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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

March 31, 2012 for the quarterly period ended March 31, 2012.

OR

 

¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-11549

 

 

BLOUNT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   63 0780521
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

4909 SE International Way,

Portland, Oregon

  97222-4679
(Address of principal executive offices)   (Zip Code)

(503) 653-8881

(Registrant’s telephone number, including area code)

 

 

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.    Yes  x    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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of May 1, 2012 there were 48,944,049 shares outstanding of $0.01 par value common stock.

 

 

 


Table of Contents

BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES

Index

 

     Page  

Part I     Financial Information

  

Item 1. Consolidated Financial Statements

  

Unaudited Consolidated Statements of Income Three months ended March 31, 2012 and 2011

     3   

Unaudited Consolidated Statements of Comprehensive Income Three months ended March 31, 2012 and 2011

     4   

Unaudited Consolidated Balance Sheets March 31, 2012 and December 31, 2011

     5   

Unaudited Consolidated Statements of Cash Flows Three months ended March 31, 2012 and 2011

     6   

Unaudited Consolidated Statement of Changes in Stockholders’ Equity Three months ended March  31, 2012

     7   

Unaudited Notes to Unaudited Consolidated Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     29   

Item 4. Controls and Procedures

     29   

Part II     Other Information

  

Item 6. Exhibits

     30   

Signatures

     31   

 

2


Table of Contents
PART I FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

Blount International, Inc. and Subsidiaries

 

     Three Months
Ended March 31,
 

(Amounts in thousands, except per share data)

   2012     2011  

Sales

   $ 226,309      $ 180,874   

Cost of sales

     163,644        120,826   
  

 

 

   

 

 

 

Gross profit

     62,665        60,048   

Selling, general, and administrative expenses

     45,161        32,205   

Facility closure and restructuring charges

     3,931        —     
  

 

 

   

 

 

 

Operating income

     13,573        27,843   

Interest income

     61        22   

Interest expense

     (4,462     (4,859

Other expense, net

     (6     (200
  

 

 

   

 

 

 

Income before income taxes

     9,166        22,806   

Provision for income taxes

     3,285        7,184   
  

 

 

   

 

 

 

Net income

   $ 5,881      $ 15,622   
  

 

 

   

 

 

 

Basic income per share

   $ 0.12      $ 0.32   

Diluted income per share

   $ 0.12      $ 0.31   
  

 

 

   

 

 

 

Weighted average shares used in per share calculations:

    

Basic

     49,032        48,989   

Diluted

     49,842        49,850   

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

 

3


Table of Contents

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Blount International, Inc. and Subsidiaries

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Net income

   $ 5,881      $ 15,622   
  

 

 

   

 

 

 

Other comprehensive income, before tax:

    

Unrealized holding gains

     358        685   

(Gains) losses reclassified to net income

     4        (330
  

 

 

   

 

 

 

Unrealized gains

     362        355   

Foreign currency translation adjustment

     1,409        1,402   
  

 

 

   

 

 

 

Other comprehensive income, before tax

     1,771        1,757   

Income tax provision on other comprehensive items

     (134     (129
  

 

 

   

 

 

 

Other comprehensive income, net of tax

   $ 1,637      $ 1,628   
  

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 7,518      $ 17,250   
  

 

 

   

 

 

 

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

 

4


Table of Contents

UNAUDITED CONSOLIDATED BALANCE SHEETS

Blount International, Inc. and Subsidiaries

 

     March 31,     December 31,  

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

   2012     2011  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 40,860      $ 62,118   

Accounts receivable, net

     146,188        133,965   

Inventories

     157,183        149,825   

Deferred income taxes

     18,432        15,849   

Other current assets

     21,020        21,618   
  

 

 

   

 

 

 

Total current assets

     383,683        383,375   

Property, plant, and equipment, net

     158,817        155,872   

Deferred income taxes

     609        589   

Intangible assets

     154,488        158,085   

Goodwill

     165,545        165,412   

Other assets

     22,109        21,239   
  

 

 

   

 

 

 

Total Assets

   $ 885,251      $ 884,572   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Current maturities of long-term debt

   $ 16,630      $ 20,348   

Accounts payable

     61,012        52,884   

Accrued expenses

     65,498        72,991   

Deferred income taxes

     685        1,255   
  

 

 

   

 

 

 

Total current liabilities

     143,825        147,478   

Long-term debt, excluding current maturities

     503,076        510,014   

Deferred income taxes

     43,710        42,820   

Employee benefit obligations

     97,081        96,974   

Other liabilities

     18,535        17,821   
  

 

 

   

 

 

 

Total liabilities

     806,227        815,107   
  

 

 

   

 

 

 

Commitments and contingent liabilities

    

Stockholders’ equity:

    

Common stock: par value $0.01 per share, 100,000,000 shares authorized, 48,940,615 and 48,814,912 outstanding, respectively

     489        488   

Capital in excess of par value of stock

     600,729        598,689   

Accumulated deficit

     (453,792     (459,673

Accumulated other comprehensive loss

     (68,402     (70,039
  

 

 

   

 

 

 

Total stockholders’ equity

     79,024        69,465   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 885,251      $ 884,572   
  

 

 

   

 

 

 

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

 

5


Table of Contents

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Blount International, Inc. and Subsidiaries

 

     Three Months Ended March 31,  

(Amounts in thousands)

   2012     2011  

Cash flows from operating activities:

    

Net income

   $ 5,881      $ 15,622   

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

    

Depreciation

     7,284        5,180   

Amortization of intangible assets

     3,966        1,867   

Stock compensation

     1,184        883   

Other non-cash charges

     64        1,166   

Excess tax benefit from share-based compensation

     (546     (249

Deferred income taxes

     (663     281   

Change in uncertain tax positions

     85        (49

Loss on disposal of assets

     134        81   

Changes in assets and liabilities:

    

(Increase) decrease in accounts receivable

     (11,471     (6,362

(Increase) decrease in inventories

     (6,787     4,900   

(Increase) decrease in other assets

     (626     862   

Increase (decrease) in accounts payable

     7,919        (439

Increase (decrease) in accrued expenses

     (8,676     (5,780

Increase (decrease) in other liabilities

     820        (654

Discontinued operations

     —          (173
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (1,432     17,136   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant, and equipment

     (10,173     (5,720

Proceeds from sale of assets

     55        82   

Acquisitions, net of cash acquired

     —          (14,121
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,118     (19,759
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net repayments under revolving credit facility

     (3,200     —     

Repayment of term loan principal

     (7,642     (2,562

Excess tax benefit from share-based compensation

     546        249   

Proceeds from share-based compensation activity

     359        291   

Taxes paid under share-based compensation activity

     (48     (240
  

 

 

   

 

 

 

Net cash used in financing activities

     (9,985     (2,262
  

 

 

   

 

 

 

Effect of exchange rate changes

     277        (1,861
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (21,258     (6,746

Cash and cash equivalents at beginning of period

     62,118        80,708   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 40,860      $ 73,962   
  

 

 

   

 

 

 

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

 

6


Table of Contents

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Blount International, Inc. and Subsidiaries

 

(Amounts in thousands)

   Shares      Common
Stock
     Capital in
Excess

of Par
     Accumulated
Deficit
    Accumulated
Other

Comprehensive
Loss
    Total  

Balance December 31, 2011

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

Net income

              5,881          5,881   

Foreign currency translation adjustment

                1,409        1,409   

Unrealized gains

                228        228   

Stock options, stock appreciation rights, and restricted stock

     126         1         856             857   

Stock compensation expense

           1,184             1,184   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

     48,941       $ 489       $ 600,729       $ (453,792   $ (68,402   $ 79,024   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The Company holds 382,380 shares of its common stock in treasury at a total cost of $6.1 million. These shares have been accounted for as constructively retired in the Consolidated Financial Statements; the shares are not included in the number of shares outstanding, and the related par value and additional purchase price has been deducted from the amounts shown for common stock and capital in excess of par.

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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Table of Contents

BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

Basis of Presentation. The unaudited Consolidated Financial Statements include the accounts of Blount International, Inc. and its subsidiaries (collectively, “Blount” or the “Company”) and are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.”). All significant intercompany balances and transactions have been eliminated. In the opinion of management, the Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, comprehensive income, cash flows, and changes in stockholders’ equity for the periods presented.

The accompanying financial data as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 has been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations. The December 31, 2011 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. We base our estimates on various assumptions that are believed to be reasonable under the circumstances. Management is continually evaluating and updating these estimates and it is reasonably possible that these estimates will change in the near term.

Reclassifications. Certain amounts in the prior period financial statements 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.

See also Note 2, Acquisitions, for information about a revision to the Consolidated Balance Sheet as of December 31, 2011 reflecting a change in provisional acquisition accounting.

NOTE 2: ACQUISITIONS

The Company accounts for acquisitions in accordance with ASC section 805. Accordingly, an acquisition’s assets and liabilities 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.

 

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In addition to the other specific provisional amounts discussed below, the Company has conducted a preliminary assessment of liabilities arising from tax matters related to its acquisitions, and has recognized provisional amounts in its initial accounting for acquisitions for the identified tax liabilities. However, the Company continues its review of these matters during the measurement period for up to one year following the date of acquisition, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the tax liabilities initially recognized, as well as any additional tax liabilities that existed as of the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional tax amounts initially recognized.

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. We recognized $13 thousand of goodwill on the acquisition of the shelf company in the Netherlands.

2011 Acquisition of KOX

On March 1, 2011, through our indirect wholly-owned subsidiary Blount B.V., we acquired KOX GmbH and related companies (“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. The purchase price consisted 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 Selling, General, and Administrative (“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 are subject to certain restrictions under terms of the related stock purchase agreement.

2011 Acquisition of PBL

On August 5, 2011, through our indirect wholly-owned subsidiary Blount Holdings France SAS, we acquired all of the outstanding stock of Finalame SA, which included PBL SAS and related companies (“PBL”). PBL is 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 increases our manufacturing capacity for lawnmower blades, increases our market share for lawnmower blades in Europe, and provides an entrance into the agricultural 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 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, income tax accounting, and Value Added Tax (“VAT”) accruals, 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 a preliminary 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. The Company is continuing its analysis of PBL’s inventory valuation, income tax accounting, and VAT accruals and therefore these amounts remain provisional as of March 31, 2012.

 

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2011 Acquisition of Woods/TISCO

On September 7, 2011, through our indirect wholly-owned subsidiary SP Companies, Inc., we acquired GenWoods HoldCo, LLC and its wholly-owned subsidiary, Woods Equipment Company (“Woods/TISCO”). Woods/TISCO, with operations primarily in the Midwestern U.S., is a manufacturer and marketer of equipment and replacement parts primarily for the agriculture end market. The acquisition of Woods/TISCO:

 

   

Increases distribution for our Farm, Ranch, and Agriculture (“FRAG”) segment, particularly in the agricultural dealer channel.

 

   

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

 

   

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

 

   

Enhances 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 Statements of Income during 2011. The acquisition was funded from cash on hand and borrowing under the Company’s revolving credit facility.

Purchase Price Allocations

We allocated the purchase prices to the following assets and liabilities based on their estimated fair values.

 

(Amounts in thousands)

   Woods/TISCO      PBL      KOX  

Cash

   $ 230       $ 1,275       $ 5,126   

Accounts receivable

     34,784         5,109         3,365   

Inventories

     38,512         9,729         8,879   

Current intangible assets subject to amortization

     —           157         —     

Current deferred tax assets

     3,754         608         —     

Other current assets

     3,057         1,162         268   

Property, plant, and equipment

     19,259         13,041         383   

Non-current deferred tax assets

     1,943         378         —     

Non-current intangible assets subject to amortization

     52,400         5,612         4,594   

Non-current intangible assets not subject to amortization

     44,330         470         5,241   

Goodwill

     55,174         3,301         3,709   

Other non-current assets

     3,474         —           —     
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     256,917         40,842         31,565   

 

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(Amounts in thousands)

   Woods/TISCO      PBL      KOX  

Current liabilities

     19,319         11,065         4,793   

Long-term debt

     —           13,304         —     

Non-current deferred income tax liability

     41,876         609         2,836   

Other non-current liabilities

     5,220         1,620         —     
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     66,415         26,598         7,629   
  

 

 

    

 

 

    

 

 

 

Acquisition price

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

Goodwill deductible for income tax purposes

   $ 9,255       $ —         $ —     
  

 

 

    

 

 

    

 

 

 

The operating results of acquisitions are included in the Consolidated Statements of Income from the acquisition dates forward. Acquisition accounting effects include 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 Company expects to recognize acquisition accounting effects of approximately $16.0 million in 2012, $14.8 million in 2013, and $12.7 million in 2014.

The following unaudited pro forma results present the estimated effect as if the acquisitions of KOX, PBL, and Woods/TISCO had occurred on January 1, 2011. 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.

 

     Three Months Ended
March 31, 2011
 

(Amounts in thousands, except per share data)

   As Reported      Pro Forma  

Sales

   $ 180,874       $ 236,563   

Net income

     15,622         13,951   
  

 

 

    

 

 

 

Basic income per share

   $ 0.32       $ 0.29   

Diluted income per share

   $ 0.31       $ 0.28   
  

 

 

    

 

 

 

NOTE 3: FACILITY CLOSURE AND RESTRUCTURING COSTS

During the first quarter of 2012, we implemented certain actions to further streamline and integrate our operations in the U.S. In Kansas City, Missouri, we moved into a new, larger North American distribution center. In Golden, Colorado, we closed our assembly, warehouse, and distribution operations and moved those functions into the new North American distribution center in Kansas City. Costs associated with these actions were approximately $4.9 million, consisting of lease exit costs, costs to move inventory and equipment, and charges to expense the book value of certain assets located in Golden that will not be utilized in Kansas City. Of these total costs, $1.0 million is reported in cost of sales in the Consolidated Statement of Income for the three months ended March 31, 2012.

NOTE 4: ACCOUNTS RECEIVABLE

Accounts receivable are shown net of the following balances:

 

     March 31,      December 31,  

(Amounts in thousands)

   2012      2011  

Allowance for doubtful accounts

   $ 3,327       $ 3,142   
  

 

 

    

 

 

 

 

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NOTE 5: INVENTORIES

Inventories consisted of the following:

 

     March 31,      December 31,  

(Amounts in thousands)

   2012      2011  

Raw materials and supplies

   $ 23,741       $ 24,022   

Work in progress

     18,656         16,006   

Finished goods

     114,786         109,797   
  

 

 

    

 

 

 

Total inventories

   $ 157,183       $ 149,825   
  

 

 

    

 

 

 

NOTE 6: INTANGIBLE ASSETS

The following table summarizes intangible assets:

 

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

(Amounts in thousands)

   In Years      Amount      Amortization      Amount      Amortization  

Goodwill

     Indefinite       $ 165,545       $ —         $ 165,412       $ —     

Trademarks and trade names

     Indefinite         61,285         —           61,176         —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total with indefinite lives

        226,830         —           226,588         —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Covenants not to compete

     2 - 4         1,112         888         1,112         843   

Patents

     11 - 13         5,320         1,229         5,320         1,121   

Manufacturing technology

     1 - 2         2,567         1,444         2,516         1,124   

Customer relationships, including backlog

     10 - 19         107,380         19,615         107,234         16,170   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total with finite lives

        116,379         23,176         116,182         19,258   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

      $ 343,209       $ 23,176       $ 342,770       $ 19,258   
     

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes changes in goodwill:

 

$165,412 $165,412
     Three Months Ended March 31,  

(Amounts in thousands)

   2012      2011  

Beginning balance

   $ 165,412       $ 103,700   

Current period acquisitions

     —           3,722   

Effect of changes in foreign currency translation rates

     133         —     
  

 

 

    

 

 

 

Ending balance

   $ 165,545       $ 107,422   
  

 

 

    

 

 

 

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

 

$165,412 $165,412
     Three Months Ended March 31,  

(Amounts in thousands)

   2012      2011  

Amortization expense

   $ 3,966       $   1,867   
  

 

 

    

 

 

 

 

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NOTE 7: DEBT

Long-term debt consisted of the following:

 

     March 31,     December 31,  

(Amounts in thousands)

   2012     2011  

Revolving credit facility borrowings

   $ 225,000      $ 228,200   

Term loans

     292,500        296,250   

Debt of PBL

     2,206        5,912   
  

 

 

   

 

 

 

Total debt

     519,706        530,362   

Less current maturities

     (16,630     (20,348
  

 

 

   

 

 

 

Long-term debt, net of current maturities

   $ 503,076      $ 510,014   
  

 

 

   

 

 

 

Weighted average interest rate at end of period

     2.75     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, 2011 and March 31, 2012, the senior credit facilities consisted of a revolving credit facility and a term loan.

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 paid $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 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 a specific leverage ratio. As of March 31, 2012, the Company had the ability to borrow an additional $85.9 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 commencing on October 1, 2011, 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.

 

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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 4.00 through June 30, 2012, 3.75 through December 31, 2012, 3.50 through September 30, 2013, 3.25 through March 31, 2014, and 3.00 thereafter.

In addition, there are covenants or restrictions relating to acquisitions, investments, loans and advances, indebtedness, dividends on our stock, the sale of stock or assets, and other categories. We were in compliance with all financial covenants as of March 31, 2012. Non-compliance with these covenants, if it were to become an event of default under the terms of the credit agreement, 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. 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 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. Certain components of this debt are secured by certain of PBL’s assets. From the date of acquisition through March 31, 2012, we have repaid $11.3 million of PBL’s debt and we intend to retire PBL’s remaining bank debt of $1.6 million during 2012. Therefore, PBL’s bank debt is classified as current as of both March 31, 2012 and December 31, 2011 on the Consolidated Balance Sheets.

 

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NOTE 8: PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS

The Company sponsors defined benefit pension plans covering employees in Canada and certain countries in Europe, and many of its employees in the U.S. The U.S. plan was frozen effective January 1, 2007. The components of net periodic benefit cost for these plans are as follows:

 

     Three Months Ended March 31,  
     2012     2011     2012      2011  

(Amounts in thousands)

   Pension Benefits     Other Benefits  

Service cost

   $ 1,026      $ 864      $ 96       $ 71   

Interest cost

     2,692        2,800        470         505   

Expected return on plan assets

     (3,577     (3,490     —           —     

Amortization of net actuarial losses

     1,936        1,074        435         223   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total net periodic benefit cost

   $ 2,077      $ 1,248      $ 1,001       $ 799   
  

 

 

   

 

 

   

 

 

    

 

 

 

The Company expects to contribute between $16 million to $18 million to its funded pension plans in 2012, including a $10 million voluntary contribution to the U.S. defined benefit pension plan.

NOTE 9: FINANCIAL GUARANTEES AND COMMITMENTS

Significant financial guarantees and commitments are summarized as follows:

 

     March 31,      December 31,  

(Amounts in thousands)

   2012      2011  

Product warranty reserves

   $ 1,617       $ 1,539   

Letters of credit outstanding

     6,555         6,488   

Other financial guarantees

     2,606         3,470   
  

 

 

    

 

 

 

Total financial guarantees and commitments

   $ 10,778       $ 11,497   
  

 

 

    

 

 

 

See also Note 7 regarding guarantees of debt.

NOTE 10: CONTINGENT LIABILITIES

The Company reserves for product liability, environmental remediation, and other legal matters as management becomes aware of such matters. A portion of these claims or lawsuits may be covered by insurance policies that generally contain both deductible and coverage limits. Management monitors the progress of each legal matter to ensure that the appropriate reserve for its estimated obligation has been recognized and disclosed in the financial statements. Management also monitors trends in case types to determine if there are any specific issues that relate to the Company that may result in additional future exposure on an aggregate basis. As of March 31, 2012 and December 31, 2011, management believes the Company has appropriately recorded and disclosed all material costs for its obligations in regard to known matters. Management believes that the recoverability of the costs of claims from insurance companies will continue in the future. Management periodically assesses these insurance companies to monitor their ability to pay such claims.

The Company is a defendant in a number of product liability lawsuits, some of which seek significant or unspecified damages involving serious personal injuries, for which there are retentions or deductible amounts under the Company’s insurance policies. Some of these lawsuits arise out of the Company’s duty to indemnify certain purchasers of the Company’s discontinued operations for lawsuits involving products manufactured prior to the sale of certain of these businesses. In addition, the Company is a party to a number of other suits arising out of the normal course of its business, including suits concerning commercial contracts, employee matters, and intellectual property rights. In some instances the Company has been the plaintiff, and has sought recovery of damages. In others, the Company is a defendant against whom damages are sought. While there can be no assurance as to their ultimate outcome, management does not believe these lawsuits will have a material adverse effect on the Company’s consolidated financial position, operating results or cash flows in the future.

 

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Table of Contents

The Company accrues, by a charge to income, an amount representing management’s best estimate of the undiscounted probable loss related to any matter deemed by management and its counsel as a reasonably probable loss contingency in light of all of the then known circumstances.

NOTE 11: EARNINGS PER SHARE DATA

Shares used in the denominators of the basic and diluted earnings per share computations were as follows:

 

     Three Months
Ended March 31,
 

(Shares in thousands)

   2012      2011  

Shares for basic per share computation – weighted average common shares outstanding

     49,032         48,989   

Dilutive effect of common stock equivalents

     810         861   
  

 

 

    

 

 

 

Shares for diluted per share computation

     49,842         49,850   
  

 

 

    

 

 

 

Options and stock appreciation rights (“SARs”) excluded from computation as anti-dilutive because they are out-of-the-money

     613         955   
  

 

 

    

 

 

 

Unvested restricted stock and restricted stock units (“RSUs”) considered to be participating securities

     219         173   
  

 

 

    

 

 

 

The allocation of undistributed earnings (net income) to the participating securities under the two class method had no effect on the calculation of earnings per share.

NOTE 12: STOCK-BASED COMPENSATION

The Company made the following stock-based compensation awards:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012      2011  

SARs granted (number of shares)

     567         469   

RSUs granted (number of shares)

     115         110   

Aggregate fair value; SARs granted

   $ 4,265       $ 3,256   

Aggregate fair value; RSUs granted

   $ 1,825       $ 1,535   
  

 

 

    

 

 

 

The SARs and RSUs granted in 2011 and 2012 vest quarterly over a three-year period and are generally restricted from exercise, sale, or other transfer for three years from the grant date. The SARs granted have a ten-year term before expiration.

 

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The following assumptions were used to estimate the fair value of SARs issued in the periods indicated:

 

     2012    2011

Estimated average life

   6 years    6 years

Risk-free interest rate

   1.1% - 1.2%    2.4%

Expected and weighted average volatility

   49.6%    48.4%

Dividend yield

   0.0%    0.0%

Weighted average exercise price

   $16.74    $15.09

Weighted average grant date fair value

   $7.95    $7.35

As of March 31, 2012, the total unrecognized stock-based compensation expense related to previously granted awards was $11 million. The weighted average period over which this expense is expected to be recognized is 29 months. The Company’s policy upon the exercise of options, restricted stock awards, RSUs, or SARs has been to issue new shares into the public market as authorized under the stockholder-approved 2006 Equity Incentive Plan.

NOTE 13: SEGMENT INFORMATION

We are a global industrial company that designs, manufactures, purchases, and markets equipment, replacement and component parts, and accessories to professionals and consumers in select end-markets and to Original Equipment Manufacturers (“OEMs”) for use on original equipment. Our products are sold in over 115 countries and approximately 63% of our 2011 sales were made outside of the U.S.

The Company identifies operating segments primarily based on organizational structure, reporting structure, and the evaluation of the Chief Operating Decision Maker (Chief Executive Officer). Our organizational structure reflects our view of the end-user market segments we serve, and we currently operate in two primary business segments. The forestry, lawn, and garden (“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 branded replacement parts and accessories from other manufacturers and markets them 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 FLAG markets, as well as KOX, and a portion of the PBL business.

The Company’s FRAG segment manufactures and markets 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, 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 component 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 represented 3.1% of consolidated sales for the three months ended March 31, 2012, and 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 equipment market.

The Corporate and Other category also includes the costs of providing certain centralized administrative functions including accounting, banking, our continuous improvement program, credit management, executive management, finance, information systems, insurance, legal, our mergers and acquisitions program, treasury and other functions. Costs of centrally provided shared services are allocated to business units based on various drivers, such as revenues, purchases, headcount, IT users, and other relevant measures of the use of such services. We also include the facility closure and restructuring costs recognized in 2012 within this Corporate and Other category, because we do not consider such events to be ongoing aspects of our business segments’ activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

 

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The following table presents selected financial information by segment.

 

     Three Months Ended March 31,  

(Amounts in thousands)

   2012     2011  

Sales:

    

FLAG

   $ 161,619      $ 155,043   

FRAG

     57,604        19,159   

Corporate and Other

     7,086        6,672   
  

 

 

   

 

 

 

Total sales

   $ 226,309      $ 180,874   
  

 

 

   

 

 

 

Operating income (expense):

    

FLAG

   $ 27,755      $ 31,637   

FRAG

     (3,738     1,138   

Corporate and Other

     (10,444     (4,932
  

 

 

   

 

 

 

Operating income

   $ 13,573      $ 27,843   
  

 

 

   

 

 

 

Acquisition accounting effects:

    

FLAG

   $ 987      $ 724   

FRAG

     3,374        1,389   

Corporate and Other

     —          —     
  

 

 

   

 

 

 

Acquisition accounting effects

   $ 4,361      $ 2,113   
  

 

 

   

 

 

 

Goodwill:

   March 31,
2012
    December  31,
2011
 
    

FLAG

   $ 66,331      $ 66,223   

FRAG

     99,201        98,176   

Corporate and Other

     13        13   
  

 

 

   

 

 

 

Total goodwill

   $ 165,545      $ 165,412   
  

 

 

   

 

 

 

NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION

 

     Three Months Ended March 31,  

(Amounts in thousands)

   2012      2011  

Interest paid

   $ 4,092       $ 4,668   

Income taxes paid, net

     2,715         2,004   

NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments. The carrying amount of accounts receivable approximates fair value because the maturity period is short and the Company has reduced the carrying amount to the estimated net realizable value with an allowance for doubtful accounts. The fair value of the senior credit facility principal outstanding is determined by reference to prices of recent transactions whereby buyers and sellers exchange their interest in portions of these loans. Derivative financial instruments are carried on the Consolidated Balance Sheets at fair value, as determined by reference to quoted terms for similar instruments. The carrying amount of other financial instruments approximates fair value because of the short-term maturity periods and variable interest rates associated with the instruments.

 

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The estimated fair values of the senior credit facility loans at March 31, 2012 and December 31, 2011 are presented below.

 

     March 31, 2012      December 31, 2011  

(Amounts in thousands)

   Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Senior credit facility loans

   $ 517,500       $ 516,206       $ 524,450       $ 521,828   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has manufacturing and/or distribution operations in Brazil, Canada, China, Europe, Japan, Mexico, Russia, and the U.S. Foreign currency exchange rate movements create a degree of risk by affecting the U.S. Dollar value of certain balance sheet positions denominated in foreign currencies, and by affecting the translated amounts of revenues and expenses. Additionally, the interest rates available in certain jurisdictions in which the Company holds cash may vary, thereby affecting the return on cash equivalent investments. The Company’s practice has been to occasionally use foreign currency and interest rate swap agreements to manage exposure to foreign currency and interest rate changes. The Company’s objective in executing these hedging instruments is to minimize earnings volatility resulting from conversion and the re-measurement of foreign currency denominated transactions.

Derivative Financial Instruments and Foreign Currency Hedging. The Company makes regular payments to its foreign subsidiaries and is exposed to changes in exchange rates from these transactions, which may adversely affect its results of operations and financial position. The Company manages a portion of foreign currency exchange rate exposures with derivative financial instruments. These instruments are designated as cash flow hedges and are recorded on the Consolidated Balance Sheets at fair value. The effective portion of the gains or losses on these contracts due to changes in fair value is initially recorded as a component of accumulated other comprehensive loss and is subsequently reclassified into net earnings when the contracts mature and the Company settles the hedged payment. The Consolidated Statement of Income classification of effective hedge results is the same as that of the underlying exposure. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates.

As of March 31, 2012, the cumulative unrealized pre-tax loss on these derivative contracts included in accumulated other comprehensive loss on the Consolidated Balance Sheet was $0.2 million. As of December 31, 2011, the cumulative unrealized pre-tax loss on these contracts included in accumulated other comprehensive loss on the Consolidated Balance Sheet was $0.5 million. Amounts recognized in cost of sales in the Consolidated Statements of Income at the maturity of the related foreign currency derivative financial instruments were as follows.

 

     Three Months Ended March 31,  

(Amounts in thousands)

           2012                     2011          

Gain (loss) on foreign currency derivative financial instruments

   $ (4   $ 330   
  

 

 

   

 

 

 

Gains and losses on these foreign currency derivative financial instruments are offset in net earnings by the effects of currency exchange rate changes on the underlying transactions. Through March 31, 2012, the Company has not recognized any amount from these contracts in earnings due to ineffectiveness. The aggregate notional amount of these foreign currency contracts outstanding was $43.9 million at March 31, 2012 and $37.5 million at December 31, 2011.

 

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Derivative Financial Instruments and Interest Rates. In the first quarter of 2011, we entered into interest rate cap agreements covering 35% of the outstanding principal on our term loans A and B that capped the maximum LIBOR used to determine the interest rate we pay at 5.00% through February 28, 2013. During the third quarter of 2011, following the Fourth Amendment and Restatement of our senor credit facilities, we terminated these interest rate cap contracts with a charge to expense of $0.1 million. The Fourth Amendment and Restatement of our senor credit facilities includes a similar 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%. This cap is designated as a cash flow hedge and is recorded on the Consolidated Balance Sheets at fair value. 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. Derivatives held by the Company are summarized as follows:

 

     Carrying Value
on Balance
    Assets (Liabilities) Measured at Fair Value  

(Amounts in thousands)

            Sheets                       Level 1                      Level 2                     Level 3          

March 31, 2012:

         

Interest rate hedge agreements

   $ (1,453   $ —         $ (1,453   $ —     

Foreign currency hedge agreements

     (198     —           (198     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

December 31, 2011:

         

Interest rate hedge agreements

   $ (1,303   $ —         $ (1,303   $ —     

Foreign currency hedge agreements

     (505     —           (505     —     

Under accounting principles generally accepted in the U.S., the framework for measuring fair value is based on independent observable inputs of market data and is based on the following hierarchy:

 

Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – 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 3 – Significant unobservable inputs that are supported by little or no market activity that are significant to the fair value of the assets or liabilities.

The fair value of these Level 2 derivatives was determined using a market approach based on daily market prices of similar instruments issued by financial institutions in an active market. The carrying values as of March 31, 2012 are included in accumulated other comprehensive loss on the Consolidated Balance Sheet and is expected to be recognized in the Consolidated Statements of Income within the next twelve months.

NOTE 16: RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued new guidance on the financial statement presentation of comprehensive income, which eliminates the option of presenting other comprehensive income as a component of the Statement of Changes in Stockholders’ Equity. The new guidance requires that all non-owner changes to comprehensive income be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. We elected to adopt this new guidance early and implemented it for the reporting period September 30, 2011 under the two-statement approach.

In September 2011, the FASB issued accounting guidance on the testing of goodwill for impairment. The guidance allows entities testing goodwill for impairment the option of performing a qualitative assessment to determine the likelihood of goodwill impairment and whether it is necessary to perform the two-step impairment test currently required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We elected to adopt this new guidance early and implemented it in 2011.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and footnotes included elsewhere in this report.

Operating Results (Unaudited)

 

     Three Months Ended March 31,            

(Amounts in millions)

   2012     2011         Change              

Contributing Factor

(Amounts may not sum due to rounding)                             

Sales

   $ 226.3      $ 180.9      $ 45.4       
           41.4     

Sales volume, including acquisitions

           4.5      Selling price and mix
           (0.4   Foreign currency translation

Gross profit

     62.7        60.0        2.6       

Gross margin

     27.7     33.2       5.4      Sales volume
           4.5      Selling price and mix
           (3.8   Product cost and mix
           (2.2   Acquisition accounting effects
           (1.0   Facility closure costs
           (0.3   Foreign currency translation

SG&A

     45.2        32.2        13.0       

As a percent of sales

     20.0     17.8       7.6      Acquisitions
           2.1      Compensation expense
           1.2      Employee benefits
           0.7      Professional services
           0.7      Advertising
           0.6      Travel and employee relocation
           (0.1   Foreign currency translation
           0.2      Other, net

Facility closure and restructuring costs

     3.9        —          3.9       

Operating income

     13.6        27.8        (14.3    

Operating margin

     6.0     15.4       2.6      Increase in gross profit
           (13.0   Increase in SG&A
           (3.9  

Facility closure and restructuring

costs

Net income

   $ 5.9      $ 15.6      $ (9.7    
           (14.3   Decrease in operating income
           0.4      Decrease in net interest expense
           0.2      Change in other income (expense)
           3.9      Decrease in income tax provision

 

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Sales in the three months ended March 31, 2012 increased by $45.4 million (25.1%) from the same period in 2011, due to increased unit volume of $41.4 million and improved average selling prices and product mix of $4.5 million. We report all incremental sales attributable to acquisitions made within the last twelve months as unit volume increase. The recent acquisitions of KOX, PBL, and Woods/TISCO contributed $52.2 million in incremental sales volume in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Excluding the effect of these acquisitions, unit sales volume decreased by $10.8 million or 6.0%. Higher average selling prices were attributable to pricing actions we implemented for select markets. The translation of foreign currency-denominated sales transactions decreased consolidated sales by $0.4 million in the current quarter compared to the first quarter of 2011, primarily due to the relatively stronger U.S. Dollar in comparison to the Euro. International sales decreased by $1.8 million (1.5%), while domestic sales decreased by $5.0 million (8.2%), both exclusive of sales from recent acquisitions. Overall, including incremental sales of recently acquired businesses, FLAG sales increased $6.5 million (4.2%), FRAG sales increased $38.4 million (200.7%), and sales of concrete cutting and finishing products were up 6.2%.

Consolidated sales order backlog at March 31, 2012 was $231.7 million compared to $211.3 million at December 31, 2011, reflecting continued strong demand for our products as well as seasonal ordering patterns.

Gross profit increased by $2.6 million (4.4%) from the first quarter of 2011 to the first quarter of 2012. Higher unit sales volume of $5.4 million, including incremental volume from recent acquisitions, along with $4.5 million of higher average selling prices and product mix contributed to the increase. Partially offsetting these increases were higher product cost and mix of $3.8 million, an increase of $2.2 million in non-cash charges for acquisition accounting, and charges of $1.0 million related to relocation of our assembly, warehouse, and distribution functions for SpeeCo from Golden, Colorado to Kansas City, Missouri. The increase in product cost and mix was driven by several factors, including:

 

   

Higher average steel costs, estimated at $1.8 million on a comparable basis.

 

   

Production and distribution inefficiencies incurred during the relocation in Kansas City, Missouri.

 

   

Costs incurred to expedite component deliveries.

The first quarter of 2012 includes acquisition accounting effects for PBL and Woods/TISCO, whereas the first quarter of 2011 does not. Acquisition accounting effects are expected to total $16.0 million for the full year of 2012 compared with $15.9 million for the full year of 2011.

Fluctuations in currency exchange rates reduced our gross profit in the first quarter of 2012 compared to the first quarter of 2011 by $0.3 million. Gross margin in the first quarter of 2012 was 27.7% of sales compared to 33.2% in the first quarter of 2011.

SG&A was $45.2 million in the first quarter of 2012, compared to $32.2 million in the first quarter of 2011, representing an increase of $13.0 million (40.2%). As a percentage of sales, SG&A increased from 17.8% in the first quarter of 2011 to 20.0% in the first quarter of 2012. Incremental SG&A expense incurred at our recent acquisitions added $7.6 million in the first quarter of 2012. Compensation expense for the quarter increased by $2.1 million on a comparative basis, reflecting annual merit increases and increased headcount. Costs of employee benefit programs increased by $1.2 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. Costs for professional services were $0.7 million higher in the first quarter of 2012 compared with the first quarter of 2011 as we continued to pursue our strategic initiatives. Advertising expense increased by $0.7 million in the quarter primarily related to new product promotions. Employee travel and relocation expenses increased by $0.6 million in the first quarter of 2012 compared to the first quarter of 2011.

During the first quarter of 2012, we implemented certain actions to further streamline and integrate our operations in the U.S. In Kansas City, Missouri, we moved into a new, larger North American distribution center. In Golden, Colorado, we closed our assembly, warehouse, and distribution operations and moved those functions into our new North American distribution center in Kansas City. Costs associated with these actions were approximately $4.9 million, consisting of lease exit costs, costs to move inventory and equipment, and charges to expense the book value of certain assets located in Golden that will not be utilized in Kansas City. Of these total costs, $1.0 million is reported in cost of sales in the Consolidated Statement of Income for the three months ended March 31, 2012.

 

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Operating income decreased by $14.3 million from the first quarter of 2011 to the first quarter of 2012, resulting in an operating margin of 6.0% of sales compared to 15.4% of sales in the prior year quarter. The decrease was due to higher SG&A expenses and facility closure and restructuring costs, partially offset by increased gross profit.

Interest expense was $4.5 million in the first quarter of 2012 compared to $4.9 million in the first quarter of 2011. The decrease was due to lower average interest rates on our debt, partially offset by higher average debt balances outstanding 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. The weighted average interest rate on our outstanding debt was 2.75% as of March 31, 2012 compared with 5.14% as of March 31, 2011.

The following table summarizes our income tax provision in 2012 and 2011:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Income before income taxes

   $ 9,166      $ 22,806   

Provision for income taxes

     3,285        7,184   
  

 

 

   

 

 

 

Effective tax rate

     35.8     31.5
  

 

 

   

 

 

 

The effective tax rate for the first quarter of 2012 was slightly higher than the federal statutory rate of 35% primarily due to the effects of state income taxes, partially offset by the favorable effects of foreign income taxes and the domestic production deduction. The impact of foreign income taxes reduced our effective tax rate as our foreign operations are generally subject to lower statutory tax rates than are our U.S. operations. Our benefit from the domestic production deduction is projected to increase in 2012 due to the acquisition of Woods/TISCO.

The effective tax rate for the first quarter of 2011 was lower than the federal statutory rate of 35% primarily due to favorable effects from foreign income taxes, partially offset by state income tax expense.

Net income in the first quarter of 2012 was $5.9 million, or $0.12 per diluted share, compared to $15.6 million, or $0.31 per diluted share, in the first quarter of 2011.

Segment Results. The following table reflects segment sales and operating results for 2012 and 2011:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Sales:

    

FLAG

   $ 161,619      $ 155,043   

FRAG

     57,604        19,159   

Corporate and other

     7,086        6,672   
  

 

 

   

 

 

 

Total sales

   $  226,309      $  180,874   
  

 

 

   

 

 

 

Operating income (expense):

    

FLAG

   $ 27,755      $ 31,637   

FRAG

     (3,738     1,138   

Corporate and other

     (10,444     (4,932
  

 

 

   

 

 

 

Operating income

   $ 13,573      $ 27,843   
  

 

 

   

 

 

 

 

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Forestry, Lawn, and Garden Segment. Sales in the FLAG segment increased $6.6 million, or 4.2%, from the first quarter of 2011 to the first quarter of 2012. The recent acquisitions of KOX and the FLAG portion of the PBL business contributed $11.5 million of incremental sales in the first quarter of 2012. Excluding the effect of these acquisitions, unit sales volume decreased by $9.0 million, or 5.8%. The lower unit sales volume is partly attributable to delay of some shipments to customers during the move to the new distribution center in Kansas City, Missouri, and also the fact that the first quarter of 2011 showed particularly strong growth in the FLAG segment, with sales unit volume up 17.5%. Changes in average selling prices and product mix increased FLAG sales revenue by $4.5 million on a year-over-year basis, excluding acquisitions. The translation of foreign currency-denominated sales transactions decreased FLAG sales by $0.4 million in 2012 compared to 2011, primarily due to the relatively stronger U.S. Dollar in comparison to the Euro. Excluding the effects of recent acquisitions, sales of forestry products were down 1.7% and sales of lawn and garden products were down 10.4%. Excluding the effects of recent acquisitions, sales to OEMs were up 4.9% while sales to the replacement market decreased by 5.3%. For the three months ended March 31, 2012, sales to OEMs accounted for 24.6% of total FLAG sales, including sales from recent acquisitions. For the three month period, excluding the effect of incremental sales from acquisitions, FLAG sales decreased 6.1% in North America, were flat in Europe and Russia, decreased by 16.1% in the Asia Pacific region, and increased by 29.7% in South America.

Sales order backlog for the FLAG segment at March 31, 2012 was $206.3 million compared to $182.4 million at December 31, 2011.

The contribution to operating income from the FLAG segment decreased $3.9 million, or 12.3%, from the first quarter of 2011 to the first quarter of 2012. Average selling price and mix improvements positively affected the FLAG contribution to operating income. Offsetting this favorable factor were lower unit sales volume, excluding recent acquisitions, as well as an increase in steel costs estimated at $1.8 million, an increase in acquisition accounting effects of $0.3 million, and increased SG&A expenses of $4.6 million, including $1.6 million attributable to the recent acquisitions.

Farm, Ranch, and Agriculture Segment. The FRAG segment results in the first quarter of 2011 include the activity of SpeeCo only, which was acquired in August 2010. The FRAG segment results in the first quarter of 2012 include the activity of SpeeCo, Woods/TISCO, and the FRAG portion of the PBL business. Sales in the FRAG segment increased $38.4 million, or 200.7% from the first quarter of 2011 to the first quarter of 2012, driven by the recent acquisitions. The incremental sales from Woods/TISCO and the PBL FRAG business were $40.7 million. SpeeCo sales decreased by $2.3 million in the first quarter of 2012 compared with the first quarter of 2011, primarily due to supplier delays in delivering components and the transition of the assembly and distribution functions from Golden, Colorado to Kansas City, Missouri.

Sales order backlog for the FRAG segment at March 31, 2012 was $24.7 million compared to $28.3 million at December 31, 2011.

The contribution to operating income from the FRAG segment was a loss of $3.7 million in the first quarter of 2012 compared to income of $1.1 million in the first quarter of 2011. Higher unit sales volume, including sales of recently acquired businesses was more than offset by increased acquisition accounting effects of $2.0 million, increased SG&A expenses of $7.6 million, primarily attributable to SG&A of the recently acquired businesses, and higher production and sourcing costs associated with supplier problems and the relocation of SpeeCo’s assembly operations from Golden, Colorado to Kansas City, Missouri. 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.

Corporate and Other. Sales of concrete cutting products increased 6.2% from the first quarter of 2011 to the first quarter of 2012, reflecting higher unit sales volume and increased demand in North America. Comparable sales in other geographic regions were flat. The net operating expense in the Corporate and Other category increased by $5.5 million, reflecting facility closure and restructuring costs of $4.9 million and an increase in corporate SG&A expenses of $0.8 million, partially offset by an increase of $0.2 million in contribution to operating income from the concrete cutting and finishing business unit.

 

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Financial Condition, Liquidity, and Capital Resources

Long-term debt consisted of the following:

 

     March 31,     December 31,  

(Amounts in thousands)

   2012     2011  

Revolving credit facility borrowings

   $ 225,000      $ 228,200   

Term loans

     292,500        296,250   

Debt of PBL

     2,206        5,912   
  

 

 

   

 

 

 

Total debt

     519,706        530,362   

Less current maturities

     (16,630     (20,348
  

 

 

   

 

 

 

Long-term debt, net of current maturities

   $ 503,076      $ 510,014   
  

 

 

   

 

 

 

Weighted average interest rate at end of period

     2.75     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 March 31, 2012, the senior credit facilities consisted of a revolving credit facility and a term loan.

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 certain financial and other covenants were amended and revised. The Company paid $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 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 a specific leverage ratio. As of March 31, 2012, the Company had the ability to borrow an additional $85.9 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 commencing on October 1, 2011, 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 4.00 through June 30, 2012, 3.75 through December 31, 2012, 3.50 through September 30, 2013, 3.25 through March 31, 2014, and 3.00 thereafter.

The status of financial covenants was as follows:

 

Financial Covenants

   Requirement      As of
March 31, 2012
 

Minimum fixed charge coverage ratio

     1.15         1.39   

Maximum leverage ratio

     4.00         3.44   

In addition, there are covenants or restrictions relating to acquisitions, investments, loans and advances, indebtedness, dividends on our stock, the sale of stock or assets, and other categories. We were in compliance with all financial covenants as of March 31, 2012. Non-compliance with these covenants, if it were to become an event of default under the terms of the credit agreement, 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. 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.

Our senior credit facility debt instruments and general credit are rated by both Standard & Poor’s and Moody’s. There were no changes to these ratings during the three months ended March 31, 2012. As of March 31, 2012, the credit ratings for the Company were as follows:

 

     Standard &
Poor’s
     Moody’s  

Senior credit facility

     BB-/Stable         Ba3/Stable   

General credit rating

     BB-/Stable         Ba3 /Stable   

Debt 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. Certain components of this debt are secured by certain of PBL’s assets. From the date of acquisition through March 31, 2012, we have repaid $11.3 million of PBL’s debt and we intend to retire PBL’s remaining bank debt of $1.6 million during 2012. Therefore, PBL’s bank debt is classified as current as of both March 31, 2012 and December 31, 2011 on the Consolidated Balance Sheets.

 

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We intend to fund working capital, capital expenditures, acquisitions, debt service requirements, repayment of PBL’s debt, and obligations under our post-retirement benefit plans for the next twelve months through cash and cash equivalents, expected cash flows generated from operations, 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.

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.

Cash and cash equivalents at March 31, 2012 were $40.9 million compared to $62.1 million at December 31, 2011. As of March 31, 2012, $40.8 million of our cash and cash equivalents was held at our foreign locations.

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

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Net income

   $ 5,881      $ 15,622   

Non-cash items

     11,508        9,160   
  

 

 

   

 

 

 

Subtotal

     17,389        24,782   

Changes in assets and liabilities, net

     (18,821     (7,473

Discontinued operations, net

     —          (173
  

 

 

   

 

 

 

Cash provided by (used in) operating activities

   $ (1,432   $ 17,136   
  

 

 

   

 

 

 

Non-cash items in the preceding table consist of depreciation; amortization of intangible assets; stock compensation, other non-cash charges; the tax benefit or expense from share-based compensation; deferred income taxes; the change in uncertain tax positions; and gains or losses on disposal of assets.

During the first three months of 2012, operating activities used $1.4 million of cash. Net income plus non-cash items totaled $17.4 million in the first quarter of 2012, reflecting reduced net income compared with the first quarter of 2011, partially offset by higher non-cash items. The increased amount of non-cash items in 2012 is primarily due to increased depreciation of property, plant, and equipment and amortization expense on intangible assets related to our recent acquisitions. The net change in working capital components and other assets and liabilities during the 2012 period used $18.8 million in cash. An increase in accounts receivable of $11.5 million, reflecting higher sales levels in March 2012 compared with December 2011, an increase in inventories of $6.8 million, reflecting the buildup of components and certain other items in anticipation of the relocation of the SpeeCo assembly operations, and a decrease in accrued expenses of $8.7 million, reflecting payment of various year-end accrued liabilities, accounted for the use of cash. These uses were partially offset by an increase in accounts payable of $7.9 million. Cash payments during the first three months of 2012 also included $4.1 million for interest and $2.7 million for income taxes. In addition, the Company expects to contribute a total of $16 million to $18 million to its funded pension plans during 2012.

 

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During the first three months of 2011, operating activities provided $17.1 million of cash. Income from continuing operations plus non-cash items totaled $24.8 million in the first quarter of 2011. Non-cash items in 2011 included increased amortization expense on intangible assets related to our recent acquisitions and higher stock compensation expense. The net change in working capital components and other assets and liabilities during the 2011 period used $7.5 million in cash. An increase in accounts receivable of $6.4 million, reflecting higher sales levels, as well as a decrease in accrued expenses of $5.8 million, reflecting payment of various year-end accrued liabilities, accounted for the use of cash. These uses were partially offset by a reduction in inventories of $4.9 million, excluding inventory acquired with KOX. Cash payments during the first three months of 2011 also included $4.7 million for interest and $2.0 million for income taxes.

Cash used in investing activities is summarized as follows:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Purchases of property, plant, and equipment, net of proceeds from sales

   $ (10,118   $ (5,638

Acquisitions, net of cash acquired

     —          (14,121
  

 

 

   

 

 

 

Net cash used in investing activities

   $ (10,118   $ (19,759
  

 

 

   

 

 

 

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 represents replacement of consumable tooling, dies, and existing equipment, with the remainder devoted to capacity and productivity improvements. During 2012, we expect to invest between $45 million and $50 million in available cash for capital expenditures, compared to $40.4 million for the full year in 2011. During 2012 we are continuing a project to significantly expand our facility in Fuzhou, China, and we are also planning for a new manufacturing facility to be located in Eastern Europe. During the three months ended March 31, 2011, we acquired KOX (see also Note 2 to the Consolidated Financial Statements included in Item 1).

Cash used in financing activities is summarized as follows:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Net repayments under revolving credit facility

   $ (3,200   $ —     

Repayment of term loan principal

     (7,642     (2,562

Proceeds and tax effects from stock-based compensation

     857        300   
  

 

 

   

 

 

 

Cash used in financing activities

   $ (9,985   $ (2,262
  

 

 

   

 

 

 

Cash used in financing activities in the first three months of 2012 consisted primarily of scheduled repayments of principal on our term loans, voluntary repayment of principal outstanding under our revolving credit facility, and repayment and cancellation of PBL debt. Cash used in financing activities in the first three months of 2011 consisted primarily of scheduled repayments of principal on our term loans.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Form 10-K for the fiscal year ended December 31, 2011.

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.

 

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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,” “beliefs,” “plans,” “indications,” “estimates,” “anticipations,” and their variants, are based upon available information and upon assumptions that the Company believes are reasonable. However, these forward looking statements involve certain risks and uncertainties 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, 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from changes in interest rates, foreign currency exchange rates, and commodity prices, including raw materials such as steel. We manage our exposure to these market risks through our regular operating and financing activities, and, when deemed appropriate, through the use of derivatives. When utilized, derivatives are used as risk management tools and not for trading or speculative purposes.

We manage our ratio of fixed to variable rate debt with the objective of achieving a mix that management believes is appropriate. Substantially all of our debt is subject to variable interest rates. In October 2011, we entered into an interest rate cap agreement that established maximum fixed interest rates on 35% of the principal amount outstanding under our term loans, as required by our senior credit facility agreement. 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 on a portion of term loan principal for the period of June 2013 through varying maturity dates between December 2014 and August 2016.

See also, the Market Risk section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our most recent Form 10-K, filed with the SEC on March 13, 2012, for further discussion of market risk.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act of 1934 reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and regulations, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures and internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e), and Rules 13a-15(f) and 15d-15(f), respectively, under the Securities Exchange Act of 1934) were effective at the reasonable assurance level.

There have been no changes in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II OTHER INFORMATION

ITEM 6. EXHIBITS

(a) Exhibits:

 

        **31.1  

Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by Joshua L. Collins, Chairman and Chief Executive Officer.

        **31.2  

Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice President and Chief Financial Officer.

        **32.1  

Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Joshua L. Collins, Chairman and Chief Executive Officer.

        **32.2  

Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice President and Chief Financial Officer.

        *101.INS   XBRL Instance Document
        *101.SCH   XBRL Taxonomy Extension Schema Document
        *101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
        *101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
        *101.LAB   XBRL Taxonomy Extension Label Linkbase Document
        *101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
        *   Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections.
        **  

Filed electronically herewith. Copies of such exhibits may be obtained upon written request from:

 

Blount International, Inc.
P.O. Box 22127
Portland, Oregon 97269-2127

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the duly authorized undersigned.

 

BLOUNT INTERNATIONAL, INC.
                    Registrant

 

/s/ Calvin E. Jenness

   

/s/ Mark V. Allred

Calvin E. Jenness     Mark V. Allred
Senior Vice President and     Vice President and Corporate Controller
Chief Financial Officer     (Principal Accounting Officer)
(Principal Financial Officer)    
Dated: May 9, 2012    

 

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