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BLT > SEC Filings for BLT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for BLOUNT INTERNATIONAL INC

Form 10-Q for BLOUNT INTERNATIONAL INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)

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

Consolidated Operating Results for the Current Quarter



                                                   Three Months Ended
                                                      September 30,
(Amounts in millions)                        2012         2011        Change                             Contributing Factor
(Amounts may not sum due to rounding)
Sales                                       $ 232.7      $ 212.9      $  19.8
                                                                                     (6.6 )    Sales volume, excluding acquisitions
                                                                                     31.8      Acquired sales volume
                                                                                      0.6      Selling price and mix
                                                                                     (5.9 )    Foreign currency translation

Gross profit                                   62.9         65.6         (2.6 )
Gross margin                                   27.0 %       30.8 %
                                                                                      5.5      Sales volume, including acquisitions
                                                                                      0.6      Selling price and mix
                                                                                     (5.6 )    Product cost and mix
                                                                                     (2.5 )    Incremental logistics costs
                                                                                      0.5      Acquisition accounting effects
                                                                                     (1.1 )    Foreign currency translation

SG&A                                           39.7         41.6         (2.0 )
As a percent of sales                          17.0 %       19.6 %
                                                                                      3.9      Incremental SG&A of acquisitions
                                                                                      0.5      Compensation expense
                                                                                     (4.2 )    Professional services
                                                                                     (1.4 )    Foreign currency translation
                                                                                     (0.8 )    Other, net

Facility closure and restructuring costs        0.8           -           0.8

Operating income                               22.5         23.9         (1.5 )
Operating margin                                9.7 %       11.2 %
                                                                                     (2.6 )    Decrease in gross profit
                                                                                      2.0      Decrease in SG&A
                                                                                     (0.8 )    Facility closure and restructuring costs

Net income                                  $  11.6      $  10.8      $   0.8
                                                                                     (1.5 )    Decrease in operating income
                                                                                      0.1      Decrease in net interest expense
                                                                                      3.9      Change in other income (expense)
                                                                                     (1.7 )    Increase in income tax provision

Sales in the three months ended September 30, 2012 increased by $19.8 million (9.3%) from the same period in 2011, primarily due to increased unit volume from recent acquisitions. We report all incremental sales attributable to acquisitions made within the last twelve months as unit volume increase when comparing to the prior year period


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during which Blount did not own the acquired businesses. The recent acquisitions of PBL (August 2011) and Woods/TISCO (September 2011) contributed $31.8 million in incremental sales volume in the three months ended September 30, 2012. Excluding the effect of these acquisitions, unit sales volume decreased by $6.6 million, or 3.1%. A slight improvement in average selling prices and product mix added $0.6 million to the sales increase. The translation of foreign currency-denominated sales transactions decreased consolidated sales by $5.9 million in the current quarter compared to the third quarter of 2011, primarily due to the relatively stronger U.S. Dollar in comparison to the Euro and Real. International sales decreased by $8.8 million (6.7%), while domestic sales decreased by $3.1 million (3.8%), both exclusive of sales from recent acquisitions. Overall, including incremental sales from recently acquired businesses, FLAG segment sales decreased $3.6 million (2.3%), FRAG segment sales increased $23.1 million (49.7%), and sales of concrete cutting and finishing products were up $0.3 million (5.3%).

Gross profit decreased by $2.6 million (4.0%) from the third quarter of 2011 to the third quarter of 2012. Higher unit sales volume, including incremental volume from recent acquisitions, increased gross profit by $5.5 million. Higher average selling prices and product mix of $0.6 million, along with a decrease of $0.5 million in acquisition accounting effects, also positively affected gross profit. Offsetting these positive factors were higher product cost and mix of $5.6 million, and incremental logistics costs of $2.5 million, including $1.2 million in above normal freight costs, related to our SpeeCo business unit in the FRAG segment. See discussion below regarding the increased logistics costs under Farm, Ranch, and Agriculture Segment within Segment Results. The increase in product cost and mix during the three months ended September 30, 2012 was driven by lower overhead absorption and efficiency factors at our factories from reduced production levels in response to reduced customer orders and by inefficiencies incurred during consolidation of our assembly and distribution centers discussed further below. Partially offsetting these cost increases were $1.3 million in lower average steel costs.

Acquisition accounting effects decreased because the third quarter of 2011 included the initial period immediately after the acquisitions of PBL and Woods/TISCO, and acquisition accounting effects are generally larger in the period immediately following the acquisition and then gradually decrease over time. Acquisition accounting effects are expected to total $15.9 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 third quarter of 2012 compared to the third quarter of 2011 by an estimated $1.1 million. Gross margin in the third quarter of 2012 was 27.0% of sales compared to 30.8% in the third quarter of 2011. Our gross margin has decreased over the last two years primarily due to the businesses we acquired in 2010 and 2011, which have lower gross margins than the gross margins of our historical businesses. Our strategies are to leverage our recent acquisitions through cross selling opportunities to increase sales volume and manufacturing efficiencies, apply continuous improvement initiatives to their manufacturing and other processes, invest in automation and productivity improvements, and to utilize our global supply chain to drive down sourcing costs, all in an effort to increase gross margins of these recently acquired business units over time. In addition, the acquisition accounting effects will gradually diminish over time with a resulting improvement to the gross margins of these acquisitions. However, there can be no assurance that we will be able to achieve our objective of improving gross margins over time. In addition to the effect of acquisitions made in 2010 and 2011, our gross margin was adversely affected by the lower production volumes and transition of distribution centers in Kansas City discussed below.

SG&A decreased by $2.0 million (4.7%) from the third quarter of 2011 to the third quarter of 2012. As a percentage of sales, SG&A decreased from 19.6% in the third quarter of 2011 to 17.0% in the third quarter of 2012. The decrease in SG&A expense for the quarter was despite the incremental SG&A expense incurred at our recent acquisitions of $3.9 million. Excluding SG&A of recent acquisitions, compensation expense for the third quarter increased by $0.5 million on a comparative basis, reflecting annual merit increases and increased headcount, partially offset by a reduction in accruals for incentive compensation plans. Costs for professional services were down $4.2 million in the third quarter of 2012 compared with the third quarter of 2011 primarily because we had a significantly higher level of due diligence activities and legal services related to acquisitions and refinancing activities in the third quarter of 2011 than in the third quarter of 2012. The stronger U.S. Dollar in the third quarter of 2012 compared with the third quarter of 2011 resulted in a $1.4 million reduction in SG&A from the translation of foreign-based SG&A costs.

During the three months ended September 30, 2012, we completed certain actions initiated at the beginning of 2012 to consolidate our operations in the U.S. In Kansas City, Missouri, we closed our previous distribution center after moving into our larger distribution center in that city. In Golden, Colorado, we completed the process of closing our


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assembly, warehouse, and distribution operations and consolidating those functions into the new North American distribution center in Kansas City, Missouri. Direct costs associated with these two actions were $0.8 million in the three months ended September 30, 2012. These costs include temporary labor costs associated with moving inventory and stabilizing shipping activities, costs to move inventory and equipment to the new distribution center, charges to expense the book value of certain assets located in the previous distribution center in Kansas City that will not be utilized in the new distribution center, and rent expense on duplicate facilities during the transition period. We do not expect to incur significant direct costs from these transitions in future periods.

Operating income decreased by $1.5 million from the third quarter of 2011 to the third quarter of 2012, resulting in an operating margin of 9.7% of sales in the current year third quarter compared to 11.2% of sales in the prior year third quarter. The decrease in operating income was due to lower gross profit and facility closure and restructuring costs, partially offset by reduced SG&A expenses.

Interest expense was $4.3 million in the third quarter of 2012 compared to $4.5 million in the third 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 in August 2011 following the amendment and restatement of our senior credit facilities. However, our average debt balances outstanding increased significantly in September 2011 when we acquired Woods/TISCO.

Other income was $0.1 million in the third quarter of 2012 compared with expense of $3.8 million in the third quarter of 2011. The net expense last year included a charge of $3.9 million recognized in conjunction with the fourth amendment and restatement of our senior credit facilities.

Net income in the third quarter of 2012 was $11.6 million, or $0.23 per diluted share, compared to $10.8 million, or $0.22 per diluted share, in the third quarter of 2011.


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Consolidated Year-to-Date Operating Results



                                                    Nine Months Ended
                                                      September 30,
(Amounts in millions)                        2012         2011        Change                              Contributing Factor
(Amounts may not sum due to rounding)
Sales                                       $ 698.1      $ 595.1      $ 103.0
                                                                                     (39.7 )    Sales volume, excluding acquisitions
                                                                                     139.3      Acquired sales volume
                                                                                      14.3      Selling price and mix
                                                                                     (10.9 )    Foreign currency translation

Gross profit                                  193.7        189.8          3.9
Gross margin                                   27.7 %       31.9 %
                                                                                      17.5      Sales volume, including acquisitions
                                                                                      14.3      Selling price and mix
                                                                                     (14.3 )    Product cost and mix
                                                                                      (6.6 )    Incremental logistics costs
                                                                                      (1.0 )    Facility closure costs
                                                                                      (3.4 )    Acquisition accounting effects
                                                                                      (2.6 )    Foreign currency translation

SG&A                                          127.4        113.2         14.2
As a percent of sales                          18.3 %       19.0 %
                                                                                      18.6      Incremental SG&A of acquisitions
                                                                                       2.8      Compensation expense
                                                                                       1.6      Employee benefits
                                                                                      (6.1 )    Professional services
                                                                                      (2.8 )    Foreign currency translation
                                                                                       0.1      Other, net

Facility closure and restructuring costs        6.4           -           6.4

Operating income                               59.9         76.6        (16.7 )
Operating margin                                8.6 %       12.9 %
                                                                                       3.9      Increase in gross profit
                                                                                     (14.2 )    Increase in SG&A
                                                                                      (6.4 )    Facility closure and restructuring costs

Net income                                  $  30.6      $  40.2      $  (9.6 )
                                                                                     (16.7 )    Decrease in operating income
                                                                                       1.1      Decrease in net interest expense
                                                                                       4.3      Change in other income (expense)
                                                                                       1.7      Decrease in income tax provision

Sales in the nine months ended September 30, 2012 increased by $103.0 million (17.3%) from the same period in 2011, due to increased unit volume from recent acquisitions and improved average selling prices and product mix. 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 $139.3 million in incremental sales volume in the nine months ended September 30, 2012. Excluding the effect of these acquisitions, unit sales volume decreased by $39.7 million, or 6.7%. Higher average selling prices of $14.3 million were primarily attributable to pricing actions we implemented in our FLAG segment for select markets. The translation of foreign currency-


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denominated sales transactions decreased consolidated sales by $10.9 million in the first nine months of 2012 compared to the first nine months of 2011, primarily due to the relatively stronger U.S. Dollar in comparison to the Euro and Real. International sales decreased by $29.8 million (7.5%), while domestic sales decreased by $6.5 million (3.3%), both exclusive of sales from recent acquisitions. Overall, including incremental sales from recently acquired businesses, FLAG sales decreased $9.7 million (2.0%), FRAG sales increased by $111.9 million (137.0%), and sales of concrete cutting and finishing products were up $0.7 million (3.9%).

Gross profit increased by $3.9 million (2.0%) from the first nine months of 2011 to the first nine months of 2012. Gross profit on higher unit sales volume of $17.5 million, including incremental volume from recent acquisitions, along with $14.3 million in higher average selling prices and product mix, contributed to the increase. Partially offsetting these increases were higher product cost and mix of $14.3 million, $6.6 million in incremental logistics costs, including $5.3 million of above normal freight costs, related to our SpeeCo business unit in the FRAG segment, $1.0 million in facility closure costs, and an increase of $3.4 million in non-cash charges for acquisition accounting. See discussion below regarding the increased logistics costs under Farm, Ranch, and Agriculture Segment within Segment Results. The increase in product cost and mix was driven by increased re-work and warranty costs on certain newly introduced SpeeCo products, estimated at $3.3 million, higher average steel costs, estimated at $1.5 million on a comparable basis, lower overhead absorption and efficiency factors at our factories from reduced production levels in response to reduced customer orders, and by production and distribution inefficiencies incurred during the consolidation of our assembly and distribution centers.

Year-to-date acquisition accounting effects increased because the first nine months of 2012 include acquisition accounting effects for the entire period related to PBL and Woods/TISCO, whereas the first nine months of 2011 include these effects only during a portion of the third quarter.

Fluctuations in currency exchange rates reduced our gross profit in the first nine months of 2012 compared to the first nine months of 2011 by $2.6 million. Gross margin in the first nine months of 2012 was 27.7% of sales compared to 31.9% in the first nine months of 2011. Our gross margin has decreased over the last two years primarily due to the businesses we acquired in 2010 and 2011, which have lower gross margins than the gross margin of our historical businesses. Excluding SpeeCo, KOX, PBL, and Woods/TISCO, our gross margin would have been 35.1% for the first nine months of 2012 compared with 35.2% for the first nine months of 2011. Our strategies are to leverage our recent acquisitions through cross selling opportunities to increase sales volume and manufacturing efficiencies, apply continuous improvement initiatives to their manufacturing and other processes, invest in automation and productivity improvements, and to utilize our global supply chain to drive down sourcing costs, all in an effort to increase gross margins of these recently acquired business units over time. In addition, the acquisition accounting effects will gradually diminish over time with a resulting improvement to the gross margins of these acquisitions. However, there can be no assurance that we will be able to achieve our objective of improving gross margins over time.

SG&A was $127.4 million in the first nine months of 2012, compared to $113.2 million in the first nine months of 2011, representing an increase of $14.2 million (12.5%). As a percentage of sales, SG&A decreased from 19.0% in the first nine months of 2011 to 18.3% in the first nine months of 2012. Incremental SG&A expense incurred at our recent acquisitions added $18.6 million in the first nine months of 2012. Compensation expense for the nine months increased by $2.8 million on a comparative basis, reflecting annual merit increases and increased headcount, partially offset by a reduction in accruals for incentive compensation plans. Costs of employee benefit programs reported in SG&A increased by $1.6 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 $6.1 million lower in the first nine months of 2012 compared with the first nine months of 2011 primarily because our level of acquisition due diligence and refinancing activity has significantly decreased. The stronger U.S. Dollar in the first nine months of 2012 compared with the first nine months of 2011 resulted in a $2.8 million reduction in SG&A from the translation of foreign-based SG&A costs.

During the nine months ended September 30, 2012, we incurred direct costs of $7.4 million in associated with the consolidation of our assembly and distribution centers. These costs include lease exit costs, charges to expense the book value of certain assets located in Golden and the previous distribution center in Kansas City that will not be utilized in the new distribution center, temporary labor costs associated with moving inventory and stabilizing shipping activities, costs to move inventory and equipment from the former locations to the new location, and rent expense on duplicate facilities during the transition


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period. Of these total costs, $1.0 million are reported in cost of sales in the Consolidated Statement of Income for the nine months ended September 30, 2012. We do not expect to incur significant direct costs from these transitions in future periods.

Operating income decreased by $16.7 million from the first nine months of 2011 to the first nine months of 2012, resulting in an operating margin of 8.6% of sales compared to 12.9% of sales in the prior year period. The decrease was due to higher SG&A expenses and facility closure and restructuring costs, partially offset by increased gross profit.

Interest expense was $13.1 million in the first nine months of 2012 compared to $14.2 million in the first nine months 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.

Other income was $0.2 million in the first nine months of 2012 compared with net expense of $4.1 million in the first nine months of 2011. The net expense last year included a charge of $3.9 million recognized in connection with the fourth amendment and restatement of our senior credit facilities.

Net income in the first nine months of 2012 was $30.6 million, or $0.61 per diluted share, compared to $40.2 million, or $0.81 per diluted share, in the first nine months of 2011.

Income Tax Provision

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



                                     Three Months Ended           Nine Months Ended
                                        September 30,               September 30,
      (Amounts in thousands)         2012           2011          2012          2011
      Income before income taxes   $  18,299      $ 15,740      $ 47,140      $ 58,455
      Provision for income taxes       6,677         4,935        16,536        18,275

      Effective tax rate                36.5 %        31.4 %        35.1 %        31.3 %

The effective tax rate for the three and nine months ended September 30, 2012 was slightly higher than the federal statutory rate of 35% primarily due to state income taxes and the recognition of a $1.6 million charge to deferred income tax expense and the related valuation allowance on certain foreign deferred tax assets, which increased the rate by 8.7% in the quarter and 3.4% on a year-to-date basis. Partially offsetting these tax increases were the favorable effects of foreign income taxes and the domestic production deduction. In addition, in the three and nine months ended September 30, 2012, the effective tax rate was reduced by 2.1% and 0.8%, respectively, by the release of accruals for uncertain tax positions. 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.

The effective tax rate for the third quarter and year-to-date periods of 2011 was lower than the federal statutory rate of 35% primarily due to favorable effects from foreign income taxes and the domestic production deduction, partially offset by state income tax expense.

Consolidated Sales Order Backlog

Consolidated sales order backlog at September 30, 2012 was $167.3 million compared to $191.0 million at June 30, 2012, and $211.3 million at December 31, 2011. The decrease in backlog during 2012 reflects softening of demand for our products in Europe and the Asia-Pacific region, and seasonal ordering patterns for some of our product lines and customers.


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Segment Results.

The following table reflects segment sales and operating results for the
comparable periods of 2012 and 2011:



                                    Three Months Ended            Nine Months Ended
                                      September 30,                 September 30,
      (Amounts in thousands)       2012           2011           2012           2011
      Sales:
      FLAG                       $ 156,728      $ 160,336      $ 484,626      $ 494,299
      FRAG                          69,688         46,565        193,634         81,719
      Corporate and Other            6,320          6,003         19,844         19,097

      Total sales                $ 232,736      $ 212,904      $ 698,104      $ 595,115

      Operating income (loss):
      FLAG                       $  24,987      $  26,897      $  82,037      $  89,270
      FRAG                           1,059          3,832         (3,620 )        5,121
      Corporate and Other           (3,582 )       (6,796 )      (18,550 )      (17,798 )

      Operating income           $  22,464      $  23,933      $  59,867      $  76,593

Forestry, Lawn, and Garden Segment. The FLAG segment consists of the operations of the Company that have historically served the FLAG markets, as well as KOX, acquired in March 2011, and the FLAG portion of PBL, acquired in August 2011. The following table reflects the factors contributing to the change in sales and operating income in the FLAG segment between the comparable periods of 2011 and 2012: . . .

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