**UNITED STATES****SECURITIES ANDEXCHANGE COMMISSION**

WASHINGTON,D. C. 20549

**FORM10-Q**

x                                  Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934For thequarterly period ended March 31, 2007.

OR

o                                    Transition report pursuant to section13 or 15(d) of the Securities Exchange Act of 1934

Commissionfile number 001-11549

**BLOUNTINTERNATIONAL, INC.**

(Exact name of registrant asspecified 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’stelephone number, including area code)

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes x              No o

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated filer o |
|---------------------------|--------|----------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).

Yes o               No x

Thenumber of shares outstanding of $0.01 par value common stock as of May 2, 2007was 47,278,091 shares.

 

----

**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**Index**
|                                                                                                                        | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Part  I Financial Information                                                                                          |       |       |       |
| Item 1.** **Consolidated Financial Statements                                                                     |       |       |       |
| Unaudited Consolidated Statements of Income  Three months ended March 31, 2007 and 2006                                |       |       |       |
| Unaudited Consolidated Balance Sheets  March 31, 2007 and December 31, 2006                                            |       |       |       |
| Unaudited Consolidated Statements of Cash Flows  Three months ended March 31, 2007 and 2006                            |       |       |       |
| Unaudited Consolidated Statement of Changes in  Stockholders’ Equity (Deficit)  Three months ended March 31, 2007 |       |       |       |
| Notes to Unaudited Consolidated Financial Statements                                                                   |       |       |       |
| Item 2.** **Management’s  Discussion and Analysis of Financial Condition and Results of Operations           |       |       |       |
| Item 3.** **Quantitative  and Qualitative Disclosures about Market Risk                                           |       |       |       |
| Item 4.** **Controls  and Procedures                                                                              |       |       |       |
| Part  II Other Information                                                                                             |       |       |       |
| Item 6.** **Exhibits                                                                                              |       |       |       |
| Signatures                                                                                                             |       |       |       |

 

2

----

**PART I**            FINANCIAL INFORMATION

**ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS**

**UNAUDITED CONSOLIDATED STATEMENTS OF INCOME**

**BlountInternational, Inc. and Subsidiaries**
| ** **                                                                      | ** ** | **Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales                                                                           |       | $                                                | 143,996    |   | $ | 163,802 |   |
| Cost of sales                                                                   |       | 99,086                                           |       | 111,208 |   |
| Gross profit                                                                    |       | 44,910                                           |       | 52,594 |   |
| Selling, general and  administrative expenses                                   |       | 29,469                                           |       | 30,310 |   |
| Operating income                                                                |       | 15,441                                           |       | 22,284 |   |
| Interest income                                                                 |       | 222                                              |       | 71 |   |
| Interest expense                                                                |       | (8,276                                           | )          | (9,068 | ) |
| Other income, net                                                               |       | 69                                               |       | 153 |   |
| Income from  continuing operations before income taxes                          |       | 7,456                                            |       | 13,440 |   |
| Provision for income  taxes                                                     |       | 2,756                                            |       | 5,054 |   |
| Income from  continuing operations                                              |       | 4,700                                            |       | 8,386 |   |
| Discontinued  operations:                                                       |       |                                             |       |   |   |
| Income (loss) before  taxes from discontinued operations                        |       | (52                                              | )          | 916 |   |
| Income tax provision  (benefit)                                                 |       | (18                                              | )          | 345 |   |
| Income (loss)  from discontinued operations                                     |       | (34                                              | )          | 571 |   |
| Net income                                                                      |       | $                                                | 4,666      |   | $ | 8,957 |   |
|                                                                            |       |                                             |       |   |   |
| Basic income per share:                                                         |       |                                             |       |   |   |
| Continuing  operations                                                          |       | $                                                | 0.10       |   | $ | 0.18 |   |
| Discontinued  operations                                                        |       | —                                           |       | 0.01 |   |
| Net income                                                                      |       | $                                                | 0.10       |   | $ | 0.19 |   |
|                                                                            | ** ** | ** **                                       |       |   |   |
| Diluted income per  share:                                                      |       |                                             |       |   |   |
| Continuing  operations                                                          |       | $                                                | 0.10       |   | $ | 0.18 |   |
| Discontinued  operations                                                        |       | —                                           |       | 0.01 |   |
| Net income                                                                      |       | $                                                | 0.10       |   | $ | 0.19 |   |
|                                                                            |       |                                             |       |   |   |
| Weighted average shares  used in per share calculations:                        |       |                                             |       |   |   |
| Basic                                                                           |       | 47,273                                           |       | 47,065 |   |
| Diluted                                                                         |       | 48,015                                           |       | 47,784 |   |
|                                                                                 |            |                                                  |            |  |  |  |  |  |  |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

3

----

**UNAUDITED CONSOLIDATED BALANCE SHEETS**

**Blount International, Inc. and Subsidiaries **
| ** **                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share data)**                                                       | ** ** | ** **         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Assets**                                                                                                                   | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                              |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                    |       | $                  | 26,413     |                  | $          | 27,636 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $2,520 and $2,545, respectively                              |       | 80,386             |       | 82,748                |       |
| Inventories, net                                                                                                             |       | 91,538             |       | 77,833                |       |
| Deferred income taxes                                                                                                        |       | 14,466             |       | 20,122                |       |
| Other current assets                                                                                                         |       | 6,408              |       | 8,342                 |       |
| Total current assets                                                                                                         |       | 219,211            |       | 216,681               |       |
| Property, plant  and equipment, net                                                                                          |       | 100,728            |       | 99,665                |       |
| Goodwill                                                                                                                     |       | 71,892             |       | 71,892                |       |
| Deferred  financing costs                                                                                                    |       | 13,593             |       | 14,574                |       |
| Deferred income  taxes                                                                                                       |       | 15,385             |       | 17,318                |       |
| Assets held for  sale                                                                                                        |       | 2,700              |       | 2,700                 |       |
| Other assets                                                                                                                 |       | 24,060             |       | 7,636                 |       |
| Total Assets                                                                                                                 |       | $                  | 447,569    |                  | $          | 430,466 |   |
|                                                                                                                         |       |               |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                                              | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                        |       |               |       |                  |       |
| Current maturities of long-term debt                                                                                         |       | $                  | 1,500      |                  | $          | 1,500 |   |
| Accounts payable                                                                                                             |       | 33,614             |       | 34,982                |       |
| Accrued expenses                                                                                                             |       | 49,092             |       | 62,140                |       |
| Deferred income taxes                                                                                                        |       | 166                |       | 197                   |       |
| Total current liabilities                                                                                                    |       | 84,372             |       | 98,819                |       |
| Long-term debt,  excluding current maturities                                                                                |       | 366,025            |       | 349,375               |       |
| Deferred income  taxes                                                                                                       |       | 929                |       | 791                   |       |
| Employee benefit  obligations                                                                                                |       | 68,757             |       | 71,724                |       |
| Other  liabilities                                                                                                           |       | 25,843             |       | 15,048                |       |
| Total  liabilities                                                                                                           |       | 545,926            |       | 535,757               |       |
| Commitments and  contingent liabilities                                                                                      |       |               |       |                  |       |
| Stockholders’  equity (deficit):                                                                                        |       |               |       |                  |       |
| Common stock: par value $0.01 per share, 100,000,000  shares authorized, 47,273,591 and 47,242,925 outstanding, respectively |       | 473                |       | 472                   |       |
| Capital in excess of par value of stock                                                                                      |       | 573,989            |       | 571,683               |       |
| Accumulated deficit                                                                                                          |       | (656,338           | )          | (661,004              | )          |
| Accumulated other comprehensive loss                                                                                         |       | (16,481            | )          | (16,442               | )          |
| Total stockholders’ deficit                                                                                             |       | (98,357            | )          | (105,291              | )          |
| Total Liabilities and  Stockholders’ Deficit                                                                            |       | $                  | 447,569    |                  | $          | 430,466 |   |
|                                                                                                                              |            |                    |            |                       |            |  |  |  |  |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

4

----

**UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**
| ** **                                                                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                                                                   | ** ** | ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                                             |       |                                                 |       |   |   |
| Income from  continuing operations                                                                     |       | $                                                    | 4,700      |   | $ | 8,386 |   |
| Adjustments to  reconcile income from continuing operations to net cash used in operating  activities: |       |                                                 |       |   |   |
| Depreciation of property, plant and equipment                                                          |       | 4,443                                                |       | 4,074 |   |
| Amortization, stock compensation and other non-cash  charges                                           |       | 3,109                                                |       | 2,584 |   |
| Excess tax benefit from share-based compensation                                                       |       | (39                                                  | )          | (302 | ) |
| Deferred income taxes                                                                                  |       | 641                                                  |       | 2,319 |   |
| Loss on disposal of property, plant, and equipment                                                     |       | 3                                                    |       | 25 |   |
| Changes in assets and liabilities:                                                                     |       |                                                 |       |   |   |
| (Increase) decrease in accounts receivable                                                             |       | 2,082                                                |       | 272 |   |
| (Increase) decrease in inventories                                                                     |       | (13,705                                              | )          | (9,598 | ) |
| (Increase) decrease in other assets                                                                    |       | 2,811                                                |       | (506 | ) |
| Increase (decrease) in accounts payable                                                                |       | (1,368                                               | )          | (4,535 | ) |
| Increase (decrease) in accrued expenses                                                                |       | (12,177                                              | )          | (6,993 | ) |
| Increase (decrease) in other liabilities                                                               |       | (2,197                                               | )          | (11,547 | ) |
| Discontinued operations                                                                                |       | (857                                                 | )          | 1,051 |   |
| Net cash used in operating activities                                                                  |       | (12,554                                              | )          | (14,770 | ) |
| ** **                                                                                             |       |                                                 |       |   |   |
| **Cash  flows from investing activities:**                                                             |       |                                                 |       |   |   |
| Proceeds from  sale of property, plant and equipment                                                   |       | 3                                                    |       | 26 |   |
| Purchases of  property, plant and equipment                                                            |       | (5,500                                               | )          | (4,081 | ) |
| Discontinued  operations                                                                               |       | —                                               |       | (16 | ) |
| Net cash used in investing activities                                                                  |       | (5,497                                               | )          | (4,071 | ) |
| ** **                                                                                             |       |                                                 |       |   |   |
| **Cash  flows from financing activities:**                                                             |       |                                                 |       |   |   |
| Net borrowings  under revolving credit facility                                                        |       | 17,025                                               |       | 98,250 |   |
| Repayment of term  loan principal                                                                      |       | (375                                                 | )          | (82,723 | ) |
| Issuance costs  related to debt                                                                        |       | —                                               |       | (700 | ) |
| Excess tax  benefit from share-based compensation                                                      |       | 39                                                   |       | 302 |   |
| Proceeds from  exercise of stock options                                                               |       | 139                                                  |       | 391 |   |
| Net cash provided by financing activities                                                              |       | 16,828                                               |       | 15,520 |   |
|                                                                                                   |       |                                                 |       |   |   |
| Net decrease in  cash and cash equivalents                                                             |       | (1,223                                               | )          | (3,321 | ) |
| Cash and cash  equivalents at beginning of period                                                      |       | 27,636                                               |       | 12,937 |   |
| Cash and cash  equivalents at end of period                                                            |       | $                                                    | 26,413     |   | $ | 9,616 |   |
|                                                                                                        |            |                                                      |            |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

5

----

**UNAUDITED CONSOLIDATED STATEMENT OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)**

**Blount International, Inc. and Subsidiaries**
| **(Amounts in thousands)**    | ** ** | ** ** | ** ** | **Shares  (in 000’s)** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------|------------|------------------------------------------|------------|--------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| **Balance  December 31, 2006**          |       | 47,243     |       | $                                | 472        |              | $          | 571,683                                  |       | $                        | (661,004   | )                                                     | $          | (16,442   | )          | $ | (105,291 | ) |
|                                    |       |       |       |                             |       |              |       |                                     |       |                     |       |                                                  |       |
| Net income                              |       |       |       |                             |       |              |       | 4,666                                    |       |                     |       | 4,666                                                 |       |
| Other comprehensive income (loss):      |       |       |       |                             |       |              |       |                                     |       |                     |       |                                                  |       |
| Foreign currency translation Adjustment |       |       |       |                             |       |              |       |                                     |       | (23                      | )          | (23                                                   | )          |
| Unrealized losses                       |       |       |       |                             |       |              |       |                                     |       | (16                      | )          | (16                                                   | )          |
| Comprehensive income, net               |       |       |       |                             |       |              |       |                                     |       |                     |       | 4,627                                                 |       |
| Exercise of stock options               |       | 31         |       | 1                                |       | 177               |       |                                     |       |                     |       | 178                                                   |       |
| Stock compensation expense              |       |       |       |                             |       | 2,129             |       |                                     |       |                     |       | 2,129                                                 |       |
| Balance March 31, 2007                  |       | 47,274     |       | $                                | 473        |              | $          | 573,989                                  |       | $                        | (656,338   | )                                                     | $          | (16,481   | )          | $ | (98,357 | ) |

 

Other comprehensive loss for the three months ended March 31,2007 was $39 thousand. Other comprehensive income for the three months endedMarch 31, 2006 was $0.2 million.

The accompanying notes are an integral part of theseconsolidated financial statements.

6

----

**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1: BASIS OF PRESENTATION**

***Basis of Presentation.***  The unaudited consolidated financialstatements include the accounts of Blount International, Inc. and itssubsidiaries (“Blount” or the “Company”) and are prepared in conformity withaccounting principles generally accepted in the United States of America. Allsignificant intercompany balances and transactions have been eliminated. In theopinion of management, the consolidated financial statements contain alladjustments (consisting of only normal recurring adjustments) necessary for afair statement of the financial position, results of operations, cash flows andchanges in stockholders’ deficit for the periods presented.

The accompanying financial data as of March 31, 2007 and forthe three months ended March 31, 2007 and 2006 has been prepared by theCompany, without audit, pursuant to the rules and regulations of the UnitedStates Securities and Exchange Commission (“SEC”). Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules andregulations. The December 31, 2006 consolidated balance sheet was derived fromaudited financial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America. Theseconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006.

***Use of Estimates.***** **The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires that management make certain estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities as of the dates of the financial statements, as well asthe reported amounts of revenues and expenses during the reporting periods. TheCompany bases its estimates on various assumptions that are believed to bereasonable under the circumstances. Management is continually evaluating andupdating these estimates and it is reasonably possible that these estimateswill change in the near term.

***Reclassifications.***  Certain amounts in the prior period financialstatements have been reclassified to conform to the current periodpresentation. Such reclassifications have no effect on previously reported netincome or net stockholders’ deficit.

**NOTE 2: DISCONTINUED OPERATIONS**

***Discontinued Lawnmower Segment.***  On July 27, 2006, the Company sold certain ofthe assets and liabilities of Dixon Industries, Inc. (“Dixon”) to HusqvarnaProfessional Outdoor Products, Inc. (“Husqvarna”), a wholly-owned subsidiary ofHusqvarna AB (Sweden). Dixon had previously been reported as the Company’sLawnmower Segment. The Company received preliminary cash proceeds of $33.9million on July 27, 2006, which were applied to the outstanding principalbalance of the Company’s revolving credit facility. The final selling price was$33.1 million after adjustment as specified in the related asset purchaseagreement. The sale included the disposition of Dixon’s recorded goodwill inthe amount of $5.0 million. Certain liabilities of Dixon, as well as theland, building, building improvements, certain machinery and equipment andvarious other assets related to its Coffeyville, Kansas facility, were retainedby the Company by merger of Dixon with and into 4520 Corp. Inc., an indirectwholly-owned subsidiary of the Company. The net property, plant and equipmentassociated with the discontinued operations of Dixon are carried at theirestimated fair value and are included in assets held for sale in theconsolidated balance sheet. The land and building are currently being marketedfor sale by the Company.

7

----

**NOTE 3: INVENTORIES, NET**

Inventories consisted of the following:
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | ** **         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Raw materials  and supplies          |       | $                  | 26,664     |                  | $          | 24,213 |   |
| Work in progress                     |       | 15,224             |       | 14,034                |       |
| Finished goods                       |       | 49,650             |       | 39,586                |       |
| Total inventories                    |       | $                  | 91,538     |                  | $          | 77,833 |   |
|                                      |            |                    |            |                       |            |  |  |  |  |

 

**NOTE 4: LONG TERM DEBT**

Long-term debt consisted of the following:
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | ** **         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Revolving credit  facility           |       | $                  | 44,025     |                  | $          | 27,000 |   |
| Term loans                           |       | 148,500            |       | 148,875               |       |
| 8 7/8% senior  subordinated notes    |       | 175,000            |       | 175,000               |       |
| Total debt                           |       | 367,525            |       | 350,875               |       |
| Less current  maturities             |       | (1,500             | )          | (1,500                | )          |
| Long-term debt                       |       | $                  | 366,025    |                  | $          | 349,375 |   |
|                                      |            |                    |            |                       |            |  |  |  |  |

The weighted average interest rate on outstanding debt as ofMarch 31, 2007was 7.98%.

The revolvingcredit facility provides for total available borrowings up to $150.0 million,reduced by outstanding letters of credit and further restricted by a specificleverage ratio and first lien credit facilities leverage ratio. As of March 31, 2007, the Company had the abilityto borrow an additional $92.1 million under the terms of the revolving creditagreement. The revolving credit facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2009. Interest is payable monthly in arrears on any prime rateborrowing and at the individual maturity dates for any LIBOR-based borrowing. Anyoutstanding principal is due in its entirety on the maturity date.

The term loan facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2010. The term loan facility requires quarterly payments of $0.4million, with a final payment of $143.3 million due on the maturity date. Oncerepaid, principal under the term loan facility may not be re-borrowed by theCompany.

The revolvingcredit facility and term loans may be prepaid at any time. There can also beadditional mandatory repayment requirements related to the sale of Companyassets, the issuance of stock under certain circumstances or upon the Company’sannual generation of excess cash flow, as determined under the creditagreement.

The revolving credit facility and term loans are governed bythe terms of amended and restated senior credit facilities. Blount International,Inc. and all of its domestic subsidiaries other than Blount, Inc. guaranteeBlount, Inc.’s obligations under the senior credit facilities. The obligationsunder the senior credit facilities are collateralized by a first prioritysecurity interest in substantially all of the assets of Blount, Inc. and itsdomestic subsidiaries, as well as a pledge of all of Blount, Inc.’s capitalstock held by Blount International, Inc. and all of the stock of domesticsubsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of thestock of its non-domestic subsidiaries as additional collateral.

The senior credit facilities contain financial covenantsrelating to maximum capital expenditures, minimum fixed charge coverage ratio,maximum leverage ratio and maximum first lien credit facilities leverage ratio.In addition, 

8

----

there are covenants relating, among other categories, toinvestments, loans and advances, indebtedness, and the sale of stock or assets.The Company was in compliance with all debt covenants as of March 31, 2007.

The Company has one registered debt security, the 8 7/8%senior subordinated notes. The interest rate on these notes is fixed untiltheir maturity on August 1, 2012. These notes are issued by Blount, Inc. andare fully and unconditionally, jointly and severally, guaranteed by the Companyand all of its domestic subsidiaries (“guarantor subsidiaries”) other thanBlount, Inc.

**NOTE 5: INCOME TAXES**

The Companycontinues to utilize its various federal and state net operating loss and taxcredit carryforwards to reduce the amount of cash tax payments required. As ofMarch 31, 2007, the estimated federal net operating loss carryforward remainingwas approximately $15.3 million.

In June 2006, the Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN No. 48”). This interpretation clarified the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB Statement No. 109, “Accounting for Income Taxes.” FIN No. 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. It also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. The Company adopted FIN No. 48 effectiveJanuary 1, 2007.

There was no material adjustment to the net liability foruncertain tax positions as a result of the adoption of FIN No. 48 on January 1,2007. However, uncertain tax positions which were previously netted on thebalance sheet are reported separately at March 31, 2007. At the adoption of FINNo. 48, the Company had $27.3 million of unrecognized tax benefits of which $12.4million, if recognized, would affect the effective tax rate. Also, as of theadoption date, the Company had accrued interest and penalties of $2.8 millionrelated to uncertain tax positions. The Company recognizes interest andpenalties related to uncertain tax positions in income tax expense. As of March31, 2007, there have been no material changes to the Company’s uncertain taxposition balances. The tax years 2001 to 2006 remain open to examination by themajor taxing jurisdictions to which the Company is subject.

**NOTE 6: PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS**

The Company sponsors defined benefit pension plans coveringsubstantially all of its employees in the U.S., Canada and Belgium. The Companyalso sponsors various other post-employment medical and benefit plans coveringmany of its current and former employees. The components of net periodicbenefit cost for these plans are as follows: 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                            | ** ** | **Other Post-Employment Benefits** | ** ** |
| **(Amounts in thousands)** | ** ** | ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                         |       | $                                                    | 907        |   | $ | 1,735 |   | $ | 95 |   | $ | 122 |   |
| Interest cost                        |       | 2,569                                                |       | 2,575 |   | 479 |   | 569 |   |
| Expected return  on plan assets      |       | (3,218                                               | )          | (2,785 | ) | — |   | (3 | ) |
| Amortization of  prior service cost  |       | (3                                                   | )          | 93 |   | 2 |   | 3 |   |
| Amortization of  net actuarial loss  |       | 384                                                  |       | 813 |   | 188 |   | 338 |   |
| Total net periodic  benefit cost     |       | $                                                    | 639        |   | $ | 2,431 |   | $ | 764 |   | $ | 1,029 |   |
|                                      |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Effective January 1, 2007, the Company implemented a redesign of itsdomestic retirement plans, including a freeze of its defined benefitpension plan and the associated nonqualified plan. As of January 1, 2007,employees who currently participate in the plans ceased accruing benefits andnew employees are not eligible to participate. All retirement benefits accruedup to the time of the freeze were preserved. Accordingly, the Company recorded a pension curtailment charge of $3.2million in the three months ended September 30, 2006, which represented the 

9

----

immediate recognition of the unamortized prior service cost for U.S.employees. The Company expects to contribute a total of approximately$12 million to $20 million to its funded pension plans during 2007.

The Company also sponsors adefined contribution 401(k) plan covering most employees in the U.S. In conjunctionwith the redesign of its domestic retirement plans, the defined contribution401 (k) plan was amended to provide for an additional annual Companycontribution of 3%, 4% or 5% of base compensation, depending upon theparticipant’s years of service. The new contribution will be made whether ornot the employee contributes to the plan. In addition, the Company intends tocontinue to match employee contributions to 401(k) accounts up to 4.5% of basecompensation.

In September 2006, FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158requires an employer to recognize the over-funded or under-funded status of adefined benefit postretirement plan (other than a multiemployer plan) as anasset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income. The Company adopted SFAS No. 158 effective December31, 2006.

**NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES**

Guarantees and other commercial commitments are summarized inthe following table: 
| ** **                            | ** ** | **March 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| **(Amounts in thousands)**  | ** ** | ** **         | ** ** | **2007** | ** ** |
| Warranty reserve                      |       | $                  | 2,991      |   |
| Letters of  credit outstanding        |       | 5,627              |       |
| Third party financing  agreements (1) |       | 2,469              |       |
|                                       |            |                    |            |  |  |  |

----

(1)             Applicableto third party financing agreements for customer equipment purchases.

Changes in the warranty reserve are as follows:
| **(Amounts in thousands)** | ** ** | ** ** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| Balance at  December 31, 2006        |       | $          | 3,269      |     |
| Accrued warranty  expense            |       | 386        |       |
| Payments made  (in cash or in-kind)  |       | (664       | )          |
| Balance at March 31,  2007           |       | $          | 2,991      |     |

The warranty reserve is included in accrued expenses on theconsolidated balance sheet. In addition to these amounts, the Company alsoguarantees certain debt of its subsidiaries (see Note 13).

The Company is a defendant in a number of product liabilitylawsuits, some of which seek significant or unspecified damages, involvingserious personal injuries for which there are retentions or deductible amountsunder the Company’s insurance policies. In addition, the Company is a party toa number of other suits arising out of the normal course of its business,including suits concerning commercial contracts, employee matters andintellectual property rights. In some instances, the Company is the plaintiff andis seeking recovery of damages. In others, the Company is a defendant againstwhom damages are being sought. While there can be no assurance as to theirultimate outcome, management does not believe these lawsuits will have amaterial adverse effect on the Company’s consolidated financial position,operating results or cash flows.

The Company accrues, by a charge to income, an amountrepresenting management’s best estimate of the undiscounted probable lossrelated to any matter deemed by management and its counsel as a probable losscontingency in light of all of the then known circumstances. The Company doesnot accrue a charge to income for a 

10

----

matter deemed by management and its counsel to be areasonably possible loss contingency in light of all of the currentcircumstances.

**NOTE 8: EARNINGS PER SHARE DATA**

Shares used in the denominators of the basic anddiluted earnings per share computations were as follows:
| ** **                                                                                                           | ** ** | **Three Months  Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Shares in thousands)**                                                                                  | ** ** | ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Shares for basic  income per share computation — weighted average common shares outstanding                     |       | 47,273                                           |       | 47,065 |   |
| Dilutive effect  of common stock equivalents                                                                         |       | 742                                              |       | 719 |   |
| Shares for  diluted income per share computation                                                                     |       | 48,015                                           |       | 47,784 |   |
| Options and stock  appreciation rights excluded from computation as anti-dilutive because they  are out-of-the-money |       | 1,766                                            |       | 778 |   |
|                                                                                                                      |            |                                                  |            |  |  |  |  |

 

**NOTE 9: STOCK-BASED COMPENSATION**

Effective January 1, 2006, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), ‘‘Share-Based Payment’’ (“SFASNo. 123(R)”). SFAS No. 123(R) requires all share-based compensation toemployees, directors and others who perform services for the Company, includinggrants of stock options and stock appreciation rights (“SARs”), to be valued atfair value on the date of grant and to be expensed over the applicable serviceperiod. Under SFAS No. 123(R), pro forma disclosure of the income statementeffects of share-based compensation is no longer an alternative to expenserecognition. The Company followed the modified prospective application methodand, accordingly, the results for prior periods were not restated.

The fair value of options and SARs was estimated on therespective grant dates using the Black-Scholes option valuation model. Theestimated average life of SARs was derived from the “simplified” methoddescribed in SEC Staff Accounting Bulletin No. 107 (“SAB 107”). The risk-freeinterest rate is based on the implied yield available on U.S. Treasuryzero-coupon issues with the remaining term equal to the average life. Theexpected volatility factors used are based on the historical volatility of theCompany’s stock. The expected dividend yield is based on historical informationand management estimate.

Under certain conditions, stock options, SARs,restricted stock units (“RSUs”) and restricted stock granted by the Company areeligible for continued vesting upon the retirement of the employee. SFAS No.123(R) clarifies that the fair value of such stock-based compensation should beexpensed based on an accelerated service period, or immediately, rather thanratably over the vesting period stated in the grant, for employees who areretirement eligible prior to the completion of the vesting period.

In the three months ended March 31, 2007, the Companyawarded 45,000 shares of restricted stock, 136,000 RSUs and 377,500 SARs underits 2006 equity compensation plan. The restricted stock and RSUs had a fairvalue of $2.1 million on the grant date and generally vest over a three yearperiod. The SARs had an aggregate fair value of $1.6 million on the grant dateand also generally vest over a three year period. The effect of applying accelerated amortization of expense recognized forthose employees that were retirement eligible or become retirement eligibleprior to the completion of the vesting period was an increase of $1.4 millionfor each of the three months ended March 31, 2007 and 2006, respectively.

11

----

The following assumptions were used to estimate the fairvalue of SARs:
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Estimated  average life                 |       | 6 years                                              |       | 6 years |   |
| Risk-free  interest rate                |       |  4.5%                                           |       |  4.6% |   |
| Expected  volatility                    |       | 29.1% - 29.3%                                        |       | 26.7% |   |
| Weighted average  volatility            |       | 29.3%                                                |       | 26.7% |   |
| Dividend yield                          |       |   0.0%                                     |       |   0.0% |   |
| Weighted average grant  date fair value |       | $4.50                                           |       | $6.09  |   |

 

As of March 31, 2007, the total unrecognized stock-basedcompensation expense related to previously granted awards was $3.6 million. Theweighted-average period over which this expense is expected to be recognized is1.2 years. The Company’s policy upon the exercise of options, RSUs or SARs hasbeen to issue new shares into the market place.

**NOTE 10: SEGMENT INFORMATION**

The Company identifies operating segments primarily based onmanagement responsibility. The Company has two operating segments, each ofwhich is a reportable segment: Outdoor Products and Industrial and PowerEquipment. See also Note 2 regarding the discontinuation of the formerLawnmower segment business. Outdoor Products manufactures and markets cuttingchain, bars, sprockets and accessories for chainsaw use; concrete-cuttingequipment; and lawnmower blades and accessories for yard care equipment.Industrial and Power Equipment manufactures and markets timber harvestingequipment, timber harvesting heads, industrial tractors and loaders; rotationalbearings, worm gear reducers, hydraulic pump drives, swing drives and winches.

The accounting policies of the segments are the same as thosedescribed in the summary of significant accounting policies.

Certain financial information by segment is presented in thetable below: 
| ** **                           | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Sales:**                           |       |                                             |       |   |   |
| Outdoor Products                     |       | $                                                | 110,867    |   | $ | 114,196 |   |
| Industrial and Power Equipment       |       | 33,205                                           |       | 49,842 |   |
| Inter-segment elimination            |       | (76                                              | )          | (236 | ) |
| Total sales                          |       | $                                                | 143,996    |   | $ | 163,802 |   |
|                                 |       |                                             |       |   |   |
| **Operating  income:**               |       |                                             |       |   |   |
| Outdoor Products                     |       | $                                                | 21,070     |   | $ | 24,807 |   |
| Industrial and Power Equipment       |       | 187                                              |       | 3,323 |   |
| Inter-segment elimination            |       | —                                           |       | (43 | ) |
| Contribution  from segments          |       | 21,257                                           |       | 28,087 |   |
| Corporate  expenses                  |       | (5,816                                           | )          | (5,803 | ) |
| Operating income                     |       | $                                                | 15,441     |   | $ | 22,284 |   |
|                                      |            |                                                  |            |  |  |  |  |  |  |

 

12

----

**NOTE 11: SUPPLEMENTAL CASH FLOWS INFORMATION**
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest paid                        |       | $                                                | 11,000     |   | $ | 12,288 |   |
| Income taxes paid, net               |       | 2,639                                            |       | 3,199 |   |
|                                      |            |                                                  |            |  |  |  |  |  |  |

 

**NOTE 12: RECENT ACCOUNTING PRONOUNCEMENTS**

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFASNo. 157 defines fair value, establishes a framework for measuring fair value inaccordance with accounting principles generally accepted in the U.S., andexpands disclosures about fair value measurements. The provisions of SFAS No.157 are effective for the Company’s fiscal year beginning January 1, 2008. TheCompany is currently evaluating the impact of the provisions of SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “Fair ValueOption for Financial Assets and Financial Liabilities-Including an amendment ofFASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue. The provisions of SFAS No. 159 are effective for the Company on January1, 2008. The Company is currently evaluating the impact of the provisions ofSFAS No. 159.

**NOTE 13: CONSOLIDATING FINANCIAL INFORMATION**

See Note 4 for a discussion of the Company’s guarantorsubsidiaries. The following consolidating financial information sets forthcondensed consolidating statements of operations, balance sheets and statementsof cash flows of Blount International, Inc., Blount, Inc., the guarantorsubsidiaries and the non-guarantor subsidiaries.

13

----

**Condensed Consolidating Statement of OperationsInformation**
| **(Amounts in thousands)**                          | ** ** | ** ** | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **For the  Three Months Ended March 31, 2007**           |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Sales                                                         |       |       |       | $                                | 110,707    |              | $          | 11,774                      |       | $                                 | 75,138     |             | $          | (53,623          | )          | $ | 143,996 |   |
| Cost of sales                                                 |       |       |       | 82,443                           |       | 9,728             |       | 59,676                      |       | (52,761                           | )          | 99,086           |       |
| Gross profit                                                  |       |       |       | 28,264                           |       | 2,046             |       | 15,462                      |       | (862                              | )          | 44,910           |       |
| Operating  expenses                                           |       |       |       | 21,133                           |       | 1,129             |       | 7,207                       |       |                              |       | 29,469           |       |
| Operating income                                              |       |       |       | 7,131                            |       | 917               |       | 8,255                       |       | (862                              | )          | 15,441           |       |
| Other, net                                                    |       | $          | (5,859     | )                                | (2,506     | )                 | 144        |                        | 236        |                              |       |             | (7,985     | )                |
| Income (loss)  from continuing operations before income taxes |       | (5,859     | )          | 4,625                            |       | 1,061             |       | 8,491                       |       | (862                              | )          | 7,456            |       |
| Provision  (benefit) for income taxes                         |       | (2,168     | )          | 2,451                            |       | 399               |       | 2,074                       |       |                              |       | 2,756            |       |
| Income (loss)  from continuing operations                     |       | (3,691     | )          | 2,174                            |       | 662               |       | 6,417                       |       | (862                              | )          | 4,700            |       |
| Loss from  discontinued operations                            |       |       |       |                             |       | (34               | )          |                        |       |                              |       | (34              | )          |
| Equity in  earnings of affiliated companies                   |       | 8,357      |       | 6,183                            |       | 68                |       |                        |       | (14,608                           | )          |             |       |
| Net income                                                    |       | $          | 4,666      |                             | $          | 8,357             |       | $                           | 696        |                              | $          | 6,417            |       | $                | (15,470    | ) | $ | 4,666 |   |

 
| **(Amounts in thousands)**                          | ** ** | ** ** | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **For the  Three Months Ended March 31, 2006**                |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Sales                                                         |       |       |       | $                                | 119,624    |              | $          | 28,649                      |       | $                                 | 69,151     |             | $          | (53,622          | )          | $ | 163,802 |   |
| Cost of sales                                                 |       |       |       | 90,889                           |       | 21,999            |       | 53,412                      |       | (55,092                           | )          | 111,208          |       |
| Gross profit                                                  |       |       |       | 28,735                           |       | 6,650             |       | 15,739                      |       | 1,470                             |       | 52,594           |       |
| Operating  expenses                                           |       |       |       | 20,324                           |       | 2,754             |       | 7,232                       |       |                              |       | 30,310           |       |
| Operating income                                              |       |       |       | 8,411                            |       | 3,896             |       | 8,507                       |       | 1,470                             |       | 22,284           |       |
| Other, net                                                    |       | $          | (5,353     | )                                | (2,925     | )                 | (161       | )                           | (405       | )                                 |       |             | (8,844     | )                |
| Income (loss)  from continuing operations before income taxes |       | (5,353     | )          | 5,486                            |       | 3,735             |       | 8,102                       |       | 1,470                             |       | 13,440           |       |
| Provision  (benefit) for income taxes                         |       | (2,013     | )          | 4,497                            |       | 233               |       | 2,337                       |       |                              |       | 5,054            |       |
| Income (loss)  from continuing operations                     |       | (3,340     | )          | 989                              |       | 3,502             |       | 5,765                       |       | 1,470                             |       | 8,386            |       |
| Income from  discontinued operations                          |       |       |       |                             |       | 571               |       |                        |       |                              |       | 571              |       |
| Equity in  earnings of affiliated companies                   |       | 12,297     |       | 11,308                           |       | 64                |       |                        |       | (23,669                           | )          |             |       |
| Net income                                                    |       | $          | 8,957      |                             | $          | 12,297            |       | $                           | 4,137      |                              | $          | 5,765            |       | $                | (22,199    | ) | $ | 8,957 |   |

 

14

----

**Condensed Consolidating Balance Sheet Information**
| **(Amounts in thousands)**                       | ** ** | ** ** | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| **March  31, 2007**                                        | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **       | ** ** |
| ** **                                                 |       |       |       |                             |       |              |       |                        |       |                             |       |             |       |
| **Assets**                                                 |       |       |       |                             |       |              |       |                        |       |                             |       |             |       |
|                                                       |       |       |       |                             |       |              |       |                        |       |                             |       |             |       |
| Cash and cash  equivalents                                 |       |       |       |                             |       |              |       | $                           | 30,419     |                             | $          | (4,006           | )          | $                | 26,413     |   |
| Accounts  receivable, net                                  |       |       |       | $                                | 47,950     |              | $          | 5,892                       |       | 26,544                           |       |             |       | 80,386           |       |
| Intercompany  receivables                                  |       |       |       | 157,226                          |       | 82,193            |       | 16,574                      |       | (255,993                         | )          |             |       |
| Inventories                                                |       |       |       | 66,077                           |       | 6,454             |       | 20,153                      |       | (1,146                           | )          | 91,538           |       |
| Deferred income  taxes                                     |       |       |       | 14,379                           |       |              |       | 87                          |       |                             |       | 14,466           |       |
| Other current assets                                       |       |       |       | 2,387                            |       | 291               |       | 3,730                       |       |                             |       | 6,408            |       |
| Total current assets                                       |       |       |       | 288,019                          |       | 94,830            |       | 97,507                      |       | (261,145                         | )          | 219,211          |       |
| Investments in  affiliated companies                       |       | $          | 158,970    |                             | 237,356    |              | 600        |                        | 248        |                             | (397,174   | )                |       |             |
| Property, plant  and equipment, net                        |       |       |       | 43,040                           |       | 10,331            |       | 47,357                      |       |                             |       | 100,728          |       |
| Assets held for  sale                                      |       |       |       | 1,500                            |       | 1,200             |       |                        |       |                             |       | 2,700            |       |
| Goodwill and  other assets                                 |       |       |       | 102,048                          |       | 11,888            |       | 12,799                      |       | (1,805                           | )          | 124,930          |       |
| Total Assets                                               |       | $          | 158,970    |                             | $          | 671,963           |       | $                           | 118,849    |                             | $          | 157,911          |       | $                | (660,124   | ) | $ | 447,569 |   |
| ** **                                                 |       |       |       |                             |       |              |       |                        |       |                             |       |             |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**   |       |       |       |                             |       |              |       |                        |       |                             |       |             |       |
| ** **                                                 |       |       |       |                             |       |              |       |                        |       |                             |       |             |       |
| Current  maturities of long-term debt                      |       |       |       | $                                | 1,500      |              |       |                        |       |                             |       |             | $          | 1,500            |       |
| Accounts payable                                           |       |       |       | 23,864                           |       | $                 | 2,992      |                        | $          | 10,764                           |       | $                | (4,006     | )                | 33,614     |   |
| Intercompany  payables                                     |       | $          | 255,993    |                             |       |              |       |                        |       |                             | (255,993   | )                |       |             |
| Other current  liabilities                                 |       |       |       | 33,559                           |       | 3,539             |       | 12,160                      |       |                             |       | 49,258           |       |
| Total current liabilities                                  |       | 255,993    |       | 58,923                           |       | 6,531             |       | 22,924                      |       | (259,999                         | )          | 84,372           |       |
| Long-term debt,  excluding current maturities              |       |       |       | 366,025                          |       |              |       |                        |       |                             |       | 366,025          |       |
| Other  liabilities                                         |       | 1,334      |       | 88,045                           |       | 45                |       | 7,910                       |       | (1,805                           | )          | 95,529           |       |
| Total  liabilities                                         |       | 257,327    |       | 512,993                          |       | 6,576             |       | 30,834                      |       | (261,804                         | )          | 545,926          |       |
| Stockholders’  equity (deficit)                       |       | (98,357    | )          | 158,970                          |       | 112,273           |       | 127,077                     |       | (398,320                         | )          | (98,357          | )          |
| Total Liabilities and  Stockholders’ Equity (Deficit) |       | $          | 158,970    |                             | $          | 671,963           |       | $                           | 118,849    |                             | $          | 157,911          |       | $                | (660,124   | ) | $ | 447,569 |   |

 

15

----

**Condensed Consolidating Balance Sheet Information**
| **(Amounts in thousands)**                       | ** ** | ** ** | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| **December  31, 2006**                                     | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                              | ** ** | ** **       | ** ** |
| ** **                                                 |       |       |       |                             |       |              |       |                        |       |                                    |       |             |       |
| **Assets**                                                 |       |       |       |                             |       |              |       |                        |       |                                    |       |             |       |
|                                                       |       |       |       |                             |       |              |       |                        |       |                                    |       |             |       |
| Cash and cash  equivalents                                 |       |       |       |                             |       | $                 | 90         |                        | $          | 29,398                                  |       | $                | (1,852     | )                | $          | 27,636 |   |
| Accounts  receivable, net                                  |       |       |       | $                                | 51,660     |              | 5,817      |                        | 25,271     |                                    |       |             | 82,748     |             |
| Intercompany  receivables                                  |       |       |       | 153,923                          |       | 83,240            |       | 17,415                      |       | (254,578                                | )          |             |       |
| Inventories                                                |       |       |       | 56,823                           |       | 5,519             |       | 17,754                      |       | (2,263                                  | )          | 77,833           |       |
| Deferred income  taxes                                     |       |       |       | 20,035                           |       |              |       | 87                          |       |                                    |       | 20,122           |       |
| Other current  assets                                      |       |       |       | 2,926                            |       | 297               |       | 5,119                       |       |                                    |       | 8,342            |       |
| Total current assets                                       |       |       |       | 285,367                          |       | 94,963            |       | 95,044                      |       | (258,693                                | )          | 216,681          |       |
| Investments in  affiliated companies                       |       | $          | 150,652    |                             | 229,533    |              | 532        |                        | 248        |                                    | (380,965   | )                |       |             |
| Property, plant  and equipment, net                        |       |       |       | 41,370                           |       | 10,421            |       | 47,874                      |       |                                    |       | 99,665           |       |
| Goodwill and  other assets                                 |       |       |       | 89,986                           |       | 13,089            |       | 12,823                      |       | (1,778                                  | )          | 114,120          |       |
| Total Assets                                               |       | $          | 150,652    |                             | $          | 646,256           |       | $                           | 119,005    |                                    | $          | 155,989          |       | $                | (641,436   | ) | $ | 430,466 |   |
|                                                       |       |       |       |                             |       |              |       |                        |       |                                    |       |             |       |
| ** **                                                 |       |       |       |                             |       |              |       |                        |       |                                    |       |             |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**   |       |       |       |                             |       |              |       |                        |       |                                    |       |             |       |
|                                                       |       |       |       |                             |       |              |       |                        |       |                                    |       |             |       |
| Current  maturities of long-term debt                      |       |       |       | $                                | 1,500      |              |       |                        |       |                                    |       |             | $          | 1,500            |       |
| Accounts payable                                           |       |       |       | 23,319                           |       | $                 | 4,312      |                        | $          | 9,203                                   |       | $                | (1,852     | )                | 34,982     |   |
| Intercompany  payables                                     |       | $          | 254,578    |                             |       |              |       |                        |       |                                    | (254,578   | )                |       |             |
| Other current  liabilities                                 |       |       |       | 41,815                           |       | 4,820             |       | 15,702                      |       |                                    |       | 62,337           |       |
| Total current liabilities                                  |       | 254,578    |       | 66,634                           |       | 9,132             |       | 24,905                      |       | (256,430                                | )          | 98,819           |       |
| Long-term debt,  excluding current maturities              |       |       |       | 349,375                          |       |              |       |                        |       |                                    |       | 349,375          |       |
| Other  liabilities                                         |       | 1,365      |       | 79,595                           |       |              |       | 8,381                       |       | (1,778                                  | )          | 87,563           |       |
| Total  liabilities                                         |       | 255,943    |       | 495,604                          |       | 9,132             |       | 33,286                      |       | (258,208                                | )          | 535,757          |       |
| Stockholders  equity (deficit)                             |       | (105,291   | )          | 150,652                          |       | 109,873           |       | 122,703                     |       | (383,228                                | )          | (105,291         | )          |
| Total Liabilities and  Stockholders’ Equity (Deficit) |       | $          | 150,652    |                             | $          | 646,256           |       | $                           | 119,005    |                                    | $          | 155,989          |       | $                | (641,436   | ) | $ | 430,466 |   |

 

16

----

**CondensedConsolidating Cash Flows Information**
| **(Amounts in thousands)**                                         | ** ** | ** ** | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **For the Three Months Ended  March 31, 2007** |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| ** **                                                                   |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Net cash  provided by (used in) operating activities                         |       | $          | 2,137      |                             | $          | (17,502           | )          | $                           | (1,054     | )                                 | $          | 6,019            |       | $                | (2,154     | ) | $ | (12,554 | ) |
| ** **                                                                   |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Purchase of  property, plant and equipment                                   |       |       |       | (3,640                           | )          | (274              | )          | (1,586                      | )          |                              |       | (5,500           | )          |
| Discontinued  operations                                                     |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Other                                                                        |       |       |       |                             |       |              |       | 3                           |       |                              |       | 3                |       |
| Net cash used in  investing activities                                       |       |       |       | (3,640                           | )          | (274              | )          | (1,583                      | )          |                              |       | (5,497           | )          |
|                                                                         |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Net borrowings  under revolving credit facility                              |       |       |       | 17,025                           |       |              |       |                        |       |                              |       | 17,025           |       |
| Repayment of  term loan principal                                            |       |       |       | (375                             | )          |              |       |                        |       |                              |       | (375             | )          |
| Advances from  (to) affiliates                                               |       | (2,315     | )          | 4,492                            |       | 1,238             |       | (3,415                      | )          |                              |       |             |       |
| Other                                                                        |       | 178        |       |                             |       |              |       |                        |       |                              |       | 178              |       |
| Net cash  provided by (used in) financing activities                         |       | (2,137     | )          | 21,142                           |       | 1,238             |       | (3,415                      | )          |                              |       | 16,828           |       |
|                                                                         |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Net decrease in  cash and cash equivalents                                   |       |       |       |                             |       | (90               | )          | 1,021                       |       | (2,154                            | )          | (1,223           | )          |
| Cash and cash  equivalents at beginning of period                            |       |       |       |                             |       | 90                |       | 29,398                      |       | (1,852                            | )          | 27,636           |       |
| Cash and cash  equivalents at end of period                                  |       | $          | —     |                             | $          | —            |       | $                           | —     |                              | $          | 30,419           |       | $                | (4,006     | ) | $ | 26,413 |   |
|                                                                         |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| **For the  Three Months Ended March 31, 2006**                               |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
|                                                                         |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Net cash  provided by (used in) operating activities                         |       | $          | 1,998      |                             | $          | (19,836           | )          | $                           | 461        |                              | $          | 3,855            |       | $                | (1,248     | ) | $ | (14,770 | ) |
|                                                                         |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Purchase of  property, plant and equipment                                   |       |       |       | (2,448                           | )          | (445              | )          | (1,188                      | )          |                              |       | (4,081           | )          |
| Discontinued  operations                                                     |       |       |       |                             |       | (16               | )          |                        |       |                              |       | (16              | )          |
| Other                                                                        |       |       |       |                             |       |              |       | 26                          |       |                              |       | 26               |       |
| Net cash used in  investing activities                                       |       |       |       | (2,448                           | )          | (461              | )          | (1,162                      | )          |                              |       | (4,071           | )          |
|                                                                         |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Net borrowings  under revolving credit facility                              |       |       |       | 98,250                           |       |              |       |                        |       |                              |       | 98,250           |       |
| Repayment of  term loan principal                                            |       |       |       | (78,070                          | )          |              |       | (4,653                      | )          |                              |       | (82,723          | )          |
| Advances from  (to) affiliates                                               |       | (2,691     | )          | 2,761                            |       |              |       | (70                         | )          |                              |       |             |       |
| Other                                                                        |       | 693        |       | (700                             | )          |              |       |                        |       |                              |       | (7               | )          |
| Net cash  provided by (used in) financing activities                         |       | (1,998     | )          | 22,241                           |       |              |       | (4,723                      | )          |                              |       | 15,520           |       |
|                                                                         |       |       |       |                             |       |              |       |                        |       |                              |       |             |       |
| Net increase  (decrease) in cash and cash equivalents                        |       |       |       | (43                              | )          |              |       | (2,030                      | )          | (1,248                            | )          | (3,321           | )          |
| Cash and cash  equivalents at beginning of period                            |       |       |       | 43                               |       |              |       | 13,731                      |       | (837                              | )          | 12,937           |       |
| Cash and cash  equivalents at end of period                                  |       | $          | —     |                             | $          | —            |       | $                           | —     |                              | $          | 11,701           |       | $                | (2,085     | ) | $ | 9,616 |   |

 

17

----

**ITEM 2.**  **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussion and analysis should be read inconjunction with our unaudited consolidated financial statements includedelsewhere in this report.

**Operating Results**

**Three months ended March 31, 2007 (unaudited)compared to three months ended March 31, 2006 (unaudited).**

Results for the first three months of 2007 were below lastyear primarily due to a decline in unit sales in North America, leading to a reductionin profitability as illustrated in the table below.
| ** **                                                                      | ** ** | **Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales                                                                           |       | $                                                | 143,996    |   | $ | 163,802 |   |
|                                                                            |       |                                             |       |   |   |
| Operating income                                                                |       | 15,441                                           |       | 22,284 |   |
|                                                                            |       |                                             |       |   |   |
| Income from continuing  operations                                              |       | 4,700                                            |       | 8,386 |   |
| Income from continuing  operations per diluted share                            |       | 0.10                                             |       | 0.18 |   |
|                                                                            |       |                                             |       |   |   |
| Income (loss) from  discontinued operations                                     |       | (34                                              | )          | 571 |   |
| Income from  discontinued operations per diluted share                          |       | 0.00                                             |       | 0.01 |   |
|                                                                            |       |                                             |       |   |   |
| Net income                                                                      |       | 4,666                                            |       | 8,957 |   |
| Net income per diluted share                                                    |       | 0.10                                             |       | 0.19 |   |
|                                                                                 |            |                                                  |            |  |  |  |  |  |  |

Sales in the three months ended March 31, 2007 decreased by$19.8 million, or 12%, from the same period in 2006. The decrease in yearover year sales volume was $25.1 million. This decrease in sales volume wasprimarily from weaker North American market conditions in both of our operatingsegments. The demand for timber products was weaker in North America as housingstarts declined. The decrease related to volume was partially offset byincreases of $3.1 million for the combination of selling price and mix and$2.2 million from the change in foreign currency translation rates fromlast year. The year over year comparison reflected the following:

·                  Sales for our Industrial andPower Equipment segment decreased by one-third year over year, reflecting thedecrease in unit sales of timber harvesting equipment in the North Americanmarkets. Sales outside North America increased $2.6 million andrepresented 13% of total segment sales, compared to 4% for the same period lastyear.

·                  Sales for our Outdoor Productssegment declined by 3%, reflecting a decrease in unit sales across productcategories in the U.S. and Canada, partially offset by growth in sales in otherinternational markets that benefited from the favorable effect of the exchangerate trends mentioned above.

Consolidated order backlog at March 31, 2007 was $99.6 million,an increase from $73.3 million at December 31, 2006, but below the levelreported at March 31, 2006 of $108.3 million.

Operating income decreased by $6.8 million during thethree month period compared to the same period in 2006, with an operatingmargin of 10.7% compared to 13.6% last year. The decrease in operating incomeincluded a year over year reduction in gross profit of $7.7 million, or15%. As a percent of sales, gross margin decreased to 31.2% for the threemonths compared to 32.1% for the same period in 2006. Selling, general andadministrative (SG&A) expense decreased by $0.8 million, or 3%, in thecomparable three month periods.

18

----

The year over year change in consolidated gross profit ispresented in the following table: 
| **(Amounts in millions)** | ** ** | ** ** | ** ** | **Three months  Ended March 31** | ** ** |
|-------------------------------------|------------|------------|------------|-------------------------------------------------|------------|
| 2006 gross  profit                  |       | $          | 52.6       |                                            |
| Increase (decrease)                 |       |       |       |
| Sales volume                        |       | (6.2       | )          |
| Price, mix and cost                 |       | (3.0       | )          |
| Foreign currency translation        |       | 1.5        |       |
| 2007 gross profit                   |       | $          | 44.9       |                                            |

 

The decrease attributed to sales volume reflected a declinein unit sales across our business segments, primarily in the U.S. and Canadianmarkets. The combined effect of product price, cost and mix was alsounfavorable, as pricing pressure and cost increases outpaced our ability toachieve productivity gains. These decreases were partially offset by gains onthe mix of products and market channels, selling prices for certain products,an increase in unit sales volume outside the U.S. and Canada and the netpositive effect of foreign currency translation rates. For the three monthperiod ended March 31, 2007, steel prices appear to have stabilized, withminimal change to product costs compared to the same period in 2006. Steelprices continue to be significantly higher than steel prices in 2004 andearlier years.

SG&A decreased to $29.5 million for the three monthperiod ended March 31, 2007 from $30.3 million in the same period of 2006.As a percent of sales, SG&A increased to 20.5% in 2007 compared to 18.5%for the same period last year. The year over year decrease of $0.8 million,or 3%, included a $0.8 million decrease in employee benefits-relatedexpenses, a $0.4 million decrease related to a reduction in staffinglevels in certain areas, and lower spending in other areas. These decreaseswere partially offset by wage increases estimated at $0.3 million, a $0.3 millionincrease in stock-based compensation and $0.5 million of additionalexpense in our foreign offices as a result of currency exchange rates.

Interest expense was $8.3 million during the threemonths ended March 31, 2007, compared to $9.1 million in the prior year’sfirst three months, due largely to the lower average outstanding debt balances.

The provision for income taxes on continuing operations was$2.8 million in the first three months of 2007, representing an effectiverate of 37.0%. This compares to a provision of $5.1 million during thethree month period in 2006 and an effective rate of 37.6%. During both of theseperiods, we continued to utilize available net operating loss and creditcarryforwards to offset cash taxes payable in the U.S., and we estimate thatthe remaining federal net operating loss carryforward as of March 31, 2007is approximately $15.3 million.

For all periods presented, discontinued operations consistedentirely of our former Lawnmower segment, which operated through July 26, 2006.The loss from discontinued operations was less than $0.1 million for thethree months ended March 31, 2007 compared to net income from discontinuedoperations of $0.6 million ($0.01 per diluted share) for the same periodin 2006. The three month period of 2006 included sales of $13.9 million,income before taxes of $0.9 million and income taxes of $0.3 million.The loss in 2007 reflects costs of continuing ownership of the previousmanufacturing facility for this segment, which is currently being marketed forsale.

19

----

***Segment Results.*******
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Sales:**                           |       |                                             |       |   |   |
| Outdoor Products                     |       | $                                                | 110,867    |   | $ | 114,196 |   |
| Industrial and Power Equipment       |       | 33,205                                           |       | 49,842 |   |
| Inter-Segment elimination            |       | (76                                              | )          | (236 | ) |
| Total sales                          |       | $                                                | 143,996    |   | $ | 163,802 |   |
|                                 |       |                                             |       |   |   |
| **Operating  income:**               |       |                                             |       |   |   |
| Outdoor Products                     |       | $                                                | 21,070     |   | $ | 24,807 |   |
| Industrial and Power Equipment       |       | 187                                              |       | 3,323 |   |
| Inter-Segment elimination            |       | —                                           |       | (43 | ) |
| Contribution  from segments          |       | 21,257                                           |       | 28,087 |   |
| Corporate  expenses                  |       | (5,816                                           | )          | (5,803 | ) |
| Operating income                     |       | $                                                | 15,441     |   | $ | 22,284 |   |
|                                      |            |                                                  |            |  |  |  |  |  |  |

 

***Outdoor Products Segment. ***Sales for the Outdoor Products segment inthe three month period of 2007 decreased $3.3 million, or 3%, compared tothe same period of 2006.

The effect of volume on the three month period was a decreasein sales of $6.5 million. This decrease in sales volume was partiallyoffset by a $1.0 million net increase related to price and mix. Additionally,the year over year effect from foreign currency translation on sales, dueprimarily to exchange rates involving the Euro and other European currencies,was $2.2 million favorable for the three month period. Geographically,sales grew outside the U.S. by 5% for the three month period compared to 2006,while sales declined by 16% in the U.S. on a year over year basis. Sales ofoutdoor care parts and accessories experienced the largest decrease, a yearover year decline of 7% compared to last year. Lawnmower blades sold in theU.S. market were the most unfavorably influenced by the effect of unfavorableweather patterns on the lawn mowing industry during the first quarter of 2007. Salesof chainsaw components and accessories decreased by 2% compared to last year,largely due to weak North American markets, and concrete cutting productsdecreased by 3% as a result of inventory corrections in key distributionchannels and the effect of late season winter storms on construction activity. Orderbacklog increased to $74.6 million, compared to $54.8 million atDecember 31 2006.

Segment contribution to operating income decreased $3.7 millionand was 19.0% of sales, compared to 21.7% of sales last year. Lower salesvolume caused $2.5 million of this decrease. The combination of price,mix, cost and SG&A resulted in a $2.3 million decrease in contributionfor the comparable year over year period. This included a non-recurring expenseof $0.9 million related to consolidation of logistics operations in theU.S., which is expected to improve customer service and reduce futurelogistical expenses. Average prices were most significantly affected by aweaker product mix and mix among market channels. There was a minimal change insteel prices during the three month period compared to the same period lastyear. Foreign currency exchange rates had a favorable net effect of $1.0 million.In the first three months of 2007, the U.S. dollar was weaker compared toEuropean currencies than it was during the same period of 2006, and thisprovided a positive effect on sales. This positive effect is partially offsetby higher product costs and operating expenses in our European branch officesand in other countries where we operate.

***Industrial and Power Equipment Segment.***** **Sales for the Industrial and Power Equipment segmentdecreased $16.6 million, or 33%, in the three month period ended March 31,2007 compared to the same period of 2006.

The year over year sales decline was caused primarily bylower unit sales volume of our timber harvesting equipment, with an estimateddownward effect of $17.7 million for the three month period. The volumedecrease occurred across most product lines and brands in North Americacompared to the prior year. Weaker timber markets in North America, caused, inpart, by a decline in U.S. housing starts, was the primary reason for themarket decline. Shipments in the first quarter of 2007 were further impacted byan inventory correction at the dealer level. Sales of our rotational bearingsand swing drive products were also lower compared to last year, with anestimated negative 

20

----

effect of $1.4 million attributed to unit volume. Thesedecreases were partially offset by an increase in sales volume outside NorthAmerica and improvements in price and mix. Sales of timber harvesting equipmentoutside North America grew $2.6 million, or two and a half times last year’ssales level, largely due to strong sales growth in Latin America. Sales outsideNorth America represented 17% of our total timber harvesting equipment sales inthe three months ended March 31, 2007. Order backlog for the segment increasedto $25.1 million at March 31, 2007 compared to $18.5 million atDecember 31, 2006.

Three month segment contribution to operating incomedecreased $3.1 million to $0.2 million, or 0.6% of sales, compared to6.7% of sales last year. The year over year decrease includes the unfavorableeffect of lower sales volume of $3.7 million. Lower sales volume waspartially offset by improvements in selling prices, product mix and thereduction of plant overhead, partially resulting from the closure of one of thesegment’s manufacturing plants in 2006. In addition, marketing expensedecreased as last year’s results included non-recurring brand conversion costs.Steel prices were comparable during the three month period compared to the sameperiod last year.

***Corporate Expense.***  Corporate expense for the three months endedMarch 31, 2007 of $5.8 million was comparable to 2006. For the threemonths, stock compensation expense was $2.1 million, $0.3 millionhigher than the same period last year, and represents all stock-basedcompensation Company-wide. The year over year increase in stock-basedcompensation expense is largely the result of adding expense from new grants tothe ongoing period expense of awards granted in 2006. Awards typically vestover three years and the expense is weighted more heavily in the period of agrant because many grantees are retirement-eligible at the grant date. UnderSFAS No. 123(R), the fair value of stock awards must be expensed immediately atthe grant date for retirement-eligible grantees. Annual stock-basedcompensation expense for 2007 is expected to be approximately $3.8 millioncompared to $3.3 million for the year 2006. Expenses for professionalservices increased $0.3 million and an increase in staffing and annual payincreases contributed to a $0.2 million increase in salaries. Theseincreases were partially offset by a $0.6 million decrease in employeebenefits expense and other cost reductions.

**Financial Condition, Liquidity and CapitalResources**

Total debt at March 31, 2007 was $367.5 million comparedto $350.9 million at December 31, 2006. As of March 31, 2007, outstandingdebt consisted of a revolving credit facility balance of $44.0 million, aterm loan of $148.5 million and 8 7/8% senior subordinated notes of $175.0 million.The funds resulting from the increase in debt outstanding in the three monthperiod were used to fund semi-annual interest payments on our seniorsubordinated notes, support increases in working capital and makecontributions, including voluntary additional contributions, to our domesticpension plan.

Interest expense was $8.3 million in the first quarterof 2007, a decrease of $0.8 million compared to the first quarter of 2006.The decrease reflects the favorable effect from a reduction in the averageprincipal amount of debt outstanding. Our interest expense may vary in thefuture because the revolving credit facility and term loan interest rates arevariable. The interest rate is fixed on the senior subordinated notes. Ourweighted average interest rate on all debt was 7.98% as of March 31, 2007compared to 7.99% as of December 31, 2006. Cash paid for interest in the firstthree months of 2007 was $11.0 million compared to $12.3 million inthe same period of 2006.

***2006 Amendment to Credit Facilities.***  On March 23, 2006, we amended certain termsof our senior credit facilities. This amendment included the following changesto the term notes and revolving credit facility:

·                  Maximum availability under therevolving credit facility was increased from $100.0 million to $150.0 million.

·                  Interest rates were reduced by0.75% for the term loan and by 1.00% for the revolving credit facility.

·                  Certain financial covenantswere modified, including increases to the amounts that may be expended foracquisitions, dividends and purchase of Company stock, as well as modificationsto certain financial ratio requirements.

·                  The Company incurred fees andthird party costs of $0.7 million related to the amendment.

21

----

Immediatelyfollowing the amendment, we completed the following transactions:

·                  $82.1 million was borrowedunder the revolving credit facility.

·                  The total principal balance of$4.6 million was paid off on the Canadian term loan, and that loan wascancelled.

·                  $77.5 million in principalwas paid against the term loan, leaving a balance of $150.0 millionoutstanding.

The revolvingcredit facility provides total available borrowings up to $150.0 million,reduced by outstanding letters of credit, and further restricted by a specificleverage ratio and first lien credit facilities leverage ratio. As of March 31, 2007, we had the ability toborrow an additional $92.1 million under the terms of the revolving creditagreement. The revolving credit facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2009. Interest is payable monthly in arrears on any prime rateborrowings and at the individual maturity dates for any LIBOR-based termborrowings. Any outstanding principal is due in its entirety on the maturitydate.

The term loan facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2010. The term loan facility requires quarterly payments of $0.4 million,with a final payment of $143.3 million due on the maturity date. Oncerepaid, principal under the term loan facility may not be re-borrowed by theCompany.

The senior credit facilities may be prepaid at any time. Therecan also be additional mandatory repayment requirements related to the sale ofour assets or the issuance of stock under certain circumstances, and upon theCompany’s annual generation of excess cash flow as determined under the creditagreement. These credit facilities contain financial covenant calculationsrelating to maximum capital expenditures, minimum fixed charge coverage ratio,maximum leverage ratio and maximum first lien credit facilities leverage ratio.In addition, there are covenants relating, among other categories, toinvestments, loans and advances, indebtedness and the sale of stock or assets. TheCompany was in compliance with all debt covenants as of March 31, 2007.

Our debt continues to be significant, and future debt servicepayments continue to represent substantial obligations. This degree of leveragemay adversely affect our operations and could have important adverseconsequences.

We intend to fund working capital, capital expenditures anddebt service requirements for the next twelve months through expected cashflows generated from operations. We expect our remaining resources will besufficient to cover any additional increases in working capital and capitalexpenditures for at least the next twelve months. There can be no assurance,however, that these resources will be sufficient to meet our needs. We may alsoconsider other options available to us in connection with future liquidityneeds.

Cash and cash equivalents at March 31, 2007 were $26.4 millioncompared to $27.6 million at December 31, 2006. The $1.2 milliondecrease in our cash balance during the first three months of 2007 compares toa decrease of $3.3 million during the same period of 2006.

Cash used in operating activities is summarized in thefollowing table:
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**    | ** ** | ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Income from  continuing operations      |       | $                                                    | 4,700      |   | $ | 8,386 |   |
| Non-cash items                          |       | 8,157                                                |       | 8,700 |   |
| Subtotal                                |       | 12,857                                               |       | 17,086 |   |
| Changes in  assets and liabilities, net |       | (24,554                                              | )          | (32,907 | ) |
| Discontinued  operations, net           |       | (857                                                 | )          | 1,051 |   |
| Cash used for operating  activities     |       | $                                                    | (12,554    | ) | $ | (14,770 | ) |
|                                         |            |                                                      |            |  |  |  |  |  |  |

 

22

----

Non-cash items consist of expenses for depreciation of property,plant and equipment; amortization and other non-cash charges; stockcompensation expense; deferred income taxes; and the tax benefit from exerciseof stock options.

Cash used for operating activities during the three monthsended March 31, 2007 of $12.6 million included the following:

·                  Income from continuing operations decreased$3.7 million from the prior year resulting primarily from a decrease insales.

·                  Non-cash items decreased $0.5 millionand included:

·                  Depreciation expense of $4.4 million.

·                  Amortization of deferred financing costs of$1.0 million

·                  Stock-based compensation expense of $2.1 million.

·                  Deferred income taxes of $0.6 million.

·                  Changes in assets and liabilities, net,included the following items:

·                  A $13.7 million increase in inventories.

·                  A combined decrease in accounts payable andaccrued expenses of $13.5 million, including a $3.8 million decreasein accrued interest, a $3.6 million decrease in accrued taxes payable anda $3.2 million reduction in accruals for performance-based compensationrelated to 2006 that was paid during the first quarter of 2007.

·                  A $2.2 million decrease in otherliabilities including contributions of $3.2 million towards our fundedpension plans.

·                  A $2.1 million decrease in accountsreceivable.

·                  Discontinued operations used $0.9 millionin cash.

Cash used in operating activities during the three monthsended March 31, 2006 of $14.8 million included the following:

·                  Income from continuing operations of $8.4 million.

·                  Non-cash items, which included the following:

·                  Depreciation expense of $4.1 million.

·                  Amortization of deferred financing costs of$0.8 million

·                  Stock-based compensation expense of $1.8 million.

·                  Deferred income taxes of $2.3 million.

·                  Changes in assets and liabilities, net,included the following items:

·                  A $9.6 million increase ininventories.

·                  A combined decrease in accounts payable andaccrued expenses of $11.5 million, including a $4.1 million reductionof accrued interest, and $4.4 million reduction in accruals forperformance-based compensation related to 2005 that was paid during the firstquarter of 2006.

·                  A decrease in other liabilities of $11.5 million,including contributions of $12.3 million toward our pension plans.

·                  Discontinued operations provided $1.1 millionin net cash.

Cash taxes paid during the first three months of 2007 were$2.6 million compared to $3.2 million for the same period in 2006. Weexpect cash tax payments to increase in the future after we fully utilize ourremaining U.S. federal net operating loss and tax credit carryforwards.

23

----

Cash used in investing activities is summarized as follows:
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                 | ** ** | ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Proceeds from  sale of property, plant and equipment |       | $                                                    | 3          |   | $ | 26 |   |
| Purchases of  property, plant and equipment          |       | (5,500                                               | )          | (4,081 | ) |
| Discontinued  operations                             |       | —                                               |       | (16 | ) |
| Cash used for investing  activities                  |       | $                                                    | (5,497     | ) | $ | (4,071 | ) |
|                                                      |            |                                                      |            |  |  |  |  |  |  |

 

Purchases of property plant and equipment are primarily forproductivity improvements and expanded manufacturing capacity, but also includeroutine replacement of aging equipment. For the three months ended March 31,2007, we also spent $1.4 million related to consolidation of NorthAmerican logistics in our Outdoor Products segment. During 2007, we expect toinvest $23.0 million to $26.0 million in available cash for capitalexpenditures, primarily for ongoing productivity and cost improvements in ourmanufacturing processes, routine replacement of machinery and equipment,replacement of tooling that is consumed in the production process andincremental capacity expansion.

Cash provided by financing activities is summarized asfollows:
| ** **                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                          | ** ** | ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net increase in  debt                                         |       | $                                                    | 16,650     |   | $ | 15,527 |   |
| Issuance costs  related to debt                               |       | —                                               |       | (700 | ) |
| Proceeds and tax  benefits from the exercise of stock options |       | 178                                                  |       | 693 |   |
| Cash provided by  financing activities                        |       | $                                                    | 16,828     |   | $ | 15,520 |   |
|                                                               |            |                                                      |            |  |  |  |  |  |  |

 

Cashprovided by financing activities in the first three months of 2007 was $16.8 millioncompared to $15.5 million in the comparable period of 2006. The 2007activity included the following transactions:

·                  Net borrowing of $16.7 million on ourrevolving credit facility to support operations.

·                  Exercise of stock options that generated$0.2 million.

The 2006 activity included the following transactions:

·                  A net draw down of $98.3 million onour revolving credit facility to fund the reduction of term loan debt as partof the amendment to our senior credit facilities that occurred in March 2006and to support operations.

·                  Payments of $82.7 million of principalon our term loan debt, which included $0.6 million of scheduled paymentsand $82.1 million related to the March 2006 amendment of our senior creditfacilities.

·                  Expenditures of $0.7 million incurredwith the March 2006 amendment to our senior credit facilities.

·                  Exercise of stock options that generated$0.7 million, including $0.4 million of proceeds from the exercise ofstock options, and a related $0.3 million of tax benefit from theseexercises.

**Critical Accounting Policies**

There have been no materialchanges to our critical accounting policies and estimates from the informationprovided in Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, included in our Form 10-K for the fiscalyear ended December 31, 2006, except as follows:

Effective January1, 2007, we account for uncertain tax positions in accordance with FIN No. 48,which clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes.” The application of income tax law is inherently complex. Lawsand regulations in this area are voluminous and are often ambiguous. As such,we are required to make many assumptions and judgments regarding our income taxexposures. Interpretations of income tax laws and 

24

----

regulations andguidance surrounding them change over time. Changes in our assumptions andjudgments can materially affect amounts recognized in the consolidatedfinancial statements. See Note 5 to the consolidated financial statements foradditional detail on our uncertain tax positions and the impact of adopting FINNo. 48.

**Recent Accounting Pronouncements**

In September 2006,the FASB issued SFAS No. 157. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in accordance with accounting principlesgenerally accepted in the U.S., and expands disclosures about fair valuemeasurements. The provisions of SFAS No. 157 are effective for the Company’sfiscal year beginning January 1, 2008. We are currently evaluating the impactof the provisions of SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159. SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. The provisions of SFAS No. 159 are effective for theCompany on January 1, 2008. We are currently evaluating the impact of theprovisions of SFAS No. 159.

**Forward Looking Statements**

“Forward looking statements,” as defined by the PrivateSecurities Litigation Reform Act of 1995, used in this report, includingwithout limitation our “outlook,” “guidance,” “expectations,” “beliefs,” “plans,”“indications,” “estimates,” “anticipations,” and their variants, are based uponavailable information and upon assumptions that the Company believes arereasonable; however, these forward looking statements involve certain risks andshould not be considered indicative of actual results that the Company mayachieve in the future. Specifically, issues concerning foreign currencyexchange rates, the cost to the Company of commodities in general, and of steelin particular, the anticipated level of applicable interest rates and theanticipated effects of discontinued operations involve certain estimates andassumptions. To the extent that these, or any other such assumptions, are notrealized going forward, or other unforeseen factors arise, actual results forthe 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 interestrates, foreign currency exchange rates and commodity prices, including rawmaterials such as steel. We manage our exposure to these market risks throughour regular operating and financing activities, and, when deemed appropriate,through the use of derivatives. When utilized, derivatives are used as riskmanagement tools and not for trading or speculative purposes. See also theMarket Risk section of Management’s Discussion and Analysis of FinancialCondition and Results of Operations in our most recent Form 10-K for furtherdiscussion of market risk.

**ITEM 4. CONTROLS AND PROCEDURES**

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s SecuritiesExchange Act of 1934 reports is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rulesand regulations, and that such information is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure. In designing and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management is required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

TheCompany, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were effective at the reasonable assurance level.

25

----

Therehave been no changes in the Company’s internal control over financial reportingduring the Company’s last fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**PART II     OTHER INFORMATION**

**ITEM 6.  EXHIBITS**

**(a) Exhibits:**

**31.1 Certification pursuant to section 302 of theSarbanes-Oxley Act of 2002 by James S. Osterman, Chairman of the Board andChief Executive Officer.

**31.2 Certification pursuant to section 302 of theSarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice President andChief Financial Officer.

**32.1 Certification pursuant to section 906 of theSarbanes-Oxley Act of 2002 by James S. Osterman, Chairman of the Board andChief Executive Officer.

**32.2Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 byCalvin E. Jenness, Senior Vice President and Chief Financial Officer.

----

**            Filedelectronically herewith. Copies of such exhibits may be obtained upon writtenrequest from:

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

26

----

**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Actof 1934, the registrant has duly caused this report to be signed on its behalfby 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 Controller  |
| Chief Financial Officer   |   | (Principal Accounting Officer) |

 

Dated:  May 8, 2007

27

----