Sales in the second quarter were $235.4 million, an increase of $15.0 million or 6.8 percent compared to the second quarter of 2013. Operating income for the second quarter of 2014, which includes $0.5 million facility closure and restructuring charges, was $22.4 million compared to $19.3 million in the same quarter last year. Second quarter net income was $12.3 million, or $0.25 per diluted share, compared to $9.3 million, or $0.19 per diluted share, in the second quarter of 2013.
“We continued to perform well in the second quarter. Additionally, demand continued to increase across nearly all geographic regions,” stated Josh Collins, Blount’s Chairman and CEO. “The improved demand and the results of our profit improvement initiatives over the past year have bolstered our confidence that we will achieve or outperform our sales and profit targets for 2014.”
Mr. Collins continued, “We are maintaining a strong focus on our Operational Excellence and other targeted cost-reduction initiatives that will continue to enhance our businesses long term. Additionally, our Board of Directors has authorized a share repurchase program that will return cash to shareholders as our balance sheet and leverage levels continue to improve.”
Blount operates primarily in two business segments – the Forestry, Lawn, and Garden (“FLAG”) segment and the Farm, Ranch, and Agriculture (“FRAG”) segment. The Company reports separate results for the FLAG and FRAG segments. Blount’s Concrete Cutting and Finishing (“CCF”) business is included in “Corporate and Other.”
The FLAG segment had second quarter 2014 sales of $160.1 million, which was $9.4 million higher than the second quarter of 2013. Sales volume increases were partially offset by a reduction in average prices. Second quarter 2014 sales increased in all geographical regions except Asia, with North America generating approximate 15 percent growth and Europe and Russia achieving approximately eight percent growth. Asia sales were down more than nine percent compared to the second quarter of 2013. The change in segment sales for the comparable second quarter periods is illustrated below.
Segment backlog was $160.9 million at June 30, 2014, an increase of three percent from $156.3 million on June 30, 2013. The increase in backlog relates primarily to increased saw chain demand compared to the prior year.
Segment contribution to operating income and Earnings Before Interest, Taxes, Depreciation, Amortization and certain charges (“Adjusted EBITDA”) was $23.8 million and $30.3 million, respectively, for the second quarter of 2014, and includes $7.6 million of allocated shared services expenses. Contribution to operating income improved 15.2 percent and Adjusted EBITDA improved 10.6 percent for the second quarter of 2014 versus the second quarter of 2013. The change in FLAG contribution to operating income for the comparable second quarter periods is presented below.
Segment contribution to operating income and Adjusted EBITDA improved primarily due to higher sales volumes, a more efficient cost profile, and favorable foreign exchange rates. Increased steel costs and the impact of targeted sales promotions slightly offset the improvements in those areas. The closure of a higher cost FLAG manufacturing plant announced in mid-2013 and higher plant utilization rates – 91 percent in the second quarter of 2014 compared to 76 percent in the second quarter of 2013 – contributed to improved overall operating efficiency. The manufacturing cost improvement was partially offset by an increase in SG&A spending, driven by incentive compensation expense as 2014 results compared more favorably to target than in 2013, along with increased advertising and professional service fees.
The FRAG segment reported second quarter 2014 sales of $67.3 million, an increase of $4.6 million from the second quarter of 2013, mainly due to improved sales volumes and stronger average pricing. Sales volumes increased primarily due to stronger sales of log splitters. The change in segment sales for the comparable second quarter periods is illustrated below.
Segment backlog was $19.1 million at June 30, 2014, compared to $16.3 million at June 30, 2013. The increased backlog reflects improved demand for log splitters and agriculture parts in the segment.
The FRAG segment had $6.8 million of Adjusted EBITDA in the second quarter of 2014. FRAG segment contribution to operating income was $2.6 million after $4.2 million of depreciation and amortization expense, and $2.4 million of allocated shared services expenses. The change in the second quarter 2014 contribution to operating income compared to the second quarter of 2013 is presented below.
The benefit of improved sales volumes and average pricing were largely offset by higher costs in the FRAG segment, mainly in the areas of manufacturing, distribution, and supplier purchased components. Conversion costs were unfavorable compared to the second quarter of 2013 as a result of marginally higher labor costs as increased production volumes drove overtime and training expense for new personnel. Product sales mix in the second quarter of 2014 included relatively lower margin products compared to 2013.
Corporate and Other generated net expense of $4.1 million in the second quarter of 2014 compared to net expense of $3.4 million in the second quarter of 2013. Second quarter 2014 net expense increased primarily due to $0.5 million of facility closure costs related to the closure of the Company’s Quertaro, Mexico blade plant announced in February 2014, as well as higher incentive compensation expense.
Second quarter 2014 net income increased primarily due to higher overall operating income in the second quarter of 2014 compared to 2013. Net interest expense decreased $0.1 million to $4.5 million in the second quarter of 2014 as a result of lower average borrowing levels. Other income improved as a result of foreign exchange impacts on non-operating assets. The change in net income for the second quarter of 2014 compared to the second quarter of 2013 is summarized in the table below.
The Company’s Board of Directors has authorized a new share repurchase program of up to $75 million of Blount common stock to be completed on or before December 31, 2016. “The share repurchase program is a result of our solid cash flow in 2013, the continued strength of our balance sheet, and our confidence in the long-term future of Blount,” stated Chief Financial Officer Calvin Jenness. “We expect to execute on this new $75 million share repurchase program while retaining sufficient capital capacity to continue making long-term investments in our business.”
As a result of sales demand and the generally improved cost profile in the FLAG business, the Company is revising its fiscal year 2014 outlook upward for both sales and Adjusted EBITDA. Sales are expected to range between $935 million and $960 million, Adjusted EBITDA between $135 million and $140 million, and operating income between $81 million and $86 million. Our expectation for sales assumes growth in FLAG segment sales of between three and six percent and growth in FRAG segment sales of between six and eight percent, both compared to full year 2013 levels. In 2014, operating income is expected to experience benefit from foreign currency exchange rates of between $2 million and $3 million, and steel costs are expected to have a $2 million to $3 million unfavorable impact for the year compared to 2013. The 2014 operating income outlook includes non-cash charges of approximately $12 million related to acquisition accounting. Free cash flow in 2014 is expected to range between $32 million and $38 million, after approximately $38 million to $42 million of capital expenditures. Net interest expense is expected to be between $17 million and $18 million in 2014, and the effective income tax rate for continuing operations is expected to be between 33 percent and 36 percent in 2014.
A comparison of key operating indicators for 2013 actual results and the 2014 outlook mid-point is provided in the table below.
Adjusted EBITDA and Free Cash Flow are non-GAAP measures and are reconciled to Operating Income and Cash Flow from Operations in the attached financial data table.
“Forward looking statements” in this release, including without limitation Blount’s “outlook,” “expectations,” “beliefs,” “plans,” “indications,” “estimates,” “anticipations,” “guidance” and their variants, as defined by the Private Securities Litigation Reform Act of 1995, are based upon available information and upon assumptions that Blount believes are reasonable; however, these forward looking statements involve certain risks and should not be considered indicative of actual results that Blount may achieve in the future.In particular, among other things, guidance given in this release is expressly based upon certain assumptions concerning market conditions, foreign currency exchange rates, and raw material costs, especially with respect to the price of steel, the presumed relationship between backlog and future sales trends and certain income tax matters, as well as being subject to the uncertainty of the current global economic situation.To the extent that these assumptions are not realized going forward, or other unforeseen factors arise, actual results for the periods subsequent to the date of this announcement may differ materially.