acquisition of Woods/TISCO.

Other expense, net was $0.3 million in 2012 and $4.5 million in 2011. In 2011, we recognized $3.9 million in charges related to the fourth amendment and restatement of our senior credit facilities.

Net income in 2012 was $39.6 million, or $0.79 per diluted share, compared to $49.7 million, or $1.01 per diluted share, in 2011.

 

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Year ended December 31, 2011 compared to year ended December 31, 2010

 

(Amounts in millions)

                             
(Amounts may not sum due to rounding)    2011     2010     Change           

Contributing Factor

Sales

   $ 831.6      $ 611.5      $ 220.2        
          $ 64.0      Sales volume, excluding acquisitions
            132.5      Acquired sales volume
            17.2      Selling price and mix
            6.5      Foreign currency translation

Gross profit

     255.8        204.0        51.8        

Gross margin

     30.8     33.4        54.7      Sales volume, including acquisitions
            17.2      Selling price and mix
            (3.5   Product cost and mix
            (3.8   Average steel costs
            (10.8   Acquisition accounting effects
            (2.0   Foreign currency translation

SG&A

     157.9        118.5        39.4        

As a percent of sales

     19.0     19.4        19.3      Incremental SG&A of acquisitions
            4.9      Compensation expense
            4.8      Professional services
            3.6      Advertising
            1.5      Travel
            1.1      Employee benefits
            2.3      Foreign currency translation
            1.9      Other, net

Operating income

     98.0        85.6        12.4        

Operating margin

     11.8     14.0        51.8      Increase in gross profit
            (39.4   Increase in SG&A

Income from continuing operations

     49.7        41.4        8.3        
            12.4      Increase in operating income
            7.0      Decrease in net interest expense
            3.0      Change in other income (expense)
            (14.1   Increase in income tax provision

Net income

   $ 49.7      $ 47.2      $ 2.5        
            8.3     

Increase in income from continuing

operations

            (5.8   Discontinued operations

Sales increased by $220.2 million, or 36.0%, from 2010 to 2011, primarily due to incremental sales volume of $132.5 million from the companies we acquired during 2010 and 2011. We report all incremental sales attributable to recent acquisitions as unit volume increase, up through the one year anniversary of the acquisition date. Excluding the effect of these acquisitions, unit sales volume increased by $64.0 million, or 10.5%. Changes in average selling prices and product mix increased sales revenue by $17.2 million on a year-over-year basis, excluding acquisitions. The translation of foreign currency-denominated sales transactions increased consolidated sales by $6.5 million in 2011 compared to 2010, excluding acquisitions, given the relatively weaker U.S. Dollar in comparison to most foreign currencies. International sales increased by $75.1 million, or 18.0%, while domestic sales increased by $12.5 million, or 6.4%, both exclusive of sales from recent acquisitions.

Gross profit increased by $51.8 million, or 25.4%, from 2010 to 2011. Higher unit sales volume, including incremental volume from recent acquisitions, provided additional gross profit of $54.7 million. Higher average selling prices and product mix accounted for $17.2 million in additional gross profit. Partially offsetting these

 

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increases were an increase in acquisition accounting effects of $10.8 million, $3.5 million in higher product cost and mix, and a year-over-year increase in steel costs of $3.8 million. Fluctuations in currency exchange rates decreased our gross profit in 2011 compared to 2010 by $2.0 million on a consolidated basis. The translation of stronger foreign currencies in Canada and Brazil into a weaker U.S. Dollar resulted in higher reported manufacturing costs. This foreign currency effect at our international manufacturing locations more than offset the positive effect on translation of international sales revenue. Gross margin in 2011 was 30.8% of sales compared to 33.4% of sales in 2010. The decline in gross margin from 2010 is primarily the result of the lower average gross margins of acquired businesses and the related acquisition accounting effects.

SG&A was $157.9 million in 2011, compared to $118.5 million in 2010, representing an increase of $39.4 million, or 33.2%. As a percentage of sales, SG&A decreased from 19.4% in 2010 to 19.0% in 2011, primarily due to the increase in sales, which outpaced the increase in SG&A spending. Incremental SG&A expense incurred at our recent acquisitions added $19.3 million in 2011. Compensation expense increased by $4.9 million from 2010 to 2011, reflecting annual wage increases, increased headcount, and higher stock compensation expense, partially offset by reduced incentive compensation expense. Costs for professional services increased by $4.8 million, largely due to our acquisition program, as we acquired KOX, PBL, and Woods/TISCO in 2011 compared with SpeeCo in 2010. Advertising expense increased by $3.6 million, primarily due to advertising programs for new product introductions. Travel costs were $1.5 million higher in 2011 compared with 2010 as the Company continued to pursue its strategic initiatives. The cost of employee benefits increased $1.1 million year-over-year. International operating expenses increased by $2.3 million from the prior year due to the movement in foreign currency exchange rates. Costs of post-retirement benefit plans, including defined benefit pension plans, defined contribution plans, post-retirement medical plans, and other post-retirement plans, were $15.5 million in 2011 and $14.7 million in 2010. These costs are reported in cost of sales and in SG&A in the Consolidated Statements of Income.

Operating income increased by $12.4 million from 2010 to 2011. The increase was due to higher sales volume and gross profit, partially offset by increased SG&A expenses. Our operating margin decreased from 14.0% of sales in 2010 to 11.8% of sales in 2011. Acquisition accounting effects reduced our operating profit by $15.9 million and our operating margin by 1.9% in 2011. Acquisition accounting effects reduced our operating profit by $5.2 million and our operating margin by 0.8% in 2010.

Interest expense was $18.7 million in 2011 compared to $25.6 million in 2010. The decrease was due to lower average interest rates on our debt, partially offset by higher average outstanding debt balances in the comparable periods. The variable interest rates on our term loans decreased significantly when we amended and restated our senior credit facilities in June 2011, and our weighted average interest rate was also reduced when we repaid our senior subordinated notes in September 2010. However, our average outstanding debt balances increased significantly in September 2011 when we acquired Woods/TISCO.

Other expense, net was $4.5 million in 2011 and primarily consisted of $3.9 million in charges related to the fourth amendment and restatement of our senior credit facilities consummated in August 2011. Other expense, net was $7.4 million in 2010 and primarily consisted of $7.0 million in charges related to the third amendment and restatement of our senior credit facilities consummated in August 2010.

Income from continuing operations in 2011 was $49.7 million, or $1.01 per diluted share, compared to $41.4 million, or $0.85 per diluted share, in 2010.

 

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Income Tax Provision

The following table summarizes our income tax provision for continuing operations in 2012, 2011, and 2010:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011     2010  

Income from continuing operations before income taxes

   $ 61,790      $ 74,950      $ 52,611   

Provision for income taxes

     22,202        25,268        11,209   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     39,588        49,682        41,402   
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     35.9     33.7     21.3
  

 

 

   

 

 

   

 

 

 

See Note 10 to 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.

The 2012 effective tax rate was increased from the federal statutory rate by foreign withholding taxes, state income taxes, and additional deferred tax expense to establish a valuation allowance against deferred tax assets arising from certain foreign net operating loss (“NOL”) carryforwards. These increases to the 2012 effective tax rate were partially offset by lower taxes on our foreign operations and permanent differences, including the domestic production deduction. Taxes on our foreign operations are lower than in the U.S. because of lower statutory tax rates and increased deductions for tax purposes in foreign jurisdictions that are not recognized as expenses for book purposes.

The 2011 effective tax rate was reduced from the federal statutory rate by lower taxes on our foreign operations, permanent differences, including the domestic production deduction, and the release of previously provided income tax expense on uncertain tax positions resulting from the expiration of the statute of limitations for certain tax returns. These reductions to the 2011 effective tax rate were partially offset by foreign withholding taxes, state income taxes, and the unfavorable impact of nondeductible transaction costs incurred to facilitate the 2011 acquisitions of KOX, PBL, and Woods/TISCO.

The 2010 effective tax rate was reduced from the federal statutory rate by lower taxes on our foreign operations, federal and state research tax credits, permanent differences, including the domestic production deduction, and by the release of previously provided income tax expense on uncertain tax positions resulting from the conclusion of an audit with the U.S. Internal Revenue Service (“IRS”) and the expiration of the statute of limitations for certain tax returns. These reductions to the 2010 effective tax rate were partially offset by additional tax expense on repatriated earnings from certain of our foreign locations, foreign withholding taxes, state income taxes, and the tax impact of writing off the deferred tax asset related to the Medicare Part D subsidy in accordance with 2010 legislation which made the previously exempt subsidy subject to federal income tax beginning in 2013.

Discontinued Operations

Discontinued operations are summarized as follows:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012      2011      2010  

Operating income prior to disposition date

   $ —         $ —         $ 1,031   

Gain on disposal

     —           —           11,941   
  

 

 

    

 

 

    

 

 

 

Income from discontinued operations before income taxes

     —           —           12,972   

Income tax expense

     —           —           7,174   
  

 

 

    

 

 

    

 

 

 

Income from discontinued operations

   $ —         $ —         $ 5,798   
  

 

 

    

 

 

    

 

 

 

The results of discontinued operations in 2010 reflect the pre-disposition operating results and the gain on sale of Gear Products. Under terms of the stock purchase agreement, the parties agreed to treat the stock sale as if it were an asset sale for income tax purposes, which resulted in an increase in the income tax expense we recognized on the sale.

 

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Segment Results

The following table reflects results by segment.

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011     2010  

Sales:

      

FLAG

   $ 650,480      $ 659,883      $ 554,053   

FRAG

     250,845        147,475        34,200   

Corporate and other

     26,341        24,272        23,227   
  

 

 

   

 

 

   

 

 

 

Total sales

   $ 927,666      $ 831,630      $ 611,480   
  

 

 

   

 

 

   

 

 

 

Operating income (expense):

      

FLAG

   $ 108,255      $ 115,597      $ 104,113   

FRAG

     (7,495     4,474        1,671   

Corporate and other

     (21,480     (22,118     (20,229
  

 

 

   

 

 

   

 

 

 

Total operating income

   $ 79,280      $ 97,953      $ 85,555   
  

 

 

   

 

 

   

 

 

 

Forestry, Lawn, and Garden Segment. The FLAG segment results in 2011 include the operations of the Company that have historically served the FLAG markets, as well as the results of KOX from the acquisition date of March 1, 2011 to the end of the year, and the results of the FLAG portion of PBL from the acquisition date of August 5, 2011 to the end of the year. The FLAG segment results in 2012 include the operations of all three business units for the entire year. The following table reflects the factors contributing to the change in sales and operating income in the FLAG segment between 2011 and 2012:

 

(Amounts in thousands)

   Sales     Contribution
to
Operating
Income
 

Year ended December 31, 2011

   $ 659,883      $ 115,597   

Unit sales volume, excluding acquisitions

     (26,468     (12,448

Selling price and product mix

     11,966        11,966   

Product cost and mix

     —          (9,203

SG&A expense, excluding acquisitions

     —          9   

Acquired businesses, excluding acquisition accounting effects

     17,880        1,695   

Decrease in acquisition accounting effects

     —          923   

Foreign currency translation

     (12,781     (284
  

 

 

   

 

 

 

Year ended December 31, 2012

   $  650,480      $ 108,255   
  

 

 

   

 

 

 

Sales in the FLAG segment decreased $9.4 million, or 1.4%, from 2011 to 2012. The acquisitions of KOX in March 2011 and the FLAG portion of the PBL business in August 2011 contributed $17.9 million of incremental sales volume during 2012 up through the one year anniversary of their respective acquisition dates. Excluding the incremental effect of these acquisitions, unit sales volume decreased by $26.5 million, or 4.0%. The lower unit sales volume is primarily due to reduced demand for our products in certain geographic regions as further described below. Changes in average selling prices, reflecting selected pricing actions taken in 2011 and 2012, and changes in product mix increased FLAG sales revenue by $12.0 million in 2012. The translation of foreign currency-denominated sales transactions decreased FLAG sales by $12.8 million, primarily due to the relatively stronger U.S. Dollar in comparison to most foreign currencies.

Excluding the effects of recent acquisitions, sales of forestry products were down 6.2%, while sales of lawn and garden products were up 8.4%. Excluding the effects of recent acquisitions, FLAG sales to OEMs were down

 

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12.5% while sales to the replacement market decreased by 2.5%. Excluding the effects of recent acquisitions, FLAG sales increased in North America by 3.7%. FLAG sales in Europe and Russia decreased 11.8%, reflecting economic weakness and uncertainty in that region during 2012, as well as the foreign currency translation effect of a relatively stronger U.S. Dollar in comparison to the Euro. FLAG sales decreased in the Asia-Pacific region by 4.3%, driven by relatively soft market conditions in that region. FLAG sales in South America increased by 7.3%, as customer demand in that geographic region was relatively strong during 2012.

Sales order backlog for the FLAG segment at December 31, 2012 was $167.9 million compared to $182.4 million at December 31, 2011. The reduction in sales order backlog reflects reduced demand for our FLAG products, particularly in Europe due to the recent weak economic conditions and uncertainty in that region.

Contribution to operating income from the FLAG segment decreased $7.3 million, or 6.4%, from 2011 to 2012. Lower unit sales volume reduced the FLAG contribution to operating income while average selling price and mix improvements positively affected the FLAG contribution to operating income. Higher product cost and mix reduced contribution to operating income from the FLAG segment by $9.2 million. The inclusion of the results of KOX and PBL for the periods after the one year anniversary of their acquisition dates has resulted in less favorable product mix as these business units operate at lower operating margins than our historical FLAG operations. In addition, lower production volumes during 2012 reduced overhead absorption and manufacturing efficiency. FLAG production facilities for 2012 were operated at an average of approximately 82% of capacity, compared to an average of approximately 93% of capacity during 2011. In addition, costs in the new distribution center in Kansas City were increased during the start-up and transition phase of that facility. Average steel costs were slightly lower in 2012 than in 2011. Excluding acquisitions, SG&A expense was flat from 2011 to 2012, reflecting the positive effects of foreign currency movements, reduced incentive compensation expense, and efforts to contain costs, offset by wage increases and increased headcount.

The effect of acquired sales volume and incremental SG&A of recent acquisitions contributed $1.7 million to operating income in 2012 in the FLAG segment, excluding acquisition costs. Acquisition accounting effects decreased for the FLAG segment by $0.9 million, reflecting the accelerated nature of the timing of recognition for such effects.

The FLAG segment results in 2011 include the operations of the Company that have historically served the FLAG markets, as well as the results of KOX from the acquisition date of March 1, 2011 to the end of the year, and the results of the FLAG portion of PBL from the acquisition date of August 5, 2011 to the end of the year. The FLAG segment results in 2010 include only the operations historically serving the FLAG markets. The following table reflects the factors contributing to the change in sales and operating income in the FLAG segment between 2010 and 2011:

 

(Amounts in thousands)

   Sales      Contribution
to
Operating
Income
 

Year ended December 31, 2010

   $ 554,053       $ 104,113   

Unit sales volume, excluding acquisitions

     56,730         21,179   

Selling price and product mix

     15,596         15,596   

Product cost and mix

     —           459   

Change in steel costs

     —           (3,845

SG&A expense, excluding acquisitions

     —           (12,884

Acquired businesses, excluding acquisition accounting effects

     27,350         (1,657

Increase in acquisition accounting effects

     —           (2,937

Foreign currency translation

     6,154         (4,427
  

 

 

    

 

 

 

Year ended December 31, 2011

   $ 659,883       $ 115,597   
  

 

 

    

 

 

 

Sales in the FLAG segment increased $105.8 million, or 19.1%, from 2010 to 2011. The acquisitions of KOX in March 2011 and the FLAG portion of the PBL business in August 2011 contributed $27.4 million of incremental sales volume during 2011. Excluding the effect of these acquisitions, unit sales volume increased by $56.7 million, or 10.2%, as the global economic recovery continued and we experienced strong demand for our products. Changes

 

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in average selling prices, reflecting selected pricing actions taken, and changes in product mix increased FLAG sales revenue by $15.6 million in 2011. The translation of foreign currency-denominated sales transactions increased FLAG sales by $6.2 million, primarily due to the relatively weaker U.S. Dollar in comparison to most foreign currencies.

Excluding the effects of recent acquisitions, sales of forestry products were up 16.0% and sales of lawn and garden products were up 4.4%. Excluding the effects of recent acquisitions, sales to OEMs were up 6.7% and sales to the replacement market increased by 14.2%. Excluding the effects of recent acquisitions, FLAG sales increased by 5.9% in North America, 18.2% in Europe, 21.2% in the Asia-Pacific Region, and by 15.9% in South America.

Contribution to operating income from the FLAG segment increased $11.5 million, or 11.0%, from 2010 to 2011. Higher unit sales volume and improved average selling price and mix increased contribution to operating income of the FLAG segment in 2011. Higher average steel costs of $3.8 million negatively affected contribution to operating income. Excluding acquisitions, SG&A expense was $12.9 million higher in 2011 than in 2010 due to increased head count, wage increases, increased advertising expenses, and increased travel and other employee-related costs.

The effect of acquired sales volume and incremental SG&A of KOX and PBL reduced contribution to operating income in 2011 in the FLAG segment by $1.7 million. Transition costs and soft market conditions in late 2011 in Europe negatively affected the 2011 results of these business units. Acquisition accounting effects increased for the FLAG segment by $2.9 million, reflecting the acquisitions of KOX and PBL in 2011. Changes in foreign currency exchange rates reduced FLAG contribution to operating income by $4.4 million, as increased sales revenue was more than offset by higher production costs in our foreign manufacturing facilities.

Farm, Ranch, and Agriculture Segment. The FRAG segment results in 2011 include the full year activity of SpeeCo, plus the activity associated with the FRAG portion of the PBL business from the acquisition date of August 5, 2011 to the end of the year, and the activity of Woods/TISCO from the acquisition date of September 7, 2011 to the end of the year. The FRAG segment results include the results of all three business units during all of 2012.

The following table reflects the factors contributing to the change in sales and operating income in the FRAG segment between 2011 and 2012:

 

(Amounts in thousands)

   Sales     Contribution
to
Operating
Income
 

Year ended December 31, 2011

   $ 147,475      $ 4,474   

Unit sales volume, excluding acquisitions

     (18,193     (5,482

Selling price and product mix

     407        407   

Product cost and mix

     —          (8,628

Incremental logistics costs

     —          (6,579

SG&A expense, excluding acquisitions

     —          (3,919

Acquired businesses, excluding acquisition accounting effects

     121,409        13,413   

Increase in acquisition accounting effects

     —          (1,280

Foreign currency translation

     (253     99   
  

 

 

   

 

 

 

Year ended December 31, 2012

   $ 250,845      $ (7,495
  

 

 

   

 

 

 

Sales in the FRAG segment increased $103.4 million, or 70.1%, from 2011 to 2012, driven by the acquisitions of PBL in August 2011 and Woods/TISCO in September 2011. Excluding the effect of sales from these acquired businesses occurring before the one year anniversary of their respective acquisition dates, FRAG unit sales volume decreased by $18.2 million, or 12.3%, from 2011 to 2012, primarily due to soft customer demand from continuing drought conditions in North America and above average temperatures, particularly in the Northeastern U.S., which has reduced demand for log splitters. Unit sales volume of log splitters and certain FRAG parts during the first half of 2012 was further negatively impacted by difficulty in obtaining certain component parts from suppliers on a timely basis. As a result, we were unable to meet all of our customer demand for FRAG products during the spring 2012 selling season, which resulted in lost sales.

 

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Excluding the effects of recent acquisitions, FRAG sales in North America decreased by 12.3%. North American FRAG sales represented 95.3% of segment sales in 2012. Sales order backlog for the FRAG segment at December 31, 2012 was $31.5 million compared to $30.8 million at December 31, 2011.

The contribution to operating income from the FRAG segment was $4.5 million in 2011 compared to a loss of $7.5 million in 2012. Reduced unit sales volume, higher product costs, increased logistics costs (see further discussion below), and increased SG&A expenses all reduced contribution to operating income from the FRAG segment. The higher product costs reflect incremental re-work and warranty costs on certain recently introduced log splitter products, and production and distribution inefficiencies incurred during the consolidation of our assembly and distribution centers.

The effect of acquired unit sales volume and incremental SG&A of recent acquisitions added $13.4 million to contribution to operating income in 2012 compared to 2011. Acquisition accounting effects were $1.3 million higher in 2012 than in 2011, reflecting the full year of ownership of the acquired businesses.

Most of our log splitter supply chain begins with unaffiliated suppliers in China. Under normal circumstances, component parts and resale products are shipped to our U.S. assembly and distribution center via ocean transport, which takes several weeks for delivery. During 2012, due to problems with obtaining certain components on a timely basis from certain of these suppliers, we fell behind on deliveries to our customers. In order to minimize service disruption to our customers, we elected to incur higher air and other freight costs to expedite the delivery of products and components from China to our assembly and distribution center in the U.S., where the component parts are assembled and the finished products are shipped to our customers. These higher freight costs were $5.3 million in 2012. We do not expect to incur significantly higher freight costs from expedited deliveries after 2012. We also incurred other incremental distribution costs of $1.3 million related to log splitter and other FRAG products in 2012. The FRAG results do not include the direct costs identified with the facility closure and restructuring activities, which are included in the Corporate and Other category.

The FRAG segment results in 2010 reflect the activity of SpeeCo from the acquisition date of August 10, 2010 to the end of the year. The FRAG segment results in 2011 reflect the full year activity of SpeeCo, plus the activity associated with the FRAG portion of the PBL business from the acquisition date of August 5, 2011 to the end of the year, and the activity of Woods/TISCO from the acquisition date of September 7, 2011 to the end of the year. The following table reflects the factors contributing to the change in sales and operating income in the FRAG segment between 2010 and 2011:

 

(Amounts in thousands)

   Sales      Contribution
to
Operating
Income
 

Year ended December 31, 2010

   $ 34,200       $ 1,671   

Unit sales volume, excluding acquisitions

     6,871         2,122   

Selling price and product mix

     1,211         1,211   

Product cost and mix

     —           (1,885

SG&A expense, excluding acquisitions

     —           (2,064

Acquired businesses, excluding acquisition accounting effects

     105,193         11,290   

Increase in acquisition accounting effects

     —           (7,871
  

 

 

    

 

 

 

Year ended December 31, 2011

   $ 147,475       $ 4,474   
  

 

 

    

 

 

 

Sales in the FRAG segment increased $113.3 million, or 331.2%, from 2010 to 2011, driven by the acquisitions of SpeeCo in 2010 and Woods/TISCO and PBL in 2011. The incremental sales from SpeeCo for a full year versus a partial year in 2010, and all of the 2011 sales of Woods/TISCO and the PBL FRAG business, were $105.2 million. Excluding the effect of sales from acquired businesses occurring before the one year anniversary of their respective acquisition dates, FRAG sales volume increased by $6.9 million, or 20.1%, in 2011 compared to 2010, primarily due to new product introductions and strong product demand at SpeeCo. Changes in selling price and product mix added $1.2 million to FRAG sales revenue in 2011.

 

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The contribution to operating income from the FRAG segment increased $2.8 million, or 167.7%, from 2010 to 2011. Increased unit sales volume and increases in average selling prices and product mix positively affected the FRAG contribution to operating income. The effect of acquired unit sales volume and incremental SG&A of recent acquisitions added $11.3 million to contribution to operating income in 2011compared to 2010. Partially offsetting these favorable factors were increased acquisition accounting effects and increased SG&A expenses.

Corporate and Other. Sales of concrete cutting and finishing products increased 8.5% from 2011 to 2012, primarily due to improved demand for our products in North America. Contribution to operating income from Corporate and Other was a $0.6 million smaller loss in 2012 than in 2011, reflecting increased sales volume and improved price and mix for our concrete cutting and finishing products, partially offset by increased SG&A costs. SG&A expenses were higher in 2012 than in 2011, reflecting the $7.4 million of direct costs associated with the facility closure and restructuring activities during 2012, and increased costs of post-retirement benefit plans, partially offset by reduced costs of professional services and incentive compensation expenses.

Sales of concrete cutting and finishing products increased 4.5% from 2010 to 2011, reflecting stronger sales in Europe. Contribution to operating income from Corporate and Other was a $1.9 million larger loss, reflecting increases in SG&A expenses of $2.1 million, partially offset by increased sales of concrete cutting and finishing products. The increase in SG&A expenses was driven largely by increased costs of professional services, primarily related to the Company’s acquisition activity.

Financial Condition, Liquidity, and Capital Resources

Our debt has fluctuated significantly in recent years due to additional borrowings to fund acquisitions, repayments from operating cash flows, and repayments from the proceeds of the sale of Gear Products. We have also undertaken several refinancing transactions which have affected our borrowing capacity, borrowing rates, financial covenants, and other terms as further described in Note 9 to the Consolidated Financial Statements. General economic conditions and conditions in financial and credit markets have also significantly affected the terms of our debt, including the interest rates we pay.

Long-term debt is summarized as follows:

 

     As of December 31,  

(Amounts in thousands)

   2012     2011  

Revolving credit facility borrowings

   $ 235,000      $ 228,200   

Term loans

     281,250        296,250   

Debt and capital lease obligation of PBL

     507        5,912   
  

 

 

   

 

 

 

Total debt

     516,757        530,362   

Less current maturities

     (15,072     (20,348
  

 

 

   

 

 

 

Long-term debt, excluding current maturities

   $ 501,685      $ 510,014   

Weighted average interest rate at end of period

     2.71     2.85

Senior Credit Facilities. The Company, through its wholly-owned subsidiary, Blount, Inc., maintains a senior credit facility with General Electric Capital Corporation as Agent for the Lenders and also as a lender, which has been amended and restated on several occasions. As of December 31, 2012, the senior credit facilities consisted of a revolving credit facility and a term loan.

The revolving credit facility provides for total available borrowings of up to $400.0 million, reduced by outstanding letters of credit, and further restricted by certain financial covenants. As of December 31, 2012, the Company had the ability to borrow an additional $61.8 million under the terms of the revolving credit agreement. The revolving credit facility bears interest at LIBOR plus 2.50% or at an index rate, as defined in the credit agreement, plus 1.50%, and matures on August 31, 2016. Interest is payable on the individual maturity dates for each LIBOR-based borrowing and monthly on index rate-based borrowings. Any outstanding principal is due in its entirety on the maturity date.

 

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The term loan facility also bears interest at LIBOR plus 2.50% or at the index rate plus 1.50% and matures on August 31, 2016. The term loan facility requires quarterly principal payments of $3.8 million with a final payment of $225.0 million due on the maturity date. Once repaid, principal under the term loan facility may not be re-borrowed.

The amended and restated senior credit facilities contain financial covenants including:

 

   

Minimum fixed charge coverage ratio of 1.15, defined as earnings before interest, taxes, depreciation, amortization, and certain adjustments defined in the credit agreement (“Adjusted EBITDA”) divided by cash payments for interest, taxes, capital expenditures, scheduled debt principal payments, and certain other items, calculated on a trailing twelve-month basis.

 

   

Maximum leverage ratio, defined as total debt divided by Adjusted EBITDA, calculated on a trailing twelve-month basis. The maximum leverage ratio is set at 4.25 through December 31, 2012, 4.00 through June 30, 2013, 3.75 through December 31, 2013, 3.50 through September 30, 2014, 3.25 through March 31, 2015, and 3.00 thereafter.

The status of financial covenants was as follows:

 

Financial Covenants

   Requirement      As of
December 31,
2012
 

Minimum fixed charge coverage ratio

     1.15         1.27   

Maximum leverage ratio

     4.25         3.80   

In addition, there are covenants, restrictions, or limitations relating to acquisitions, investments, loans and advances, indebtedness, dividends on our stock, the sale or repurchase of our stock, the sale of assets, and other categories. In the opinion of management, we were in compliance with all financial covenants as of December 31, 2012. Non-compliance with these covenants is an event of default under the terms of the credit agreement, and could result in severe limitations to our overall liquidity, and the term loan lenders could require immediate repayment of outstanding amounts, potentially requiring sale of a sufficient amount of our assets to repay the outstanding loans.

The amended and restated senior credit facilities may be prepaid at any time without penalty. There can also be additional mandatory repayment requirements related to the sale of Company assets, the issuance of stock under certain circumstances, or upon the Company’s annual generation of excess cash flow, as determined under the credit agreement. Our debt is not subject to any triggers that would require early payment due to any adverse change in our credit rating.

Our senior credit facility debt instruments and general credit are rated by both Standard & Poor’s and Moody’s. During 2012, Moody’s lowered our credit rating from Ba3/Stable to Ba3/Negative. There has been no change in our credit rating by Standard & Poor’s during 2012. As of December 31, 2012, the credit ratings for the Company were as follows:

 

     Standard &
Poor’s
     Moody’s  

Senior credit facility

     BB-/Stable         Ba3/Negative   

General credit rating

     BB-/Stable         Ba3/Negative   

Debt and Capital Lease Obligation of PBL. In conjunction with the acquisition of PBL we assumed $13.5 million of PBL’s debt, consisting of current and long-term bank obligations, revolving credit facilities, and $0.6 million in capital lease obligations. As of December 31, 2012, we have repaid all of PBL’s bank debt.

We intend to fund working capital, operations, capital expenditures, acquisitions, debt service requirements, 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 cover 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-retirement benefit plans, the postponement of capital expenditures, restructuring of our credit facilities, and issuance of new debt or equity securities.

 

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Our interest expense may vary in the future because the revolving credit facility and term loan interest rates are variable. The Fourth Amendment and Restatement of our senior credit facilities include a requirement to cover 35% of the outstanding principal on our term loan with fixed or capped interest rates, and we entered into interest rate cap and swap agreements in the fourth quarter of 2011 to meet this requirement. See further discussion of these agreements in Item 7A, Quantitative and Qualitative Disclosures about Market Risk. The weighted average interest rate on all debt was 2.71% as of December 31, 2012 and 2.85% as of December 31, 2011.

Cash and cash equivalents at December 31, 2012 were $50.3 million compared to $62.1 million at December 31, 2011. As of December 31, 2012, $39.0 million of our cash and cash equivalents was held at our foreign locations.

Cash provided by operating activities is summarized in the following table:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011     2010  

Net income

   $ 39,588      $ 49,682      $ 47,200   

Non-cash items

     43,321        50,258        27,578   
  

 

 

   

 

 

   

 

 

 

Subtotal

     82,909        99,940        74,778   

Changes in assets and liabilities, net

     (31,638     (21,873     (18,900

Discontinued operations, net

     —          (334     (6,712
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 51,271      $ 77,733      $ 49,166   
  

 

 

   

 

 

   

 

 

 

Non-cash items consist of income from discontinued operations; early extinguishment of debt; depreciation; amortization; stock-based compensation; excess tax benefit from stock-based compensation; deferred income taxes; change in uncertain tax positions, loss on disposal of assets; 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.

2012 net cash provided by operating activities of $51.3 million reflected the following significant items:

 

   

Net income of $39.6 million, a year-over-year decrease from 2011 of $10.1 million, reflecting reduced operating results.

 

   

Depreciation of property, plant, and equipment totaling $28.6 million, an increase of $5.1 million from 2011, reflecting a full year of depreciation for the companies we acquired in 2011 as well as an increase in capital expenditures. We expect depreciation expense to increase in the near term due to further planned increases in capital expenditures.

 

   

Amortization of $16.5 million, an increase of $4.2 million from 2011, reflecting a full year of amortization for the companies we acquired in 2011.

 

   

Stock-based compensation expense of $5.6 million compared to $4.4 million in 2011, reflecting grants made over the preceding three years.

 

   

A net deferred tax benefit of $7.6 million, primarily due to differences in timing of amortization of acquisition intangibles, compared to net deferred tax expense of $2.3 million recognized in 2011.

 

   

A decrease in accounts receivable of $5.0 million, reflecting a $7.0 million decrease in sales in the fourth quarter of 2012 compared with the fourth quarter of 2011.

 

   

An increase of $25.5 million in inventories, reflecting a buildup due to production and purchases of inventory in expectation of increased sales in 2012 whereas actual sales were lower than expected.

 

   

A decrease in other liabilities of $9.7 million, primarily from cash contributions made to our post-retirement benefit plan obligations.

 

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2011 net cash provided by operating activities of $77.7 million reflected the following significant items:

 

   

Net income of $49.7 million, for a year-over-year increase from 2010 of $2.5 million, reflecting improved operating results and lower interest expense, partially offset by higher income taxes.

 

   

A charge of $3.9 million for early extinguishment of debt, resulting from our August 2011 refinancing transactions.

 

   

Depreciation of property, plant, and equipment totaling $23.5 million, an increase of $2.5 million from 2010, reflecting the additional depreciation of our recently acquired businesses as well as an increase in capital expenditures.

 

   

Amortization of $12.3 million, an increase of $5.7 million from 2010 due to the acquisitions of KOX, PBL and Woods/TISCO during 2011, and a full year of amortization for SpeeCo, acquired in August 2010.

 

   

Stock-based compensation expense of $4.4 million compared to $3.3 million in 2010, reflecting increased grant levels.

 

   

Other non-cash charges of $5.0 million, including acquisition accounting charges related to adjustments to fair value of inventory and property, plant, and equipment totaling $4.3 million.

 

   

An increase in accounts receivable of $12.1 million, reflecting increased sales in the fourth quarter of 2011 compared with the fourth quarter of 2010, including the effect of sales from our 2011 acquisitions.

 

   

An increase of $6.6 million in accounts payable and accrued expenses, primarily the result of higher accrued taxes.

 

   

A decrease in other liabilities of $16.4 million, primarily from cash contributions made to our post-retirement benefit plan obligations.

2010 net cash provided by operating activities of $49.2 million reflected the following significant items:

 

   

Net income of $47.2 million, less the income generated by discontinued operations of $5.8 million.

 

   

A charge of $7.0 million for early extinguishment of debt, resulting from our August 2010 refinancing transactions.

 

   

Depreciation of property, plant, and equipment totaling $21.0 million.

 

   

Amortization of $6.6 million.

 

   

Stock-based compensation expense of $3.3 million.

 

   

A benefit from the change in uncertain tax positions of $7.8 million due to the expiration of statutes on open tax years.

 

   

An increase in inventories of $6.8 million, reflecting increased production levels in anticipation of sales growth in the following year.

 

   

A net decrease of $3.2 million in accounts payable and accrued expenses, primarily the result of the timing of year-end disbursements.

 

   

A decrease in other liabilities of $11.7 million, primarily from cash contributions made to our post-retirement benefit plan obligations.

 

   

A net cash outflow for discontinued operations of $6.7 million, representing income taxes paid on the gain from the sale of Gear Products, partially offset by positive cash flow from operating Gear Products up to the date of sale.

Cash contributions for pension and other post-retirement benefit plans totaled $27.0 million in 2012, $28.2 million in 2011, and $26.0 million in 2010. Funding requirements for all such post-retirement benefit plans are expected to total between $20 million and $21 million during 2013. 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 2013 of between $7.5 million and $8.5 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.

 

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Table of Contents

Cash used in investing activities is summarized as follows:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011     2010  

Purchases of property, plant, and equipment, net of proceeds from sale of assets

   $ (51,727   $ (39,406   $ (19,843

Acquisitions, net of cash acquired

     —          (217,362     (90,854

Discontinued operations

     —          —          25,176   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (51,727   $ (256,768   $ (85,521
  

 

 

   

 

 

   

 

 

 

Purchases of property, plant, and equipment are primarily for productivity improvements, expanded manufacturing capacity, and replacement of consumable tooling and equipment. Generally, about one-third of our capital spending has represented replacement of consumable tooling, dies, and existing equipment, with the remainder devoted to capacity and productivity improvements. During 2012, we invested a total of $51.9 million in property, plant, and equipment, compared to $40.4 million in 2011, and $20.0 million in 2010. The significant increase over this three-year period reflects a significant expansion of capacity at our manufacturing facility in Fuzhou, China, as well as the inclusion of activity at our recently acquired businesses. We also invested in equipment and racking at our new larger assembly and distribution center in Kansas City. We expect our purchases of property, plant, and equipment in 2013 to be between $45 million and $50 million, including continued investment in equipment at the expanded facility in Fuzhou, China, and modernization of our other manufacturing facilities and equipment in various locations. We also continue to investigate potential locations to build or acquire a new manufacturing facility in Eastern Europe. During 2011, we sold assets for $1.0 million, including our idle land and building in Milan, Tennessee.

In 2011 we also used $217.4 million of cash to acquire KOX, PBL, and Woods/TISCO, net of cash acquired. In 2010 we used $90.9 million of cash to acquire SpeeCo, net of cash acquired. We also sold Gear Products for $25.2 million in 2010.

Cash provided by (used in) financing activities is summarized as follows:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011     2010  

Net borrowing (repayment) under revolving credit facility

   $ 6,800      $ 228,200      $ (3,400

Proceeds from issuance of term debt

     —          300,000        350,000   

Repayment of term loan and PBL debt principal

     (20,416     (361,563     (107,465

Repayment of 8 7/8% senior subordinated notes

     —          —          (175,000

Debt issuance costs

     (1,115     (6,509     (6,267

Stock-based compensation activity

     2,217        1,651        3,405   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

   $ (12,514   $ 161,779      $ 61,273   
  

 

 

   

 

 

   

 

 

 

2012 activity included fees paid related to the amendment of our senior credit facilities and the following significant financing items:

 

   

Net borrowing under the revolving credit facility of $6.8 million.

 

   

Repayment of $15.0 million in term debt principal as required under the senior credit facility agreement.

 

   

Repayment of $5.4 million in PBL debt principal as we eliminated all bank debt at this subsidiary.

 

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2011 activity included the Fourth Amendment and Restatement of our senior credit facilities and the following significant financing items:

 

   

Net borrowing under the new revolving credit facility, of $228.2 million.

 

   

Borrowing $300.0 million under the new term loan facility.

 

   

Repayment of the previous term loan principal balances outstanding on the initial funding date in the amount of $342.3 million.

 

   

Repayment of $7.7 million in additional term debt principal payments under the senior credit facilities.

 

   

Repayment of principal outstanding under the new term loan in the amount of $3.8 million.

 

   

$6.5 million in debt issuance costs related to the refinancing.

 

   

Assumption of $13.5 million of PBL’s debt upon the acquisition of that entity and subsequent repayment of $7.8 million of such debt.

2010 activity included the Third Amendment and Restatement of our senior credit facilities and the following significant financing items:

 

   

Borrowing $350.0 million under two new term loans.

 

   

Repayment of $107.5 million of principal outstanding on our previous term loan B.

 

   

Repayment of $175.0 million for the redemption of all of our 8 7/8% senior subordinated notes.

 

   

$6.3 million in debt issuance costs and costs to redeem our 8 7/8% senior subordinated notes.

 

   

The net repayment of all outstanding principal under our revolving credit facility.

 

   

$2.4 million of proceeds from stock-based compensation and $1.0 million in related income taxes.

As of December 31, 2012, our contractual and estimated obligations are as follows:

 

(Amounts in thousands)

   Total      2013      2014-2015      2016-2017      Thereafter  

Debt obligations (1)

   $ 516,757       $ 15,072       $ 30,144       $ 471,541       $ —     

Estimated interest payments (2)

     63,501         15,586         32,494         15,421         —     

Operating lease obligations (3)

     49,648         7,920         11,425         7,951         22,352   

Other post-retirement obligations (4)

     10,612         1,610         2,146         1,734         5,122   

Defined benefit pension obligations (5)

     7,511         7,511         —           —           —     

Purchase commitments (6)

     1,210         1,210         —           —           —     

Other long-term liabilities (7)

     75         75         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 649,314       $ 48,984       $ 76,209       $ 496,647       $ 27,474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Scheduled minimum principal payments on debt and minimum required payments under capital leases. Additional voluntary prepayments may also be made from time to time. Additional mandatory principal payments may be required under certain circumstances. See also Note 9 to Consolidated Financial Statements.
(2) Estimated future interest payments based on existing debt balances, timing of scheduled minimum principal payments, and estimated variable interest rates. See also Note 9 to Consolidated Financial Statements.
(3) See also Note 13 to Consolidated Financial Statements.
(4) Estimated payments for various non-qualified retirement benefits. 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 12 to Consolidated Financial Statements.

 

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(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 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 11 to 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.
(7) Consulting fees for a former officer of the Company.

As of December 31, 2012, our recorded liability for uncertain tax positions was $7.8 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, 2012 and 2011, 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.

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 accounting principles generally accepted in the U.S. 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 affect our more significant judgments and estimates in the preparation of our Consolidated Financial Statements.

Sales Deductions. We record reductions to selling prices as products are shipped. These reductions are based on competitive and market conditions, promotional programs, and specific customer contracts in some instances. Some reductions are determined based on sales volumes or other measurements not yet finalized at the time of shipment. These reductions are estimated and recorded at the time of shipment either through a reduction to the invoice total or the establishment of a reserve or an accrual for settlement at a later date. 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’ financial statements and conditions through monitoring services. Based on these reviews and analyses, the allowance is adjusted in the appropriate period 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 Reserves. 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 the required inventory reserves for excess or obsolete inventory by assessing inventory turns and market selling prices on a product by product basis. We maintain such reserves until a product is sold or market conditions require a change in the reserves.

 

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Goodwill and Other Indefinite-Lived Intangible Assets. We perform an annual analysis for impairment of goodwill and other intangible assets with indefinite lives at the reporting unit level during the fourth quarter of every year. We also perform an impairment analysis of goodwill and other indefinite-lived intangible assets whenever circumstances indicate that impairment may have occurred. The impairment tests are performed in a multi-step process, beginning with a review of qualitative factors and business and market conditions to consider whether or not impairment may be indicated. If the possibility of impairment is indicated, further analysis is performed by estimating the fair values of the reporting units using a discounted projected cash flow model. We believe the discounted projected cash flow model is an appropriate valuation technique because these are established businesses with reasonably predictable future cash flows and because it has been our experience that this technique is generally used when valuing businesses in our industry.

We compare the estimated fair values based on discounted projected cash flows to the carrying values of the reporting units, including goodwill and other intangible assets. If the carrying amount of any reporting unit’s goodwill and other indefinite-lived intangible assets exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Through December 31, 2012, we have not recognized any impairment in the carrying value of goodwill and other indefinite-lived intangible assets.

However, the projection of future cash flows is subject to assumptions, uncertainties, and estimates, and the actual future cash flows may differ significantly from these projections. For example, many of the factors described in “Risk Factors” could have a material adverse effect on these businesses and their future cash flows. Assumptions about future profitability, growth rates, and the weighted average cost of capital used to discount the projected future cash flows to their net present value have a significant effect on the valuations. Events or changes in circumstances or business and market conditions may occur in the future that could create underperformance relative to projected future cash flows, which could result in the recognition of future impairments.

During 2012, we determined the estimated fair value of our recent acquisitions in accordance with the above described methodology. As expected, the excess of estimated fair value over the carrying value of net assets for these recent acquisitions is relatively low because these acquisitions were recorded at estimated fair value at their respective recent acquisition dates. The following table presents a summary of the 2012 analysis.

 

Dollar amounts in thousands

   SpeeCo     KOX     PBL     Woods/TISCO  

Goodwill and other indefinite-lived intangible assets

   $ 48,763      $ 8,391      $ 3,420      $ 99,176   

Percentage by which estimated fair value exceeds net asset carrying value

     9.1     13.6     9.8     9.2

The estimated fair values are highly sensitive to changes in our assumptions. For example, a one percent increase in the discount rate used to calculate the present value of projected cash flows, or a one percent decrease in the assumed rates of growth in future cash flows for any of these business units would indicate an impairment of the intangible assets.

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 related 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. Under terms of the related divestiture agreements, we remain contractually obligated, as between the buyer and us, for certain environmental claims for any contamination determined to have occurred during our ownership period for certain discontinued operations. In certain limited

 

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circumstances, we maintain insurance coverage for a portion of this exposure. We record a liability for our estimated obligations. 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.

Workers’ Compensation Self-Insurance Costs. We incur expenses in connection with our self-insured program for workers’ compensation costs covering certain of our employees and former employees. Under terms of the related divestiture agreements, we remain contractually obligated, as between 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. These estimated obligations are frequently increased or decreased as more information on specific cases becomes available or performance trends change.

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 SARs. Assumptions for the risk-free interest rate, expected volatility, and dividend yield are based on historical information and management estimates.

Post-Retirement Obligations. We determine our post-retirement obligations on an actuarial basis that requires management to make certain assumptions. These assumptions include the long-term rate of return on plan assets for those plans that are funded, the discount rate to be used in calculating the applicable benefit obligation, and the anticipated inflation trend in future health care costs. These assumptions are reviewed on an annual basis and consideration is given to market conditions, applicable indices, historical results, changes in regulations, as well as to the requirements of Accounting Standards Codification (“ASC”) 715.

The net post-retirement 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. The fair value of these pension assets is determined in accordance with ASC 820. 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 Level 2 measurements are not 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 7.6% for 2012. 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 current target weighting, which is 50% equity securities, 48% debt securities and 2% other for the U.S. plan, and 62% equities and 38% debt securities for the Canadian plan. To validate this 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 4.2% was used to determine our plan liabilities at December 31, 2012, consisting of 4.00% for the U.S. plan and 4.50% for the Canadian plan. The difference in discount rates between the two plans is attributable to differences in the relevant bond indices and market interest rates between the U.S. and Canada as of December 31, 2012. 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 we obtained published indices 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 indices for similar debt securities.

 

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We have assumed that health care costs will increase by 9% in 2013, 8% in 2014, 7% in 2015, 6% in 2016, and 5% in 2017 and thereafter. These assumptions are based on historical rates of inflation for health care costs and expectations for future increases in health care costs.

Our annual post-retirement 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 $2.2 million in 2013. A 1% decrease in the discount rate would increase pension expense by $3.9 million in 2013, and a 1% increase in the discount rate would decrease pension expense by $3.2 million in 2013. A 1% increase in the health care cost trend assumption for 2013 and beyond would increase annual post-retirement medical costs by approximately $0.3 million per year and a 1% decrease in the health care cost trend assumption for 2013 and beyond would decrease annual post-retirement medical costs by approximately $0.2 million a year.

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 recent voluntary contributions made by the Company to the U.S. pension plan and the current funded status, there is no required minimum contribution to this plan for 2013. However, required funding in future years for this and other retirement plans may increase significantly.

Uncertain Tax Positions. We account for uncertain tax positions in accordance with ASC 740-10. 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, 2012, we have a deferred tax asset valuation allowance of $2.6 million, related to state and foreign net operating loss carryforwards.

Recent Accounting Pronouncements

In December 2011, the FASB issued new guidance on offsetting (netting) assets and liabilities. For derivatives and financial assets and liabilities, the new guidance requires disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The new guidance is effective for us on January 1, 2013 and will result in enhanced footnote disclosures about balance sheet offsetting and related arrangements.

In February 2013, the FASB issued new guidance on the presentation of amounts reclassified out of accumulated other comprehensive income. This guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements. The new guidance requires an entity to present, either in a single note or parenthetically on the face of the financial statements, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. This revised guidance is effective for us on January 1, 2013.

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

 

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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 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, and the anticipated effects of discontinued operations 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 interest rate cap agreements that limit the maximum interest rate we can be charged on variable interest rate debt. During 2010, we redeemed in full our only fixed rate debt, the 8 7/8% senior subordinated notes. As of December 31, 2012, all of our outstanding debt is subject to variable interest rates. The senior credit facility agreement terms include a requirement to cover 35% of the outstanding principal on our term loan with fixed or capped interest rates. In October 2011, we entered into an interest rate cap agreement covering an initial notional amount of $103.7 million of term loan principal outstanding that caps the maximum interest rate at 7.50%. In October and November 2011, we also entered into a series of interest rate swap contracts whereby the interest rate we pay will be fixed at between 3.30% and 4.20% on $130.0 million of term loan principal for the period of June 2013 through varying maturity dates between December 2014 and August 2016.

The interest rate under our senior credit facility consists of a margin applied to either LIBOR or a defined index rate. As of December 31, 2012, a 100 basis point increase in LIBOR for the duration of one year would have increased interest expense by approximately $5.4 million in 2012. 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 contractual selling arrangements, many of our foreign sales are denominated in U.S. Dollars. However, approximately 22% of our sales and 31% of our operating costs and expenses were transacted in foreign currencies during 2012. As a result, fluctuations in 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 our behalf. We selectively hedged a portion of the anticipated payment transactions 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 income and is subsequently reclassified into earnings when we settle the hedged payment to Blount Canada. We use the hypothetical derivative method under ASC 815 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. As of December 31, 2012 and 2011, the total notional amount of such contracts outstanding was $45.5 million and $37.5 million, respectively. During 2012, we recognized losses of $0.1 million and during 2011 and 2010, we recognized gains of $0.8 million and $2.4 million, respectively, in earnings from these contracts as they matured. We have not recognized any amount in earnings in the years ended December 31, 2012, 2011, or 2010 due to ineffectiveness of these Canadian Dollar hedging instruments.

 

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We may, in the future, decide to manage additional exposures to currency exchange rate fluctuations through derivative products. The following table illustrates the estimated effect on our 2012 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, and the Swiss Franc, in which we purchase certain products from a supplier.

 

     Effect of 10% Weaker U.S. Dollar – Increase  (Decrease)  

(Amounts in thousands)

   Sales      Cost of Sales      Operating Income  

Brazilian Real

   $ 3,155       $ 3,032       $ (364

Canadian Dollar

     1,549         7,193         (6,082

Chinese RMB

     772         1,565         (949

Euro

     11,182         7,339         880   

Japanese Yen

     1,269         127         952   

Swiss Franc

     —           1,511         (1,511

Commodity Price Risk. We secure raw materials primarily through a centrally administered supply chain organization. Recently, we established 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 of 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 2012, 2011, or 2010.

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 $97.8 million of steel in 2012, which was our largest sourced commodity. A hypothetical 10% change in the price of steel would have had an estimated $9.8 million effect on pre-tax income in 2012. We utilize multiple suppliers to purchase steel. We estimate the impact to cost of sales in the Consolidated Statements of Income from changes in our cost of purchased steel was a decrease of $3.8 million from 2009 to 2010, an increase of $3.8 million from 2010 to 2011, and a decrease of $0.6 million from 2011 to 2012. Some selling prices to our customers have been increased, in part to offset the increase in steel commodity costs. In addition to steel raw material, we also purchase components and subassemblies 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 2012 was $52.8 million and a hypothetical 10% change in freight costs would have had an estimated $5.3 million effect on pre-tax income in 2012. 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

Management of Blount International, Inc. is responsible for the information and representations contained in this report. The financial statements have been prepared in conformity with generally accepted accounting principles. Reasonable judgments and estimates have been made where necessary. Other financial information in this report is consistent with these financial statements.

Our accounting systems include controls designed to reasonably assure that assets are safeguarded from unauthorized use or disposition and that provide for the preparation of financial statements in conformity with generally accepted accounting principles. These systems are supplemented by the selection and training of qualified financial personnel and an organizational structure providing for appropriate segregation of duties.

Three directors of the Company, who are not members of management, serve as the Audit Committee of the Board of Directors and are the principal means through which the Board discharges its financial reporting responsibility. The Audit Committee is responsible for the appointment of the independent registered public accounting firm, and reviews with the independent registered public accounting firm, management, and the internal auditors, the scope and the results of the annual audit, the effectiveness of our internal controls over financial reporting, disclosure controls and procedures, and other matters relating to financial reporting and the financial affairs of Blount International, Inc. as they deem appropriate. The independent registered public accounting firm and the internal auditors have full access to the Committee, with and without the presence of management, to discuss any appropriate matters.

Management’s Report on Internal Controls over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a -15(f). Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.

Internal controls over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of their inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

PricewaterhouseCoopers LLP, an independent registered public accounting firm that has audited the Consolidated Financial Statements, has also audited the effectiveness of our internal control over financial reporting as of December 31, 2012 as stated in their report which appears herein.

 

/s/ Joshua L. Collins

   

/s/ Calvin E. Jenness

Joshua L. Collins     Calvin E. Jenness
Chairman and     Senior Vice President and
Chief Executive Officer     Chief Financial Officer
    (Principal Financial Officer)

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the Consolidated Financial Statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Blount International, Inc. and its subsidiaries at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related Consolidated Financial Statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Portland, Oregon
March 8, 2013

 

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CONSOLIDATED STATEMENTS OF INCOME

Blount International, Inc. and Subsidiaries

 

     Year Ended December 31,  

(Amounts in thousands, except per share data)

   2012     2011     2010  

Sales

   $ 927,666      $ 831,630      $ 611,480   

Cost of sales

     671,451        575,821        407,454   
  

 

 

   

 

 

   

 

 

 

Gross profit

     256,215        255,809        204,026   

Selling, general, and administrative expenses

     170,535        157,856        118,471   

Facility closure and restructuring costs

     6,400        —          —     
  

 

 

   

 

 

   

 

 

 

Operating income

     79,280        97,953        85,555   

Interest income

     158        171        119   

Interest expense

     (17,364     (18,721     (25,636

Other income (expense), net

     (284     (4,453     (7,427
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before taxes

     61,790        74,950        52,611   

Provision for income taxes

     22,202        25,268        11,209   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     39,588        49,682        41,402   
  

 

 

   

 

 

   

 

 

 

Discontinued operations:

      

Income from discontinued operations before taxes

     —          —          12,972   

Provision for income taxes

     —          —          7,174   
  

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —          —          5,798   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 39,588      $ 49,682      $ 47,200   
  

 

 

   

 

 

   

 

 

 

Basic income per share:

      

Continuing operations

   $ 0.81      $ 1.02      $ 0.86   

Discontinued operations

     —          —          0.13   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 0.81      $ 1.02      $ 0.99   
  

 

 

   

 

 

   

 

 

 

Diluted income per share:

      

Continuing operations

   $ 0.79      $ 1.01      $ 0.85   

Discontinued operations

     —          —          0.12   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 0.79      $ 1.01      $ 0.97   
  

 

 

   

 

 

   

 

 

 

Weighted average shares used in per share calculations:

      

Basic

     49,170        48,701        47,917   

Diluted

     49,899        49,434        48,508   

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Blount International, Inc. and Subsidiaries

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011     2010  

Net income

   $ 39,588      $ 49,682      $ 47,200   
  

 

 

   

 

 

   

 

 

 

Unrealized gains (losses):

      

Unrealized holding gains (losses)

     (2,242     (1,819     837   

Gains (losses) reclassified to net income

     75        (644     (2,353
  

 

 

   

 

 

   

 

 

 

Unrealized losses, net

     (2,167     (2,463     (1,516

Foreign currency translation adjustment

     1,434        (2,984     309   

Pension liability adjustment:

      

Net loss

     (14,358     (49,349     (9,351

Amortization of net loss

     8,573        5,137        4,562   

Amortization of prior service cost

     (6     (6     (6
  

 

 

   

 

 

   

 

 

 

Pension liability adjustment

     (5,791     (44,218     (4,795
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax

     (6,524     (49,665     (6,002

Income tax benefit on other comprehensive items

     1,144        16,249        1,253   
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (5,380     (33,416     (4,749
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 34,208      $ 16,266      $ 42,451   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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CONSOLIDATED BALANCE SHEETS

Blount International, Inc. and Subsidiaries

 

     December 31,  

(Amounts in thousands, except share and per share data)

   2012     2011  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 50,267      $ 62,118   

Accounts receivable, net

     128,444        133,965   

Inventories

     174,816        149,825   

Deferred income taxes

     19,522        15,812   

Other current assets

     20,273        21,618   
  

 

 

   

 

 

 

Total current assets

     393,322        383,338   

Property, plant, and equipment, net

     177,702        155,872   

Deferred income taxes

     2,438        589   

Intangible assets

     143,161        158,085   

Goodwill

     165,175        165,084   

Other assets

     23,493        21,239   
  

 

 

   

 

 

 

Total Assets

   $ 905,291      $ 884,207   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Current maturities of long-term debt

   $ 15,072      $ 20,348   

Accounts payable

     54,295        52,884   

Accrued expenses

     71,473        72,991   

Deferred income taxes

     292        1,255   
  

 

 

   

 

 

 

Total current liabilities

     141,132        147,478   

Long-term debt, excluding current maturities

     501,685        510,014   

Deferred income taxes

     40,501        42,455   

Employee benefit obligations

     93,086        96,974   

Other liabilities

     17,405        17,821   
  

 

 

   

 

 

 

Total liabilities

     793,809        814,742   
  

 

 

   

 

 

 

Commitments and contingent liabilities

    

Stockholders’ equity:

    

Common stock: par value $0.01 per share, 100,000,000 shares authorized, 49,140,091 and 48,814,912 outstanding, respectively

     491        488   

Capital in excess of par value of stock

     606,495        598,689   

Accumulated deficit

     (420,085     (459,673

Accumulated other comprehensive loss

     (75,419     (70,039
  

 

 

   

 

 

 

Total stockholders’ equity

     111,482        69,465   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 905,291      $ 884,207   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Blount International, Inc. and Subsidiaries

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011     2010  

Cash flows from operating activities:

      

Net income

   $ 39,588      $ 49,682      $ 47,200   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Income from discontinued operations

     —          —          (5,798

Early extinguishment of debt

     —          3,871        7,010   

Depreciation

     28,586        23,482        20,971   

Amortization

     16,532        12,325        6,628   

Stock-based compensation

     5,592        4,441        3,290   

Excess tax benefit from stock-based compensation

     (1,187     (877     (1,340

Deferred income taxes

     (7,589     2,331        2,658   

Change in uncertain tax positions

     (369     (1,240     (7,827

Loss on disposal of assets

     955        899        1,202   

Other non-cash charges, net

     801        5,026        784   

Changes in assets and liabilities, excluding acquisitions:

      

(Increase) decrease in accounts receivable

     4,985        (12,057     1,048   

(Increase) decrease in inventories

     (25,487     2,188        (6,788

(Increase) decrease in other assets

     (781     (2,228     1,741   

Increase (decrease) in accounts payable

     1,414        58        (6,883

Increase (decrease) in accrued expenses

     (2,070     6,571        3,708   

Increase (decrease) in other liabilities

     (9,699     (16,405     (11,726

Discontinued operations

     —          (334     (6,712
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     51,271        77,733        49,166   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property, plant, and equipment

     (51,925     (40,373     (20,002

Proceeds from sale of assets

     198        967        159   

Acquisitions, net of cash acquired

     —          (217,362     (90,854

Discontinued operations

     —          —          25,176   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (51,727     (256,768     (85,521
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Net borrowings (payments) under revolving credit facility

     6,800        228,200        (3,400

Proceeds from issuance of term debt

     —          300,000        350,000   

Repayment of term loan principal

     (15,000     (353,750     (107,465

Repayment of PBL debt principal

     (5,416     (7,813     —     

Repayment of 8 7/8% senior subordinated notes

     —          —          (175,000

Debt issuance costs

     (1,115     (6,509     (6,267

Excess tax benefit from stock-based compensation

     1,187        877        1,340   

Proceeds from stock-based compensation activity

     1,152        1,041        2,398   

Taxes paid under stock-based compensation activity

     (122     (267     (333
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (12,514     161,779        61,273   
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes

     1,119        (1,334     720   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (11,851     (18,590     25,638   

Cash and cash equivalents at beginning of year

     62,118        80,708        55,070   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 50,267      $ 62,118      $ 80,708   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

Blount International, Inc. and Subsidiaries

 

(Amounts in thousands)

   Shares      Common
Stock
     Capital in
Excess

of Par
     Accumulated
Deficit
    Accumulated
Other

Comprehensive
Income

(Loss)
    Total  

Balance December 31, 2009

     47,759       $ 478       $ 581,211       $ (556,555   $ (31,874   $ (6,740

Net income

              47,200          47,200   

Foreign currency translation adjustment

                309        309   

Unrealized losses

                (963     (963

Pension liability adjustment

                (4,095     (4,095

Stock options, stock appreciation rights, and restricted stock

     477         4         3,393             3,397   

Stock compensation expense

           3,290             3,290   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance December 31, 2010

     48,236         482         587,894         (509,355     (36,623     42,398   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

              49,682          49,682   

Foreign currency translation adjustment

                (2,984     (2,984

Unrealized losses

                (1,554     (1,554

Pension liability adjustment

                (28,878     (28,878

Acquisition of KOX

     310         3         4,706             4,709   

Stock options, stock appreciation rights, and restricted stock

     269         3         1,648             1,651   

Stock compensation expense

           4,441             4,441   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance December 31, 2011

     48,815         488         598,689         (459,673     (70,039     69,465   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

              39,588          39,588   

Foreign currency translation adjustment

                1,434        1,434   

Unrealized losses

                (1,364     (1,364

Pension liability adjustment

                (5,450     (5,450

Stock options, stock appreciation rights, and restricted stock

     325         3         2,214             2,217   

Stock compensation expense

           5,592             5,592   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance December 31, 2012

     49,140       $ 491       $ 606,495       $ (420,085   $ (75,419   $ 111,482   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The Company holds 382,380 shares of its common stock in treasury. These shares have been accounted for as constructively retired in the Consolidated Financial Statements, and are not included in the number of shares outstanding.

On March 1, 2011, we issued 309,834 shares of common stock valued at $4.7 million as part of the acquisition price of KOX.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business. The Company is a global manufacturer and marketer of equipment, accessories, and replacement parts sold to consumers and professionals in select end-markets, including the forestry, lawn and garden, farm, ranch, agriculture, and construction sectors. The Company manufactures and markets branded products, serving professional loggers, arborists, construction workers, homeowners, equipment dealers, landscapers, farmers, rural land owners, and OEMs. The Company’s manufactured products include products such as cutting chain, guide bars, and sprockets for chain saw use, lawnmower and edger blades, grass and crop cutting equipment, electric and gas-powered log splitters, riding lawnmowers, tractor attachments, and concrete cutting and finishing equipment. The Company maintains manufacturing facilities in the U.S., Brazil, Canada, China, France, and Mexico. We also market and distribute other products and accessories closely aligned with the products that we manufacture, including cutting line and spools for line trimmers, safety equipment and clothing, small engine replacement parts, small tractor linkage parts and attachments, and other accessories used in the market sectors we serve. Many of the products we manufacture are sold to OEMs for use on new chain saws and landscaping equipment, or for private branding purposes, using the OEMs’ brands. See additional information about our business in Item 1, Business, included elsewhere in this report.

Basis of Presentation. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries and are prepared in conformity with accounting principles generally accepted in the U.S. All significant intercompany balances and transactions have been eliminated.

Foreign Currency. For foreign subsidiaries whose operations are principally conducted in U.S. Dollars, monetary assets and liabilities are translated into U.S. Dollars at the current exchange rate, while other assets (principally property, plant, and equipment and inventories) and related costs and expenses are generally translated at historic exchange rates. Sales and other costs and expenses are translated at the average exchange rate for the period and the resulting foreign exchange adjustments are recognized in income. Assets and liabilities of the remaining foreign operations are translated to U.S. Dollars at the current exchange rate and their statements of income are translated at the average exchange rate for the period. Gains and losses resulting from translation of the financial statements of these operations are reflected as “other comprehensive income (loss)” in stockholders’ equity and in the Consolidated Statements of Comprehensive Income. Foreign currency transaction gains and losses from settling transactions denominated in currencies other than the U.S. Dollar are recognized in the Consolidated Statements of Income when realized.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles recognized in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the components of equity, and the disclosure of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses recognized during the reporting periods. Estimates are used when accounting for the allowance for doubtful accounts, inventory obsolescence, goodwill and other long-lived assets, product warranties, casualty insurance costs, product liability reserves and related expenses, other legal proceedings, employee benefit plans, income taxes and deferred tax assets and liabilities, and contingencies. It is reasonably possible that actual results could differ materially from these estimates and assumptions and significant changes to estimates could occur in the near term.

Cash and Cash Equivalents. All highly liquid temporary cash investments with maturities of 90 days or less at the date of investment that are readily convertible to known amounts of cash and present minimal risk of changes in value because of changes in interest rates are considered to be cash equivalents.

Allowance for Doubtful Accounts. The Company estimates the amount of accounts receivable that are not collectible and records an allowance for doubtful accounts which is presented net with accounts receivable on the Consolidated Balance Sheets. As of December 31, 2012 and 2011, the allowance for doubtful accounts was $3.1 million. It is reasonably possible that actual collection experience may differ significantly from management’s estimate.

 

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Inventories. Inventories are valued at the lower of cost or market. The Company determines the cost of most raw materials, work in process, and finished goods inventories by standard cost, which approximates cost determined on the first in, first out (“FIFO”) method. The Company writes down its inventories for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

Property, Plant, and Equipment. Property, plant, and equipment is stated at cost and is depreciated on the straight-line method over the estimated useful lives of the individual assets. The principal ranges of estimated useful lives for depreciation purposes are as follows:

 

Asset Category

   Useful Life  

Buildings and building improvements

     10 to 45 years   

Machinery and equipment

     3 to 10 years   

Furniture, fixtures, and office equipment

     3 to 10 years   

Transportation equipment

     3 to 15 years   

Gains or losses on disposal are reflected in income. Property, plant, and equipment under capital lease is capitalized, with the related obligations stated at the principal portion of future lease payments. Interest cost incurred during the period of construction of plant and equipment is capitalized. Capitalized interest was $0.5 million in 2012, $0.2 million in 2011, and $0.1 million in 2010.

Goodwill and Other Intangible Assets with Indefinite Useful Lives. The Company accounts for goodwill and other intangible assets with indefinite useful lives under ASC 350. Under the provisions of ASC 350, the Company evaluates annually in the fourth quarter, or whenever circumstances indicate, whether or not there are any qualitative indications of potential impairment of these assets. If there is indication of potential impairment, the Company performs a quantitative analysis. The quantitative analysis of impairment is performed by estimating the fair values of the reporting units using a discounted cash flow model and comparing those fair values to the carrying values of the reporting units, including goodwill. If the fair value of a reporting unit is less than its carrying value, the Company then allocates the fair value of the unit to all the assets and liabilities of that unit, including any unrecognized intangible assets, as if the reporting unit’s fair value were the price to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Events or changes in circumstances may occur that could cause underperformance relative to projected future cash flows that would create future impairments. No impairments have been recognized in 2012, 2011, or 2010 for goodwill or other intangible assets with indefinite useful lives .

Impairment of Long-Lived Assets. The Company evaluates the carrying value of long-lived assets to be held and used, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such asset are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the projected cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for disposal costs. No significant impairment charges were recognized in 2012, 2011, or 2010.

Deferred Financing Costs. The Company capitalizes costs incurred in connection with borrowings or establishment of credit facilities. These costs are amortized as an adjustment to interest expense over the life of the borrowing or life of the credit facility using the straight line method, which approximates the effective interest rate method. In the case of early debt principal repayments, the Company adjusts the value of the corresponding deferred financing costs with a charge to other expense, and similarly adjusts the future amortization expense.

Income Taxes. In accordance with ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Included in recorded tax liabilities are estimated amounts related to uncertain tax

 

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positions. Actual tax liabilities may differ materially from these estimates. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The American Jobs Creation Act of 2004 includes a deduction of up to 9 percent of “qualified production activities income,” as defined in the law and subject to certain limitations. The benefit of this deduction is accounted for as a special deduction when realized in accordance with ASC 740-10, Section 55. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense.

Product Liability. The Company monitors claims that relate to the alleged malfunction or defects of its products that may result in an injury to the equipment operator or others. The Company records an accrued liability and charge to cost of sales for its estimated obligation as claims are incurred and evaluated. The accrual may increase or decrease as additional information regarding claims develops.

Environmental Remediation Liabilities. The Company is conducting several testing, monitoring, and in some cases, remediation efforts regarding environmental matters at certain of its current and former operating sites. In addition, from time to time, regulatory bodies and third parties have asserted claims to the Company alleging responsibility for environmental remediation. The Company records an accrued liability and charge to expense for its estimated cost of environmental remediation as situations are evaluated. The accrual may increase or decrease as new information is received, regulatory changes are enacted, or changes in estimate are developed.

Insurance Accruals. It is the Company’s policy to retain a portion of expected losses related to general and product liability, workers’ compensation, and vehicle liability losses through retentions or deductibles under its risk management and insurance programs. Provisions for losses expected under these programs are recorded based on estimates of the ultimate undiscounted aggregate liabilities for claims incurred.

Warranty. The Company offers certain product warranties with the sale of its products. An estimate of warranty costs is recognized at the time the related revenue is recognized and the warranty obligation is recorded as a charge to cost of sales and as a liability on the balance sheet. Warranty cost is estimated using historical customer claims, supplier performance, and new product performance.

Derivative Financial Instruments. The Company accounts for derivative financial instruments in accordance with ASC 815. The Company’s earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, interest rates, and commodity prices. The Company’s risk management policy allows for the use of derivative financial instruments to manage foreign currency exchange rate, interest rate, and commodity price exposures. The policy specifies that derivatives are not to be used for speculative or trading purposes and formally designates the financial instruments used as a hedge of a specific underlying exposure or forecasted transaction. The Company formally assesses, both at inception and at least quarterly thereafter, using the hypothetical derivative method, whether the derivatives used qualify for hedge accounting and are effective at offsetting the related underlying exposure. All derivatives are recognized on the Consolidated Balance Sheets at their fair value. As of December 31, 2012 and 2011, derivatives consisted of foreign currency hedge instruments, interest rate swap agreements, and an interest rate cap agreement, all of which are designated as cash flow hedges. The effective portion of changes in the fair value of hedging derivative instruments is recognized in other comprehensive income (loss) until the instrument is settled, at which time the gain or loss is recognized in current earnings. Any ineffective portion of changes in the fair value of hedging derivative instruments, should it occur, would be recognized immediately in earnings. See further information in Note 19.

Revenue Recognition. The Company recognizes revenue when persuasive evidence that a sales arrangement exists, title and risk of loss have passed to the customer, the price to the customer is fixed or determinable, and collectability is reasonably assured, which has historically been upon the date of shipment of product for the majority of the Company’s sales transactions. There are a small number of shipments with FOB destination or similar shipping terms, for which revenue is not recognized until delivery has occurred.

Shipping and Handling Costs. The Company incurs expenses for the shipment of goods to customers. These expenses are recognized in the period in which they occur and are classified as revenue if billed to the customer and as cost of sales if incurred by the Company in accordance with ASC 605-45.

 

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Sales Incentives. The Company provides various sales incentives to customers in the form of coupons, rebates, discounts, free product, and advertising allowances. The estimated cost of such expenses is recorded at the time of revenue recognition and recorded as a reduction to revenue, except that free product is recorded as cost of sales, in accordance with ASC 605-50.

Advertising. Advertising costs are expensed as incurred, except for cooperative advertising allowances, which are accrued over the period the revenues are recognized. Advertising costs were $12.5 million, $12.8 million, and $7.3 million for 2012, 2011, and 2010, respectively.

Research and Development. Expenditures for research and development are expensed as incurred and include costs of direct labor, indirect labor, materials, overhead, and outside services. These costs were $17.0 million, $19.6 million, and $14.8 million for 2012, 2011, and 2010, respectively.

Reclassifications. Certain amounts in the prior period financial statements and footnotes may have been reclassified to conform to the current period presentation. Such reclassifications, if any, have no effect on previously reported net income, comprehensive income, total cash flows, or net stockholders’ equity.

Recent Accounting Pronouncements. In July 2012, the FASB issued revised guidance on how an entity tests indefinite-lived intangible assets for impairment. Under the new guidance, an entity is no longer required to calculate the fair value of the indefinite-lived intangible assets and perform the quantitative impairment test unless the entity determines, based on a qualitative assessment, that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. This revised guidance is effective on January 1, 2013. We elected to adopt this new guidance early and implemented it in 2012.

NOTE 2:  ACQUISITIONS

The Company accounts for acquisitions in accordance with ASC 805. Accordingly, assets acquired and liabilities assumed are recorded at their estimated fair values on the date of acquisition. The Company estimates the fair value of assets using various methods and considering, among other factors, projected discounted cash flows, replacement cost less an allowance for depreciation, recent comparable transactions, and historical book values. The Company estimates the fair value of inventory that is considered to be readily marketable by considering the estimated costs to complete the manufacturing, assembly, and selling processes, and the normal gross profit margin typically associated with its sale. The Company estimates the fair value of inventory that is not considered to be readily marketable by evaluating the estimated net realizable value for such inventory. The Company estimates the fair value of identifiable intangible assets based on discounted projected cash flows or estimated royalty avoidance costs. The Company estimates the fair value of liabilities assumed considering the historical book values and projected future cash outflows. The fair value of goodwill represents the residual enterprise value which does not qualify for separate recognition, including the value of the assembled workforce.

2010 Acquisition of SpeeCo

On August 10, 2010, we acquired SpeeCo, located in Golden, Colorado, a supplier of log splitters, post-hole diggers, tractor three-point linkage parts and equipment, and farm and ranch accessories. The acquisition of SpeeCo expanded our product offerings and broadened our customer base. The acquisition of SpeeCo also created opportunities for synergies in the areas of marketing, sales, assembly operations, distribution, and back office consolidation of support functions. We also believe there are opportunities to sell some of SpeeCo’s products into our FLAG distribution network domestically and internationally and began such sales in 2011. The opportunities for synergies were further enhanced when we acquired PBL and Woods/TISCO during 2011.

The purchase price was $91.7 million in cash, consisting of $90.0 million in negotiated enterprise value and a $1.7 million working capital adjustment. SpeeCo had $0.8 million of cash on the acquisition date, resulting in a net cash outflow of $90.9 million. We assumed none of SpeeCo’s debt in the transaction. In addition, we incurred legal and other third party fees totaling $1.0 million in conjunction with the acquisition that were expensed to SG&A in the Consolidated Statement of Income in 2010. The acquisition was financed with a combination of cash on hand and borrowing under the Company’s revolving credit facility.

 

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SpeeCo’s pre-acquisition operating results (unaudited) for the twelve months preceding the acquisition date are summarized below.

 

(Amounts in thousands)

   Twelve Months
Ended July 31, 2010
 

Sales

   $ 77,077   

Operating income

     8,174   

Depreciation and amortization

     4,469   

SpeeCo’s operating income for the twelve months ended July 31, 2010 includes $0.4 million in management fees charged by SpeeCo’s former owner.

2011 Establishment of Blount B.V.

On January 19, 2011, we acquired a dormant shelf company registered in the Netherlands and changed the name to Blount Netherlands B.V. (“Blount B.V.”). The acquisition price was $21 thousand, net of cash acquired, plus the assumption of certain liabilities. This acquisition, along with the formation of an additional holding entity named BI Holdings C.V., a limited partnership registered with the Dutch Trade Register with a Bermuda office address and parent of Blount B.V., increases our flexibility to make international acquisitions. Direct ownership of certain of our foreign subsidiaries was transferred from our wholly-owned subsidiary, Blount, Inc., to Blount B.V. through a series of transactions executed in February 2011.

2011 Acquisition of KOX

On March 1, 2011, we acquired KOX, a Germany-based direct-to-customer distributor of forestry-related replacement parts and accessories, primarily serving professional loggers and consumers in Europe. The acquisition of KOX increased our distribution capabilities and expanded our geographic presence in Europe. KOX has been a customer of Blount for over 30 years and purchased approximately $9.2 million of forestry replacement parts from Blount in 2010.

The total purchase price was $23.9 million, consisting of $19.2 million in cash and 309,834 shares of our common stock valued at $4.7 million based on the closing price of our stock on the acquisition date. KOX had $5.1 million of cash on the acquisition date, resulting in a net cash outflow of $14.1 million. We assumed none of KOX’s debt in the transaction. In addition, we incurred legal and other third party fees totaling $1.2 million in conjunction with the acquisition that were expensed to SG&A in the Consolidated Statements of Income during 2010 and 2011. The cash portion of the acquisition was funded from available cash on hand at Blount B.V. The common stock shares issued in the purchase were subject to certain restrictions through March 1, 2013 under terms of the related stock purchase agreement.

KOX’s pre-acquisition operating results (unaudited) for calendar year 2010 are summarized below.

 

(Amounts in thousands)

   Year Ended
December 31, 2010
 

Sales

   $ 34,889   

Operating income

     3,266   

Depreciation

     128   

2011 Acquisition of PBL

On August 5, 2011, we acquired PBL, a manufacturer of lawnmower blades and agricultural cutting parts based in Civray, France, with a second manufacturing facility in Queretaro, Mexico. The acquisition of PBL increased our manufacturing capacity for lawnmower blades, increased our market share for lawnmower blades in Europe, and provided an entrance into the agricultural cutting parts market in Europe. We also expect to benefit from PBL’s low-cost manufacturing methods and technology utilized at its facilities in France and Mexico.

The purchase price consisted of $14.2 million in cash and the assumption of $13.5 million of PBL’s debt. PBL had $1.3 million of cash on the acquisition date, resulting in a net cash outflow of $13.0 million. In addition, we

 

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incurred legal and other third party fees totaling $0.9 million in conjunction with the acquisition that were expensed to SG&A in the Consolidated Statement of Income during 2011. The cash portion of the acquisition was funded from available cash on hand at Blount B.V.

The initial acquisition accounting for PBL included provisional amounts for inventory obsolescence reserves and income tax accounting, as we were not able to obtain sufficient details and complete our analysis of these matters at the time of the acquisition. During March and April 2012, we obtained additional details about PBL’s inventory and performed an analysis of obsolescence as of the acquisition date. This analysis supported the recognition of additional obsolescence reserves in the amount of $1.7 million to reduce the acquisition date inventory to fair value. Accordingly, we have revised the Consolidated Balance Sheet as of December 31, 2011 to reflect this adjustment to the PBL acquisition accounting. The effect of this revision was to reduce inventory by $1.7 million, increase goodwill by $1.1 million, and increase current deferred tax assets by $0.6 million as of December 31, 2011.

PBL’s pre-acquisition operating results (unaudited) for the twelve months preceding the acquisition date are summarized below.

 

(Amounts in thousands)

   Twelve Months
Ended July 31, 2011
 

Sales

   $ 33,162   

Operating income

     1,804   

Depreciation and amortization

     2,857   

2011 Acquisition of Woods/TISCO

On September 7, 2011, we acquired Woods/TISCO, with operations primarily in the Midwestern U.S., a manufacturer and marketer of equipment and replacement parts primarily for the agriculture end market. The acquisition of Woods/TISCO:

 

   

Increased distribution for our FRAG segment, particularly in the agricultural dealer channel.

 

   

Expanded our FRAG product line offerings of tractor attachments and aftermarket replacement parts.

 

   

Provided opportunities to leverage our manufacturing and product development expertise and global distribution and supply chain network, particularly in the area of product sourcing.

 

   

Enhanced our U.S. manufacturing and distribution capabilities through the addition of three manufacturing and five distribution facilities.

The purchase price was $190.5 million in cash, consisting of $185.0 million in negotiated enterprise value and a $5.5 million working capital adjustment. Woods/TISCO had $0.2 million of cash on the acquisition date, resulting in a net cash outflow of $190.3 million. We assumed none of Woods/TISCO’s debt in the transaction. In addition, we incurred legal and other third party fees totaling $2.0 million in conjunction with the acquisition that were expensed to SG&A in the Consolidated Statement of Income during 2011. The acquisition was funded from cash on hand and borrowing under the Company’s revolving credit facility.

The initial acquisition accounting for Woods/TISCO included provisional amounts for income tax accounting, as we were not able to obtain sufficient details and complete our analysis of these matters at the time of the acquisition. During September 2012, we obtained additional details about deferred income taxes at Woods/TISCO and, accordingly, we have revised the Consolidated Balance Sheet as of December 31, 2011. The effect of the adjustment was to reduce long-term deferred income tax liabilities by $0.4 million, reduce current deferred tax assets by $38 thousand, and reduce goodwill by the net amount of $0.3 million.

Woods/TISCO’s pre-acquisition operating results (unaudited) for the twelve months preceding the acquisition date are summarized below.

 

(Amounts in thousands)

   Twelve Months Ended
August 31, 2011
 

Sales

   $ 164,810   

Operating income

     17,870   

Depreciation and amortization

     2,549   

 

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Woods/TISCO’s operating income for the twelve months ended August 31, 2011 included expenses of $0.7 million related to Woods/TISCO’s former chief executive officer, $0.5 million in management fees charged by Woods/TISCO’s former owner, $0.4 million in expenses attributed to Woods/TISCO’s efforts to sell its business, $0.3 million in costs associated with the closure of a facility, and $0.3 million in fees associated with Woods/TISCO’s September 2010 refinancing transaction.

Purchase Price Allocations

We allocated the purchase price for each acquisition to the following assets and liabilities based on their estimated fair values.

 

(Amounts in thousands)

   Woods/TISCO      PBL      KOX      SpeeCo  

Cash

   $ 230       $ 1,275       $ 5,126       $ 816   

Accounts receivable

     34,784         5,109         3,365         7,525   

Inventories

     38,512         9,729         8,879         18,868   

Current intangible assets subject to amortization

     —           157         —           401   

Current deferred tax assets

     3,716         608         —           657   

Other current assets

     3,057         1,162         268         625   

Property, plant, and equipment

     19,259         13,041         383         1,812   

Non-current deferred tax assets

     1,943         378         —           —     

Non-current intangible assets subject to amortization

     52,400         5,612         4,594         43,214   

Non-current intangible assets not subject to amortization

     44,330         470         5,241         5,968   

Goodwill

     54,846         3,301         3,709         42,794   

Other non-current assets

     3,474         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets acquired

     256,551         40,842         31,565         122,680   
  

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

     19,319         11,065         4,793         13,762   

Long-term debt

     —           13,304         —           —     

Non-current deferred income tax liability

     41,510         609         2,836         17,142   

Other non-current liabilities

     5,220         1,620         —           106   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     66,049         26,598         7,629         31,010   
  

 

 

    

 

 

    

 

 

    

 

 

 

Acquisition price

   $ 190,502       $ 14,244       $ 23,936       $ 91,670   

Goodwill deductible for income tax purposes

   $ 9,255       $ —         $ —         $ 6,998   

The operating results of acquisitions are included in the Consolidated Statements of Income from the acquisition dates forward. These 2011 results, excluding the post-acquisition allocation of the cost of certain shared services and corporate support functions, are summarized in the following table.

 

     Year Ended December 31, 2011  

(Amounts in thousands)

   KOX     PBL     Woods/TISCO  

Incremental net sales

   $ 21,639      $ 9,679      $ 55,464   

Incremental income (loss) before income taxes

     (2,864     (2,727     1,326   

Acquisition accounting effects

     2,152        1,734        4,913   

 

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The 2010 results of SpeeCo, excluding the post-acquisition allocation of the cost of certain shared services and corporate support functions, are summarized in the following table.

 

     Year Ended
December 31, 2010
 

(Amounts in thousands)

   SpeeCo  

Incremental net sales

   $ 34,200   

Incremental income before income taxes

     2,097   

Acquisition accounting effects

     3,368   

Acquisition accounting effects included in the above tables represent non-cash charges included in cost of sales for amortization of intangible assets and adjustments to fair value on acquired property, plant, and equipment, as well as expensing of the step-up to fair value of acquired inventory. Acquisition accounting effects do not include transaction costs associated with the acquisitions.

The following table summarizes the acquisition accounting effects charged to cost of sales for the years indicated:

 

     Year Ending December 31,  

(Amounts in thousands)

   2012      2011      2010  

SpeeCo

   $ 4,671       $ 5,555       $ 3,368   

KOX

     1,016         2,152         —     

PBL

     2,028         1,734         —     

Woods/TISCO

     7,013         4,913         —     

Prior acquisitions

     1,270         1,525         1,789   
  

 

 

    

 

 

    

 

 

 

Total acquisition accounting effects

   $ 15,998       $ 15,879       $ 5,157   
  

 

 

    

 

 

    

 

 

 

The following unaudited pro forma results present the estimated effect as if the acquisition of SpeeCo had occurred on January 1, 2009, and as if the acquisitions of KOX, PBL, and Woods/TISCO had occurred on January 1, 2010. The unaudited pro forma results include the historical results of each acquired business, pro forma elimination of sales from Blount to each acquired business, if any, pro forma acquisition accounting effects, pro forma interest expense effects of additional borrowings to fund each transaction, pro forma interest effects from reduced cash and cash equivalents following use of cash to fund each transaction, and the related pro forma income tax effects.

 

     Twelve Months  Ended
December 31, 2011
     Twelve Months  Ended
December 31, 2010
 

(Amounts in thousands, except per share data)

   As Reported      Pro Forma      As Reported      Pro Forma  

Sales

   $ 831,630       $ 975,455       $ 611,480       $ 863,014   

Net income

     49,682         58,192         47,200         47,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic income per share

   $ 1.02       $ 1.19       $ 0.99       $ 1.00   

Diluted income per share

   $ 1.01       $ 1.18       $ 0.97       $ 0.98   

NOTE 3:  FACILITY CLOSURE AND RESTRUCTURING COSTS

During 2012, we completed certain actions to consolidate our operations in the U.S. In Kansas City, Missouri, we moved into a new, larger North American assembly and distribution center, and closed our previous distribution center in that city. In Golden, Colorado, we closed our assembly, warehouse, and distribution operations and consolidated those functions into the new North American facility in Kansas City. During 2012, we recognized direct costs of $7.4 million associated with these two actions. These costs consisted of lease exit costs, charges to expense the book value of certain assets located in Golden and in the previous distribution center in Kansas City that will not be utilized in the new distribution center, temporary labor costs associated with moving inventory items and stabilizing shipping activities, costs to move inventory and equipment, and rent expense on duplicate facilities during the transition period. Of these total costs, $1.0 million are reported in cost of sales in the Consolidated Statement of Income for the twelve months ended December 31, 2012.

 

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NOTE 4:  INVENTORIES

Inventories consisted of the following:

 

     December 31,  

(Amounts in thousands)

   2012      2011  

Raw materials and supplies

   $ 22,815       $ 24,022   

Work in progress

     19,388         16,006   

Finished goods

     132,613         109,797   
  

 

 

    

 

 

 

Total inventories

   $ 174,816       $ 149,825   
  

 

 

    

 

 

 

NOTE 5:  PROPERTY, PLANT, AND EQUIPMENT, NET

Property, plant, and equipment, net consisted of the following:

 

     December 31,  

(Amounts in thousands)

   2012     2011  

Land

   $ 9,081      $ 9,081   

Buildings and improvements

     82,910        65,699   

Machinery and equipment

     262,058        239,882   

Furniture, fixtures, and office equipment

     42,498        33,342   

Transportation equipment

     1,126        1,105   

Construction or equipment acquisitions in progress

     23,075        30,568   

Accumulated depreciation

     (243,046     (223,805
  

 

 

   

 

 

 

Total property, plant, and equipment, net

   $ 177,702      $ 155,872   
  

 

 

   

 

 

 

NOTE 6:  DEFERRED FINANCING COSTS

Deferred financing costs represent costs incurred in conjunction with the Company’s debt financing activities and are amortized over the term of the related debt instruments. Deferred financing costs and the related amortization expense are adjusted when any pre-payments of principal are made to the related outstanding loan. See also Note 9. The following activity occurred during the years indicated:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011  

Beginning balance

   $ 5,716      $ 4,088   

Financing costs deferred

     1,115        4,006   

Write off due to early extinguishment of debt

     —          (1,368

Amortization

     (1,336     (1,010
  

 

 

   

 

 

 

Ending balance

   $ 5,495      $ 5,716   
  

 

 

   

 

 

 

 

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Amortization expense, assuming no further cost deferrals or prepayments of principal, is expected to be as follows:

 

(Amounts in thousands)

   Expected Annual
Amortization
 

2013

   $ 1,499   

2014

     1,499   

2015

     1,499   

2016

     998   
  

 

 

 

Total scheduled amortization

   $ 5,495   
  

 

 

 

NOTE 7:  INTANGIBLE ASSETS

The following table summarizes intangible assets:

 

            December 31, 2012      December 31, 2011  
     Life      Gross      Accumulated      Gross      Accumulated  

(Amounts in thousands)

   In Years      Amount      Amortization      Amount      Amortization  

Goodwill

     Indefinite       $ 165,175       $ —         $ 165,084       $ —     

Trademarks and trade names

     Indefinite         61,251         —           61,176         —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total with indefinite lives

        226,426         —           226,260         —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Covenants not to compete

     2 - 4         1,112         985         1,112         843   

Patents

     11 - 13         5,320         1,554         5,320         1,121   

Manufacturing technology

     1         2,563         2,563         2,516         1,124   

Customer relationships, including backlog

     10 - 19         107,333         29,316         107,234         16,170   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total with finite lives

        116,328         34,418         116,182         19,258   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

      $ 342,754       $ 34,418       $ 342,442       $ 19,258   
     

 

 

    

 

 

    

 

 

    

 

 

 

On the December 31, 2011 Consolidated Balance Sheet, $15 thousand of intangible assets, representing unamortized backlog, are included in other current assets.

Amortization expense for intangible assets included in the Consolidated Statements of Income was as follows:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012      2011      2010  

Amortization expense

   $ 15,196       $ 11,315       $ 4,382   

Amortization expense for these intangible assets is expected to total $14.2 million in 2013, $12.0 million in 2014, $10.5 million in 2015, $9.1 million in 2016, and $7.5 million in 2017.

Through December 31, 2012, no impairment of these assets has been recognized. A total of $38.3 million of goodwill is deductible for tax purposes, and is being amortized on the U.S. tax return. The accumulated tax amortization on this deductible goodwill was $26.3 million and $21.9 million at December 31, 2012 and 2011, respectively.

 

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NOTE 8:  ACCRUED EXPENSES

Accrued expenses consisted of the following:

 

     December 31,  

(Amounts in thousands)

   2012      2011  

Salaries, wages, and related withholdings

   $ 21,095       $ 29,275   

Accrued taxes

     9,769         5,758   

Advertising

     7,899         6,814   

Employee benefits

     6,550         8,425   

Accrued customer incentive programs

     4,933         6,020   

Unrealized loss on derivative instruments

     3,988         1,813   

Product liability reserves

     2,905         4,841   

Accrued professional services fees

     2,070         2,088   

Product warranty reserve

     1,914         1,539   

Accrued interest

     1,253         1,340   

Other

     9,097         5,078   
  

 

 

    

 

 

 

Total accrued expenses

   $ 71,473       $ 72,991   
  

 

 

    

 

 

 

NOTE 9:  DEBT

Debt consisted of the following:

 

     As of December 31,  

(Amounts in thousands)

   2012     2011  

Revolving credit facility borrowings

   $ 235,000      $ 228,200   

Term loans

     281,250        296,250   

Debt and capital lease obligation of PBL

     507        5,912   
  

 

 

   

 

 

 

Total debt

     516,757        530,362   

Less current maturities

     (15,072     (20,348
  

 

 

   

 

 

 

Long-term debt, excluding current maturities

   $ 501,685      $ 510,014   

Weighted average interest rate at end of period

     2.71     2.85

Minimum principal payments required are as follows:

 

(Amounts in thousands)

   Payments  

2013

   $ 15,072   

2014

     15,072   

2015

     15,072   

2016

     471,322   

2017 and thereafter

     219   
  

 

 

 

Total debt

   $ 516,757   
  

 

 

 

Senior Credit Facilities. The Company, through its wholly-owned subsidiary, Blount, Inc., maintains a senior credit facility with General Electric Capital Corporation as Agent for the Lenders and also as a lender, which has been amended and restated on several occasions. As of December 31, 2012 and 2011, the senior credit facilities consisted of a revolving credit facility and a term loan.

August 2010 Third Amendment and Restatement of Senior Credit Facilities. On August 9, 2010, the Company entered into the Third Amendment and Restatement of its senior credit facilities. The Third Amendment and

 

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Restatement included an increase in maximum borrowings available under the revolving credit facility to $75.0 million and an extension of its maturity date to August 2015, an increase of the term loan B facility to $275.0 million and an extension of its maturity date to August 2016, establishment of a new term loan A facility at $75.0 million with a maturity date of August 2015, and modification of the interest rates and certain financial and other covenants. The Company paid $6.3 million in fees and transaction costs in connection with this amendment.

The Company used the $350.0 million combined proceeds of the two term loans to repay the principal outstanding under its previous term loan B facility and its 8 7/8% senior subordinated notes originally due August 1, 2012. These 8 7/8% senior subordinated notes were redeemed in full on September 16, 2010, following the expiration of the required redemption notification period. In conjunction with the redemption of the 8 7/8% senior subordinated notes and the repayment of principal on the previous term loan B, the Company expensed $3.5 million in unamortized deferred financing costs.

January 2011 Amendment of Senior Credit Facilities. On January 28, 2011, the senior credit facility was amended to facilitate a foreign subsidiary reorganization and to allow additional flexibility for making foreign acquisitions.

June 2011 Fourth Amendment and Restatement of Senior Credit Facilities. On June 13, 2011, the Company entered into the Fourth Amendment and Restatement of its senior credit facilities with an initial funding date of August 9, 2011. The Fourth Amendment and Restatement included an increase in maximum borrowings under the revolving credit facility to $400.0 million, a new $300.0 million term loan facility, an extension of the maturity date on both facilities to August 31, 2016, a reduction in interest rates on both facilities, and the modification of certain financial and other covenants. The Company incurred $6.5 million in fees and transaction costs in connection with the Fourth Amendment and Restatement. On the initial funding date the Company expensed $3.9 million, consisting of unamortized deferred financing costs from previous modifications to the senior credit facilities as well as certain fees and transaction costs associated with the June 13, 2011 amendment.

August 2012 Amendment of Senior Credit Facilities. On August 3, 2012, the senior credit facilities were amended to modify the maximum leverage ratio covenant, as defined below. Certain other minor modifications to the credit agreement were made. The Company incurred $1.2 million in fees and transaction costs in connection with this amendment.

Current Terms of Senior Credit Facilities. The revolving credit facility provides for total available borrowings of up to $400.0 million, reduced by outstanding letters of credit, and further restricted by certain financial covenants. As of December 31, 2012, the Company had the ability to borrow an additional $61.8 million under the terms of the revolving credit agreement. The revolving credit facility bears interest at LIBOR plus 2.50% or at an index rate, as defined in the credit agreement, plus 1.50%, and matures on August 31, 2016. Interest is payable on the individual maturity dates for each LIBOR-based borrowing and monthly on index rate-based borrowings. Any outstanding principal is due in its entirety on the maturity date.

The term loan facility also bears interest at LIBOR plus 2.50% or at the index rate plus 1.50% and matures on August 31, 2016. The term loan facility requires quarterly principal payments of $3.8 million with a final payment of $225.0 million due on the maturity date. Once repaid, principal under the term loan facility may not be re-borrowed.

The amended and restated senior credit facilities contain financial covenants including:

 

   

Minimum fixed charge coverage ratio of 1.15, defined as Adjusted EBITDA divided by cash payments for interest, taxes, capital expenditures, scheduled debt principal payments, and certain other items, calculated on a trailing twelve-month basis.

 

   

Maximum leverage ratio, defined as total debt divided by Adjusted EBITDA, calculated on a trailing twelve-month basis. The maximum leverage ratio is set at 4.25 through December 31, 2012, 4.00 through June 30, 2013, 3.75 through December 31, 2013, 3.50 through September 30, 2014, 3.25 through March 31, 2015, and 3.00 thereafter.

In addition, there are covenants, restrictions, or limitations relating to acquisitions, investments, loans and advances, indebtedness, dividends on our stock, the sale or repurchase of our stock, the sale of assets, and other categories. In the opinion of management, we were in compliance with all financial covenants as of December 31, 2012. Non-compliance with these covenants is an event of default under the terms of the credit agreement, and could result in severe limitations to our overall liquidity, and the term loan lenders could require immediate repayment of outstanding amounts, potentially requiring sale of a sufficient amount of our assets to repay the outstanding loans.

 

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The amended and restated senior credit facilities may be prepaid at any time without penalty. There can also be additional mandatory repayment requirements related to the sale of Company assets, the issuance of stock under certain circumstances, or upon the Company’s annual generation of excess cash flow, as determined under the credit agreement. Our debt is not subject to any triggers that would require early payment due to any adverse change in our credit rating.

Our senior credit facility debt is incurred by our wholly-owned subsidiary, Blount, Inc. Blount International, Inc. and all of its domestic subsidiaries other than Blount, Inc. guarantee Blount, Inc.’s obligations under the senior credit facilities. The obligations under the senior credit facilities are collateralized by a first priority security interest in substantially all of the assets of Blount, Inc. and its domestic subsidiaries, as well as a pledge of all of Blount, Inc.’s capital stock held by Blount International, Inc. and all of the stock of domestic subsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of the stock of its direct non-domestic subsidiaries as additional collateral.

Debt and Capital Lease Obligation of PBL. In conjunction with the acquisition of PBL we assumed $13.5 million of PBL’s debt, consisting of current and long-term bank obligations, revolving credit facilities, and $0.6 million in capital lease obligations. As of December 31, 2012 we have repaid all of PBL’s bank debt. PBL’s outstanding bank debt was classified as current as of December 31, 2011 on the Consolidated Balance Sheet.

NOTE 10:  INCOME TAXES

The provision (benefit) for income taxes was as follows:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012     2011      2010  

Current

       

Federal

   $ 15,781      $ 16,249       $ 7,828   

State

     1,685        1,116         1,973   

Foreign

     12,325        5,572         4,521   

Deferred

       

Federal

     (6,598     155         2,846   

State

     (582     751         447   

Foreign

     (409     1,425         768   
  

 

 

   

 

 

    

 

 

 

Provision for income taxes

   $ 22,202      $ 25,268       $ 18,383   
  

 

 

   

 

 

    

 

 

 

The provision is reported as follows:

       

Continuing operations

   $ 22,202      $ 25,268       $ 11,209   

Discontinued operations

     —          —           7,174   
  

 

 

   

 

 

    

 

 

 

Provision for income taxes

   $ 22,202      $ 25,268       $ 18,383   
  

 

 

   

 

 

    

 

 

 

The Company also recorded the following deferred tax amounts directly to the components of stockholders’ equity:

 

     Year Ended December 31,  

(Amounts in thousands)

   2012      2011     2010  

Pension liability adjustment

   $ 340       $ 15,340      $ 700