Report by the President of Husqvarna - 2011 Husqvarna Annual Report

2011 was a challenging year for Husqvarna Group. We experienced operational difficulties in one of our largest production facilities, which had a substantial negative impact on the Group’s operating income.  Despite the issues, I am pleased that our sales, adjusted for changes in exchange rates, increased and we maintained our position as global leader. In some areas, such as robotic lawn mowers and riders, market positions have strengthened. The same applies to several areas in the Construction business area, where years of consistent initiatives focusing on innovation and new product launches have generated higher sales, improved margins and increased market shares.

The performance of the Group’s three business areas was mixed. The market in Europe was strong with good demand through the first half of the year, while the second half was weaker, at the same time as weather conditions were less favorable than in 2010. Sales for the twelve-months period were somewhat higher than the previous year, which was in line with the market trend. The operating margin for Europe & Asia/Pacific remained high at almost 14 percent, despite increased investments in branding, marketing and product development. The Group’s best performance was in robotic lawn mowers and riders, where market shares also increased.

In Americas, demand weakened once again. Since 2005, when demand was at its highest, it has declined every year except 2010; the total decline since 2005 is around 25 percent. Net sales were lower and operating profit was far from acceptable, which can be attributed in part to the disruptions in production. Our goal is to improve the operating margin in this business area, primarily by increasing the percentage of sales to dealers while improving the product mix and efficiency in the part of the business aimed at retailers. It will probably take some time before we reach a satisfactory level of profitability, but we have set our course to achieve this goal.

The Group’s smallest business area, Construction, has performed best, with improved sales, operating margin and market share, which is the result of a long-term consistent focus on product innovation and internal efficiency measures.

Strategy remains firm

As the newly appointed President and CEO of Husqvarna Group, I would like to emphasize that the Group’s strategy remains unchanged. Our top priority for 2011 was to continue the change program we have initiated, which was aimed at consolidating the Group within brands, manufacturing, sales, logistics and product development. This work is continuing in 2012 but the measures must be prioritized to ensure maximum delivery reliability for our customers. We will also slow the pace of change moving forward, which will delay the savings effects associated with these initiatives until after 2012.

One consequence of the more cautious pace of change is that it will take longer to ramp up the new production plant in Poland compared with our initial plan.  Moving production of ride-on lawn mowers to Poland will take up to two years to complete, instead of one year.  Our experience of the new production plant has been excellent.

The production disturbances in the Group’s largest plant in North America were partially a result of relocating production from a small plant into a larger factory. The purpose of the relocation was to reduce the fixed costs in production of ride-on lawn mowers, which is vital in the highly competitive North American market. Plant capacity has been gradually restored following extensive efforts. Since the selling season for garden products is short, delivery reliability and punctuality are particularly crucial. As an extra measure in 2012, we therefore focused to a greater extent than usual on preseason production already late in 2011.

Innovation is a key factor for success

Innovation has always been a factor for success at Husqvarna Group. To further strengthen our global leadership position, we are continuing to invest in innovation, by having the right products for the market at the right time.

There was plenty of product news in 2011. We launched a new platform for professional chainsaws, one of the strongest segments in the Group, which was received very well by the market. In 2012 we will add several new saws to the platform. In robotic lawn mowers we launched a model specially designed for small gardens and in 2012 we will launch another model that is specially adapted to the broad consumer segment. For professional lawn care, several new ride-on lawn mowers were launched and the Group now has a competitive product offering in this segment. In Construction, many new products became bestsellers, including new power cutters, drilling systems and a demolition robot.

Global launch of McCulloch

One of the Group’s most extensive launches began in 2011. A brand new line of products with daring, innovative design is being developed under the McCulloch brand. The products, which are being sold in retail outlets, are in the higher price segment for this sales channel. Initially the launch will mainly be in Russia, Germany, the Nordic region and the U.S, but in the long term the new product range will be sold globally. Chainsaws, lawn mowers and trimmers are among the products that will be available in 2012. 

Battery products under the Husqvarna brand.   

Battery-powered products, which do not produce any emissions, currently represent a small but rapidly growing part of the garden product market. Battery performance to date has been adequate only for simple consumer products, but the product portfolio has been keeping pace with improving battery performance and growing customer demand for quiet and environmentally friendly products. In 2012 the Group’s line of battery-powered consumer products under the Gardena brand will expand with semi-professional products under the Husqvarna brand.

Efficient procurement process more important

In several of Husqvarna Group’s major product categories, production largely comprises assembly of relatively finished components. The Group makes almost all of its products close to our customers in the major markets in North America and Europe. Less than 30 percent of component purchases are made from low-cost countries such as China. 

Since purchasing of components is the Group’s largest cost item, there is great potential for improved efficiency by increasing the share of purchases from suppliers in low-cost countries. Equally important is ensuring efficiency along the entire global sourcing supply chain, not only in terms of quality and delivery reliability, but also issues concerning environment, human rights and corruption. To increase the focus on this area, the global purchasing organization was structured as a separate staff that reports directly to the CEO.

Outlook for 2012

Husqvarna Group’s consumer-oriented business is obviously affected by the global slowdown in consumer demand. In southern Europe, several major national financing issues remain unresolved and problems threaten to cause secondary effects in the rest of Europe, resulting in lower consumer demand. Uncertainty is high and we are trying to maintain a high level of preparedness to respond quickly to changes in demand.

Finally, I would like to thank all the Group’s employees for their outstanding efforts during a challenging year. Our listings in our major markets in Europe and North America for the 2012 season are unchanged compared with 2011, but with a better mix. I view this accomplishment as a confirmation of our strategy to consistently invest in innovative quality products under strong brands. A high level of service and delivery reliability are Husqvarna Group’s top priorities for 2012.

Hans Linnarson

President and CEO

Blount Announces 2011 4th Quarter and Full Year Results, Outlook for 2012

-- Full year sales increased 36% to $832 million

-- Full year operating income increased 14% to $98 million

-- Fourth quarter 2011 sales increased 38% from the prior year, 4% when excluding sales associated with

    acquired businesses

-- Fourth quarter 2011 operating income and operating margin consistent with fourth quarter 2010 results,

    excluding the impact of businesses acquired in 2011

PORTLAND, Ore. -- March 6 -- today announced results for the fourth quarter and full year ended December 31, 2011. Blount also provided an outlook for 2012.

Results for the Quarter and Full Year Ended December 31, 2011

Sales in the fourth quarter were $236.5 million, a 38% increase from the fourth quarter of 2010 and a 4% increase when excluding the impact of acquired businesses. Operating income for the fourth quarter of 2011 was $21.4 million compared to $21.5 million in the prior year. The year-over-year impact of acquired businesses increased sales by $59.0 million and decreased operating income by $0.4 million in the fourth quarter of 2011.

Fourth quarter 2011 operating income includes non-cash charges of $6.7 million related to accounting for acquisitions. Fourth quarter income from continuing operations was $9.5 million ($0.19 per diluted share) compared to $12.4 million ($0.25 per diluted share) in the fourth quarter of 2010. Both non-cash purchase accounting charges and a higher income tax rate contributed significantly to the lower income from continuing operations. The year-over-year increase in non-cash purchase accounting charges in the fourth quarter of 2011 reduced income from continuing operations by $3.4 million, or $0.07 per diluted share. 

Full year 2011 sales were $831.6 million, a 36% increase from 2010. Full year 2011 sales rose 14% when excluding sales generated from acquired businesses. Operating income for 2011 was $98.0 million compared to $85.6 million in 2010, and income from continuing operations was $49.7 million ($1.01 per diluted share) compared to $41.4 million ($0.85 per diluted share) in 2010. The year-over-year increase in non-cash purchase accounting charges in 2011 reduced income from continuing operations by $8.5 million, or $0.17 per diluted share. 

"The past year was extremely productive, including the acquisitions of KOX, PBL, and Woods/TISCO; the refinancing of our lending facility, which lowered our borrowing costs and provided us low cost acquisition financing; the introduction of an OREGON® branded log splitter and OREGON® PowerNow™ cordless chain saw; the ground breaking for the expansion of our saw chain and guide bar manufacturing facility in China, which will allow us to meet future customer demand; and the opening of our new Kansas City distribution center," commented Josh Collins, Blount's Chairman and Chief Executive Officer.

"Our fourth quarter 2011 results reflect increased spending and investment in connection with executing our strategic programs as well as some slowing in sales growth compared to rates we saw earlier in the year. We expect a busy 2012 as we work to integrate the recently acquired businesses and increase capacity."

Segment Results

As a result of the acquisitions we made in 2011, we now operate in two business segments – the Forestry, Lawn, and Garden ("FLAG") segment and the Farm, Ranch, and Agriculture ("FRAG") segment.  Beginning with the fourth quarter of 2011, the Company is reporting separate results for the FLAG and FRAG segments. Blount's Concrete Cutting and Finishing ("CCF") business is included in "Corporate and Other." All financial information for our business segments is presented on a comparable basis.

Forestry, Lawn, and Garden

The FLAG segment reported fourth quarter and full year 2011 sales of $165.6 and $659.8 million, respectively. Fourth quarter 2011 sales increased 14% from the fourth quarter of 2010; 4% when excluding acquired businesses. For comparability, all sales statistics are quoted excluding the impact of acquired businesses for the period during which Blount did not own the acquired business.

Fourth quarter 2011 sales were strongest in the South Asia and South American markets, growing a combined 10% compared to the fourth quarter of 2010, followed by the U.S. which grew 6% in the fourth quarter of 2011. Europe and Russia combined for an 8% sales decline as market conditions softened with sovereign debt concerns and economic conditions in that region. The change in segment sales for the comparable fourth quarter periods is illustrated below, with sales from businesses acquired within the past year of $14.0 million presented entirely as acquired volume increase.

Segment backlog was $182.4 million at December 31, 2011 compared to $126.0 million at December 31, 2010. Backlog at December 31, 2011 includes $9.7 million related to businesses acquired in 2011.

Segment contribution to operating income and Earnings Before Interest, Taxes, Depreciation, Amortization and certain charges ("Adjusted EBITDA") was $26.3 million and $33.3 million, respectively, for the fourth quarter of 2011. Segment contribution to operating income and Adjusted EBITDA increased by 0.4% and 5.3%, respectively, for the fourth quarter of 2011 versus 2010.  Increased selling prices had the largest impact on segment operating income.

The impact of steel costs reduced segment contribution to operating income, partially offset by favorable changes in currency exchange rates, which combined for a reduction to segment contribution margin by approximately 110 basis points.

The positive impact of currency on the segment's cost structure was related to the relatively weaker Brazilian currency as well as more favorable currency exchange rates underlying material purchases on a year-over-year basis. Increased unit volume and segment average selling prices improved segment contribution to operating income, but were partially offset by increased costs/mix spending, combining for an increase in segment contribution margin of 90 basis points.

The increase in segment cost/mix spending was driven by higher advertising expense in support of the recently introduced OREGON® PowerNow™ cordless chain saw. Compensation and relocation costs also increased in connection with positioning personnel in the supply chain and marketing areas to execute the Company's strategic programs.

Farm, Ranch, and Agriculture

The FRAG segment reported fourth quarter and full year 2011 sales of $65.8 and $147.5 million, respectively. Fourth quarter 2011 sales increased $45.3 million from the fourth quarter of 2010, driven nearly entirely by sales generated by acquired businesses. Excluding the impact of acquired businesses, sales increased just over 1%. The change in segment sales for the comparable fourth quarter periods is illustrated below, with sales from business acquired within the past year of $45.1 million presented entirely as acquired volume increase.

Segment backlog was $28.3 million at December 31, 2011 compared to $6.7 million at December 31, 2010. December 31, 2011 backlog includes $21.5 million related to businesses acquired in 2011.

Segment contribution to operating income and Adjusted EBITDA was a net expense of $0.6 million and earnings of $6.3 million, respectively, for the fourth quarter of 2011. Acquired businesses had a significant impact on segment contribution to operating income.

The unfavorable cost/mix impact on segment contribution to operating income was driven primarily by approximately $2.0 million of costs associated with consolidating the SpeeCo assembly and distribution center from Golden, Colorado, into our Kansas City, Missouri facility and supplier driven warranty expenses. Those costs include overlapping personnel expense, operating and logistics costs, and severance expense associated with closing the Golden, Colorado operation and product rework and refund expense associated with the warranty issues. The consolidation is expected to be completed by the end of the second quarter of 2012 and provide approximately $1.0 million of cost savings on an annual basis by the end of 2012.

Corporate and Other

Corporate and other generated net expense of $4.3 million in the fourth quarter of 2011, down from $5.4 million in the fourth quarter of 2010. Lower spending on strategic programs, primarily business acquisition expenses, drove the improvement.

Income from Continuing Operations

Fourth quarter 2011 income from continuing operations declined primarily due to the impact of non-cash purchase accounting charges and a larger income tax expense in the fourth quarter of 2011 compared to the fourth quarter of 2010. A reduction in net interest expense partially offset the impacts of purchase accounting and income taxes. Net interest expense was $4.5 million in the fourth quarter of 2011 versus $5.0 million in the fourth quarter of 2010. The impact of lower interest rates in 2011 more than offset the higher average borrowing levels driven by acquisitions in 2011.

The Company recorded tax expense of $7.0 million in the fourth quarter of 2011 versus $4.0 million in the fourth quarter of 2010. The fourth quarter 2011 effective tax rate was adversely impacted by certain book expense items that are not deductible for income tax purposes.

Cash Flow and Debt

As of December 31, 2011, the Company had net debt of $468.2 million, a decrease of $2.2 million from September 30, 2011. The decrease in net debt in the fourth quarter of 2011 resulted primarily from the generation of $16.7 million of cash from operations, offset by net capital expenditures of $15.2 million.

Net capital expenditures were $9.3 million larger in the fourth quarter of 2011 than the fourth quarter of 2010 as the Company executed on its planned investment in China manufacturing capacity and incurred capital spending at acquired businesses. The Company generated $1.5 million in free cash flow in the fourth quarter of 2011. The Company defines free cash flow as cash flows from operating activities less net capital spending.

The ratio of net debt to pro forma last-twelve-months ("LTM") Adjusted EBITDA was 2.8x as of December 31, 2011, which is consistent with September 30, 2011 and an increase from 2.1x of net leverage at the end of December 2010. The increase in leverage from the end of 2010 is the result of acquisitions made in 2011, offset by free cash flow generation in 2011.

2012 Financial Outlook

The Company's fiscal year 2012 outlook is for sales to range between $1,020 million and $1,060 million, and operating income to range between $120 million and $133 million. Our expectation for 2012 sales levels assumes growth in FLAG sales of 4% to 7% and growth in FRAG sales of 8% to 11%, both compared to 2011 pro forma full-year levels and including sales price increases of between 1% and 3%.

The expectation for 2012 assumes that unfavorable foreign currency exchange rates will reduce operating income on a year-over-year basis by between $1.0 million and $2.0 million and rising steel prices will further reduce year-over-year operating income between $2.0 million and $3.0 million.

The outlook for 2012 operating income also includes estimated non-cash charges as a result of acquisition accounting of approximately $17 million. Free cash flow for 2012 is expected to range between $50 million and $60 million, after approximately $45 million to $50 million of capital expenditures. Net interest expense is expected to be approximately $17 million in 2012, and the effective income tax rate for continuing operations is expected to be between 34% and 37% in 2012.

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.

Blount is a global manufacturer and marketer of replacement parts, equipment, and accessories for consumers and professionals operating primarily in two market segments: Forestry, Lawn, and Garden ("FLAG"); and Farm, Ranch, and Agriculture ("FRAG"). Blount also sells products in the construction markets and is the market leader in manufacturing saw chain and guide bars for chainsaws.  Blount has a global manufacturing and distribution footprint and sells its products in more than 115 countries around the world.  Blount markets its products primarily under the OREGON®, OREGON® PowerNow™, Carlton®, Woods®, TISCO, SpeeCo®, and ICS® brands.

Taking It to the Max - Scag Maximizes Throughput

March 1 -- When it comes to finishers getting maximum throughput and optimal first pass yield from their finishing departments, Metalcraft of Mayville, in Wisc. has quite a story to tell.

It’s a story of 300 percent throughput improvements, quadrupling labor productivity and 180 percent performance-to-manufacturing standards. A story of kitting product on the paint line so it can be delivered to the assembly line with maximum efficiency. A story of custom paint racks and jam-packed line density.

Tucked away on the north end of Mayville, a small Wisconsin city of 4,000 people, this contract fabricator, manufacturer and producer of Scag brand commercial lawn mowers and lawn maintenance equipment has quietly—though aggressively—embarked on a lean journey that would grab the attention of any finisher seeking to improve quality and reduce cost.

Walking the manufacturing floor and making it a point to greet each and every employee by name, Vice President of Operations Randy Gloede reflects on the journey, noting that at the outset the Metalcraft team recognized that the capacity constraint that was the paint coating department would be a key area of focus.

“We looked at how we could do a better job delivering to the voice of the customer,” Gloede says. “In the case of the paint line, our assembly line is the customer.”

Metalcraft began by breaking down the entire value stream to find waste in its system. The company uses a simple definition to identify waste.

“If a customer won’t pay for it, it’s officially waste,” Gloede says.

Any steps in its finishing process that didn’t directly add value to the product and thus the customer were attacked.

Less than a year ago the company delivered components to its assembly line in batches of parts, and the assembly line pulled these parts out of work-in-process inventory to be assembled into its lawn tractors. If a batch of parts didn’t flow off of the paint line before they were needed by the assembly department, the assembly line would have to be shut down, causing labor and production inefficiencies and disrupting employee work schedules.

So working backwards from the assembly line to the paint line, Metalcraft challenged itself to find a way for the paint line to deliver to the assembly line the exact quantity of parts needed to produce a single tractor at—or shortly before—the moment these parts were required.

To reach this goal, the paint line needed to deliver parts in kits, or the precise combination of individual component parts needed for one tractor. The solution was a “kit rack” capable of carrying the right combination of parts through the paint line. This rack is removed from the paint line and transferred on a cart to the assembly cell where the parts it holds can be assembled into the final product.

The benefits to the assembly line—inventory reductions, the elimination of line downs, delivering components to the exact point of use—are clear. But Metalcraft also focused keenly on reducing waste in the paint department. By engineering racking that maximizes line density and presents product to the paint line in a manner that optimizes yield, the paint department’s productivity has gone through the roof.

For example, a year ago the paint line required a crew of 11 people to load parts, unload parts and apply powder. At that time the line was capable of painting the components for one complete tractor every eight minutes. The company’s attention to line density and kitting changed that for the better.

“We now paint with five people on the paint line and paint an average of two complete tractors every eight minutes,” Gloede explains.

Further, since the company can no longer rely on excess batch inventory in the event of a paint line reject, optimizing yield of conforming and thus usable painted parts became paramount. Therefore, a significant part of the paint line transformation involved identifying common rejects, plotting them on a Pareto Chart and then identifying and resolving root causes.

All told, the project has generated phenomenal results. Remember the regular shut-downs incurred on the assembly line when it ran out of parts? The company has not had a single shut-down in 10 months.

Now that product is kitted when it arrives on the assembly line from the paint line, assemblers no longer have to waste valuable seconds and minutes seeking out the right part. Today an entire tractor can be manufactured in under six hours, and though 34 Scag Tiger Cat (just one of several products manufactured here) are currently built each day, there are only 28 such units in process at any given point in time. That creates meaningful reductions in work-in-process inventory.

Metalcraft’s improvements have drawn the attention of customers and suppliers alike. American Finishing Resources is a valued supplier of coatings removal services and fixture fabrication to Metalcraft. AFR’s Dave Garczynski was impressed with the transformation on the Metalcraft’s paint line.

“Efficiency improvements measured in hundreds of percents are nothing short of incredible,” he says. “If you had told us a year ago that the Metalcraft team could have implemented this degree of change I’m not sure anyone would have believed it … but they did it.”

The improvements don’t stop, however, at throughput and quality. By organizing work centers and simplifying operations the company has drastically improved in the area of safety as well.

“Our most important metric is safety,” Gloede says. “We have cut our DART rate (Days Away, Restrictions and Transfers) by 50 percent in the last year. This is the metric we’re most proud of.”

Progress will continue at Metalcraft, where the idea that lean success is not a destination but a journey is well recognized.

“It’s amazing how much has changed in 18 months,” Gloede reflects. “And there’s still so much we can improve.”

www.pfonline.com   

DR Trimmer Enters 25th Year of Production

Wheeled Trimmer that Redefined Lawn Care, Helped Establish Company to See Major Upgrade in 2012

Vergennes, VT -- February 29 -- DR® Power Equipment today marked the 25th Anniversary of its DR® Trimmer/Mower by announcing that the wheeled string trimmer, which redefined lawn care for a generation of property owners while helping establish the Vermont company that produces it, will receive a powerful upgrade in 2012.

Introduced in 1987, the DR® Trimmer/Mower was the first gas-powered, wheeled trimmer available to consumers. Combining the best features of a hand-held trimmer and a bladed mower in an easy to use, powerful package, the machine quickly gained popularity among home and property owners who wanted a one-machine solution to their maintenance needs. Since then, more than 500,000 DR Trimmers have been sold in the United States, making it America’s #1 selling trimmer on wheels.

But the story of the DR® Trimmer/Mower is more than sales numbers.

“The DR® Trimmer is the product that put DR on the map,” said DR® Power Equipment President Joe Perrotto. “It helped transform DR Power Equipment from an industry newcomer, a small shop in Vermont with one product, to the respected American manufacturer we are today.”

Development of the DR® Trimmer was led by DR® Power Equipment co-founders Dick Raymond, Rich Alther, John Gibbons, and Lyman P. Wood, longtime friends and business partners who had all recently left positions at Garden Way, Inc., then producer of the well-known Troy-Bilt Tiller. The foursome hoped to use its extensive knowledge of gardening and country living to launch a successful new business based in Vermont. But there was one big problem: the group had nothing to sell.

Legal agreements with Garden Way, Inc. kept the group from developing a competing product for gardeners, so the men turned their attention to lawn and property care. Raymond and Wood developed the idea of mounting a rotating string trimmer on wheels; this, the two thought, would transform trimming into a less physically stressful task and ultimately eliminate the need for consumers to purchase both a lawn mower and a hand-held string trimmer.

Raymond and Wood called their new invention the DR® Trimmer /Mower and touted it as “The Greatest Breakthrough in Property Care Equipment since the Invention of the Power Mower Itself.” The DR® Trimmer remains one of the company’s best-selling products.

“Very few products enjoy 25 years of continuous production,” Perrotto said. “All of us here at DR® Power Equipment are humbled, and very excited to be celebrating this rare milestone.”

“The DR® Trimmer has changed dramatically since its introduction, as we continue to improve upon its original design, but something that will never change is DR® Power Equipment’s commitment to quality, performance, and innovation,” Perrotto said.

DR® Power Equipment, a division of Country Home Products, Inc., the premiere developer and marketer of professional-grade outdoor equipment for residential use, was founded in 1985 in Charlotte, Vermont. Country Home Products is a three time winner of Vermont’s “Best Places to Work” award. It employs over 220 people and occupies three facilities.